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| TMK > SEC Filings for TMK > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
Summary of Operations. Torchmark's operations are segmented into its insurance underwriting and investment operations as described in Note G-Business Segments. The measures of profitability described in Note G are useful in evaluating the performance of the segments and the marketing groups within each insurance segment, because each of our distribution units operates in a niche market. These measures enable management to view period-to-period trends, and to make informed decisions regarding future courses of action.
The tables in Note G-Business Segments demonstrate how the measures of profitability are determined. Those tables also reconcile our revenues and expenses by segment to major income statement line items for the three-month periods ended March 31, 2009 and 2008. Additionally, a table in that note, Analysis of Profitability by Segment, provides a summary of the profitability measures that demonstrates year-to-year comparability and which reconciles those measures to our net income. That summary represents our overall operations in the manner that management views the business, and is a basis of the following highlights discussion.
A discussion of operations by each segment follows later in this report. These discussions compare the first three months of 2009 with the same period of 2008, unless otherwise noted.
Highlights, comparing the first three months of 2009 with the first three months of 2008. Net income per diluted share declined 29% to $.91. Net income for the 2009 period reflects an after-tax charge of $.49 per share for realized investment losses attributable to writedowns of securities determined to be other-than-temporarily impaired. These writedowns are discussed in detail in Note E-Investments under the caption Other-Than-Temporary Impairments in this report. Net income per share during the 2008 period reflected an after tax loss of $.05 per share for realized investment losses of which $.03 was a result of other-than-temporary impairments of fixed maturities and real estate. Additionally, as explained in Note G-Business Segments, differences in our estimate of interim results for Medicare Part D as we view this product for segment purposes and GAAP resulted in an $11 million after-tax charge to 2009 earnings or $.13 per share, compared with a charge of $9 million after-tax or $.09 per share in the prior period. We expect our 2009 full year benefit ratios to be approximately the same as those for interim periods, as was the case in 2008 and prior years. For this reason, there should be no differences in segment versus GAAP reporting by year end 2009, as it relates to Medicare Part D.
We use three statistical measures as indicators of product sales: "annualized premium in force," "net sales," and "first-year collected premium." Annualized premium in force is defined as the premium income that would be received over the following twelve months at any given date on all active policies if those policies remain in force throughout the twelve-month period. Annualized premium in force is an indicator of potential growth in premium revenue. Net sales is defined as annualized premium issued, net of
cancellations in the first thirty days after issue, except for Direct Response, where net sales is annualized premium issued at the time the first full premium is paid after any introductory offer has expired. Annualized premium issued is the gross premium that would be received during the policies' first year in force, assuming that none of the policies lapsed or terminated. Although lapses and terminations will occur, we believe that net sales is a useful indicator of the rate of acceleration of premium growth. First-year collected premium is the premium collected during the reporting period for all policies in their first policy year. First-year collected premium takes lapses into account in the first policy year when lapses are more likely to occur, and thus is a useful indicator of how much new premium is expected to be added to premium income in the future.
Total premium income declined 3% for the three months to $686 million, as health premium declined 11%. Total net sales, excluding Medicare Part D net sales, declined 12% to $99 million. Also excluding Part D, first-year collected premium declined 17% to $77 million for the period.
Life insurance premium income grew 2% to $413 million. Life net sales increased in each of Torchmark's major distribution groups, increasing 11% in total to $78 million. First-year collected life premium increased 7% to $55 million. Life underwriting margins increased 3% to $110 million.
Health insurance premium income, excluding Medicare Part D premium, decreased 11% to $224 million. Health net sales, excluding Part D, declined 51% to $21 million and first-year collected health premium, excluding Part D, declined 46% to $22 million. These declines resulted primarily from the increased turnover of agents in our United American (UA) Branch Office Agency. This Agency has historically been a key distributor of our health products, but has been facing increased competition in recent periods. We are addressing the turnover in the UA Branch Office Agency by combining this Agency with the Liberty National Exclusive Agency, offering the agents new lines of products to sell with new compensation incentives focused on marketing those products. Beginning this quarter, we have combined the financial results for Liberty National and the UA Branch Office systems to reflect their ongoing consolidation. We will continue to report net sales and producing agents separately for the balance of 2009. Health underwriting income of $41 million, excluding Part D, remained at 18% of premium in 2009.
Our Medicare Part D prescription drug business is a component of the health insurance segment. In the manner we view our Medicare Part D business as described in Note G-Business Segments, policyholder premium was $46 million in 2009, a 2% decrease from 2008. Underwriting income was flat at $5 million.
Excess investment income per diluted share increased 5% to $.96, while excess investment income declined 4% to $80 million. Net investment income increased 1% or $2 million, even though the portfolio at amortized cost grew 3%. We held significantly more short-term investments in the 2009 period due to the uncertain economic environment, even though yields on short-terms were .1% in 2009 compared with 3.1% a year earlier. The decline in excess investment income resulted from the $6 million increase in interest cost on net insurance policy liabilities. Financing costs declined 3% in the period primarily as a result of lower short-term rates on our commercial paper facility.
In the first quarter of 2009, we invested new money at an effective annual yield on new investments of 7.7%. This yield compares with an average portfolio yield of 6.97% (for the period ended March 31, 2009). The fixed-maturity portfolio at fair value accounted for 91% of total investments at March 31, 2009 and had an average rating of BBB+. The fixed maturity portfolio contains no securities backed by subprime or Alt A mortgages. We are not a party to any counterparty risk, with no credit default swaps or other derivative contracts. We do not engage in securities lending.
We have an on-going share repurchase program which began in 1986 and was reaffirmed at the October 30, 2008 Board of Directors' meeting. With no specified authorization amount, we determine the amount of repurchases based on the amount of our excess cash flow, general market conditions, and other alternative uses. In the first three months of 2009, we acquired 2.07 million shares of the Company's common stock in the open market at a cost of $48 million ($22.98 average price per share). Of the $48 million, $47 million was from excess operating cash flow, which was used to repurchase 2.05 million shares, and $869 thousand was from the cash received from stock option exercises by current and former employees. Proceeds from these option exercises were used to repurchase 20 thousand shares in order to offset dilution from the exercises. In view of the current economic conditions, we have temporarily suspended our share repurchase program. We may resume the program when market conditions are favorable.
A detailed discussion of our operations by component segment follows.
Life insurance, comparing the first three months of 2009 with the first three months of 2008. Life insurance is our predominant segment, representing 60% of premium income and 73% of insurance underwriting margin in the first three months of 2009. In addition, investments supporting the reserves for life business generate the majority of excess investment income attributable to the Investment segment. Life insurance premium income increased 2% to $413 million. We are currently in the process of combining our United American (UA) Branch Office Exclusive Agency with the Liberty National Exclusive Agency. Management expects that our subsidiaries, UA and Liberty National, will be merged by the end of 2009. For this reason, all premium income and margin data will be reported on a combined basis in this report. However, we will continue to report sales data and agent counts separately for the two agencies until the two companies are merged. The following table presents Torchmark's life insurance premium by distribution method.
Life Insurance
Premium by Distribution Method
(Dollar amounts in thousands)
Three months ended March 31, Increase
2009 2008 (Decrease)
% of % of
Amount Total Amount Total Amount %
Direct Response $ 135,283 33 $ 128,635 32 $ 6,648 5
American Income Exclusive Agency 122,993 30 115,483 29 7,510 7
Liberty National Exclusive Agency 74,921 18 76,298 19 (1,377 ) (2 )
Other Agencies 79,551 19 82,532 20 (2,981 ) (4 )
Total Life Premium $ 412,748 100 $ 402,948 100 $ 9,800 2
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Net sales, defined earlier in this report as an indicator of new business production, grew 11% to $78 million. Each of our three primary distribution groups had growth in net sales. An analysis of life net sales by distribution group is presented below.
Life Insurance
Net Sales by Distribution Method
(Dollar amounts in thousands)
Three months ended March 31, Increase
2009 2008 (Decrease)
% of % of
Amount Total Amount Total Amount %
Direct Response $ 34,201 44 $ 30,556 43 $ 3,645 12
American Income Exclusive Agency 27,537 35 24,355 35 3,182 13
Liberty National Exclusive Agency 12,095 15 10,050 14 2,045 20
United American Branch Office Agency 1,732 2 2,040 3 (308 ) (15 )
Other Agencies 2,892 4 3,493 5 (601 ) (17 )
Total Life Net Sales $ 78,457 100 $ 70,494 100 $ 7,963 11
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First-year collected life premium, defined earlier in this report, was $55 million in the 2009 period, rising 7% over the prior-year period. First-year collected life premium by distribution group is presented in the table below.
Life Insurance
First-Year Collected Premium by Distribution Method
(Dollar amounts in thousands)
Three months ended March 31, Increase
2009 2008 (Decrease)
% of % of
Amount Total Amount Total Amount %
Direct Response $ 21,550 39 $ 20,602 40 $ 948 5
American Income Exclusive Agency 21,894 40 19,237 38 2,657 14
Liberty National Exclusive Agency 8,648 16 7,845 15 803 10
Other Agencies 2,667 5 3,578 7 (911 ) (25 )
Total $ 54,759 100 $ 51,262 100 $ 3,497 7
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The Direct Response operation consists of two primary components: insert media and direct mail. Insert media, which targets primarily the adult market, involves placing insurance solicitations as advertising inserts into a variety of media, such as coupon packets, newspapers, bank statements, and billings. Direct mail targets primarily young middle-income households with children. The juvenile life insurance policy is a key product. Not only is the juvenile market an important source of sales, but it also is a vehicle to reach the parents and grandparents of the juvenile policyholders. Parents and grandparents of these juvenile policyholders are more likely to respond favorably to a Direct Response solicitation for life coverage on themselves than is the general adult population. Also, both the juvenile policyholders and their parents are low acquisition-cost targets for sales of additional coverage over time. We expect that sales to this demographic group will continue as one of Direct Response's premier markets.
Direct Response's life premium income rose 5% to $135 million, representing 33% of Torchmark's total life premium, the largest contribution to premium of any distribution system. Net sales of $34 million rose 12% and first-year collected premium of $22 million rose 5% over the prior year period.
The American Income Exclusive Agency markets primarily to members of labor unions, but also to credit unions and other associations. This agency produced premium income of $123 million, an increase of 7%. American Income is Torchmark's fastest growing life insurance agency on the basis of premium collection. Net sales increased 13% to $28 million, while first-year collected premium rose 14% to $22 million. Growth in sales in our captive agencies is highly dependent on growing the size of the agency force. The American Income agent count was 3,506 at March 31, 2009, 34% higher than a year earlier (2,616). The American Income agency continues to emphasize the recruiting and retention of new agents, focusing on an incentive program to reward growth in both recruiting and production.
As previously mentioned, we are merging the UA Branch Office Agency into the Liberty National Exclusive Agency. The Liberty National Agency has historically marketed life insurance to middle-income customers primarily in the Southeast. The UA Branch Office Agency has historically emphasized health products, but is now changing its
focus for newly recruited agents to market Liberty's life and health products. Life premium income for this combined agency was $75 million for the 2009 quarter, a 2% decline compared with $76 million in the 2008 period. First-year collected premium on a combined basis rose 10% to $9 million.
Liberty National's net sales increased 27% to $13 million, the largest percentage gain of any life distribution group. The increase in net sales, a lead indicator, is indicative of the recent growth in the size of this agency. The Liberty Agency had 3,563 producing agents at March 31, 2009, compared with 2,803 a year earlier, an increase of 27%. Efforts have been underway to build the size of this Agency over the past few quarters. One factor in this program has been revisions to the agent's compensation system to increase incentives. Management believes that the production incentives and rewards of this compensation system have allowed the agency to attract more successful agents and that these changes will result in a more productive agency over the long term.
The UA Branch Office Agency produced net sales of $1.7 million in 2009 of Liberty National's life products. As noted above, this Agency traditionally focused on health product sales. Due to intense competition in recent periods in the health insurance market, the UA Branch has experienced sharp declines in agent count. The UA Branch Office Agency had 1,567 producing agents at March 31, 2009, compared with 2,670 agents a year earlier.
As is the case with all of our captive agency forces, growing the number of productive agents is critical to the growth in sales. Going forward, we are shifting the emphasis in the UA Branch to life and health products currently marketed by Liberty National agents. These products are priced to achieve higher profit margins and have better persistency than the UA Branch's limited-benefit health insurance. This Agency will continue to offer the current product portfolio, but the majority of our financial incentives will be used to encourage new agents to sell the Liberty National product line. We believe that the combination of this Agency with the Liberty National Agency will provide financial incentives to agents and will improve the stability and profitability of the UA Branch Office Agency.
The Other Agencies distribution systems offering life insurance include the Military Agency, the UA Independent Agency (which predominantly writes health insurance), United Investors, and various minor distribution channels. The Other Agencies distribution group contributed $80 million of life premium income, or 19% of Torchmark's total in the 2009 quarter, but contributed only 4% of net sales.
Life Insurance
Summary of Results
(Dollar amounts in thousands)
Three months ended March 31,
2009 2008 Increase
% of % of
Amount Premium Amount Premium Amount %
Premium and policy charges $ 412,748 100 $ 402,948 100 $ 9,800 2
Net policy obligations 164,478 40 166,868 41 (2,390 ) (1 )
Commissions and acquisition expense 137,800 33 128,505 32 9,295 7
Insurance underwriting income before
other income and administrative expense $ 110,470 27 $ 107,575 27 $ 2,895 3
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Life insurance underwriting income before insurance administrative expense was $110 million, increasing 3%. This margin growth was caused primarily by premium growth but also by a reduction in Direct Response's obligation ratios in 2009. As a percentage of life premium, underwriting margin remained steady at 27%.
Health insurance, comparing the first three months of 2009 with the first three months of 2008. Health premium accounted for 40% of our total premium in the 2009 period, while the health underwriting margin accounted for 30% of total underwriting margin, reflective of the lower underwriting margin as a percent of premium for health compared with life insurance. Our health products are supplemental health plans that include a variety of limited-benefit health plans including hospital/surgical, cancer and accident plans sold to customers under age 65, as well as Medicare Supplements sold to Medicare enrollees. We also provide coverage under the Medicare Part D prescription drug plan. Medicare Part D business is shown as a separate health component and will be discussed separately in the analysis of the health segment.
As explained in Note G-Business Segments, management does not view the government risk-sharing premium for Medicare Part D as a component of premium income. Excluding this risk-sharing premium, health insurance premium for the 2009 period was $270 million, declining 10%. A reconciliation between segment reporting for Medicare Part D and GAAP is presented in the chart in Note G-Business Segments, and those differences are fully discussed in that note.
The table below is an analysis of our health premium by distribution method.
Three months ended March 31, Increase
2009 2008 (Decrease)
% of % of
Amount Total Amount Total Amount %
United American Independent Agency
Limited-benefit plans $ 17,023 $ 22,278 $ (5,255 ) (24 )
Medicare Supplement 70,776 72,718 (1,942 ) (3 )
87,799 39 94,996 37 (7,197 ) (8 )
Liberty National Exclusive Agency
Limited-benefit plans 67,487 84,697 (17,210 ) (20 )
Medicare Supplement 38,724 43,839 (5,115 ) (12 )
106,211 48 128,536 51 (22,325 ) (17 )
American Income Exclusive Agency
Limited-benefit plans 17,888 17,594 294 2
Medicare Supplement 277 322 (45 ) (14 )
18,165 8 17,916 7 249 1
Direct Response
Limited-benefit plans 121 131 (10 ) (8 )
Medicare Supplement 11,741 11,516 225 2
11,862 5 11,647 5 215 2
Total Health Premium (Before Part D)
Limited-benefit plans 102,519 46 124,700 49 (22,181 ) (18 )
Medicare Supplement 121,518 54 128,395 51 (6,877 ) (5 )
Total (Before Part D) 224,037 100 253,095 100 (29,058 ) (11 )
Medicare Part D* 45,888 46,621 (733 ) (2 )
Total Health Premium* $ 269,925 $ 299,716 $ (29,791 ) (10 )
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* Health premium per the segment analysis will not agree with health premium on the Consolidated Statement of Operations because of the Part D government risk-sharing premium adjustment, explained in Note G-Business Segments.
Presented below is a table of health net sales by distribution method.
Three months ended March 31, Increase
2009 2008 (Decrease)
% of % of
Amount Total Amount Total Amount %
United American Independent Agency
Limited-benefit plans $ 3,726 $ 7,212 $ (3,486 ) (48 )
Medicare Supplement 3,623 2,691 932 35
7,349 36 9,903 24 (2,554 ) (26 )
United American Branch Office Agency
Limited-benefit plans 5,526 22,991 (17,465 ) (76 )
Medicare Supplement 1,483 2,340 (857 ) (37 )
7,009 34 25,331 61 (18,322 ) (72 )
Liberty National Exclusive Agency
Limited-benefit plans 2,939 2,277 662 29
Medicare Supplement 37 22 15 68
2,976 14 2,299 5 677 29
American Income Exclusive Agency
Limited-benefit plans 2,782 2,771 11 0
Medicare Supplement 0 0 0 0
2,782 14 2,771 7 11 0
Direct Response
Limited-benefit plans 5 216 (211 ) (98 )
Medicare Supplement 408 1,266 (858 ) (68 )
413 2 1,482 3 (1,069 ) (72 )
Total Net Sales (Before Part D)
Limited-benefit plans 14,978 73 35,467 85 (20,489 ) (58 )
Medicare Supplement 5,551 27 6,319 15 (768 ) (12 )
Total (Before Part D) 20,529 100 41,786 100 (21,257 ) (51 )
Medicare Part D* 10,119 9,225 894 10
Total Net Sales * $ 30,648 $ 51,011 $ (20,363 ) (40 )
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* Net sales for Medicare Part D represents only new first-time enrollees.
The following table presents health insurance first-year collected premium by distribution method.
Health Insurance
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