Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
TMK > SEC Filings for TMK > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for TORCHMARK CORP

Form 10-Q for TORCHMARK CORP


9-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Summary of Operations. Torchmark's operations are segmented into its insurance underwriting and investment operations as described in Note F-Business Segments. The measures of profitability described in Note F 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 F-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, 2014 and 2013. 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 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 2014 with the same period of 2013, unless otherwise noted. The following discussions are presented in the manner we view our operations, as described in Note F-Business Segments.

Highlights, comparing the first three months of 2014 with the first three months of 2013. Net income per diluted share increased 17% to $1.48 from $1.27. Included in net income in 2014 were after-tax realized investment gains of $11 million ($.12 per share) compared with losses of $4 million or $.04 per share in 2013. Realized investment gains and losses are presented more fully under the caption Realized Gains and Losses in this report.

We use three statistical measures as indicators of future premium growth:
"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


Table of Contents

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 rose 3% in 2014 to $792 million. Total net sales rose 29% to $152 million. After removing the impact of sales of Medicare Part D, which increased significantly in 2014 as a result of the addition of automatic enrollees discussed later in this report, net sales rose 11% to $121 million. First-year collected premium was $109 million for the 2014 period, compared with $110 million for the 2013 period. Excluding Part D, there was a 1% increase in first-year collected premium.

Life insurance premium income grew 4% to $489 million. Life net sales increased 5% to $89 million. First-year collected life premium gained 1% to $66 million. Life underwriting margins increased 6% to $141 million.

Health insurance premium income, which excludes Medicare Part D premium, declined 1% to $219 million. Health net sales, led by sales of Medicare Supplement, rose 34% to $32 million for the quarter. First-year collected health premium rose 3% to $25 million for the period. Health margins declined 1% to $49 million.

In the manner we view our Medicare Part D prescription drug business as described in Note F-Business Segments, policyholder premium was $83 million in 2014 compared with $77 million in 2013, an increase of 8%. As discussed under the caption Medicare Part D in this report, the increase in Part D premium resulted primarily from an increase in automatic enrollees. The increase in automatic enrollees, along with an increase in employer group activity, resulted in net sales increasing from $9 million to $31 million in 2014.

As explained in Note F-Business Segments, differences in our estimate of interim results for Medicare Part D as we view this product for segment purposes and GAAP financial statement purposes resulted in a $13 million after-tax charge to earnings in 2014 ($.15 per share) and a $8 million charge in 2013 ($.09 per share). We expect our 2014 full year benefit ratios to be approximately the same as those for interim periods, as was the case in 2013 and prior years. For this reason, there should be no difference in our segment versus financial statement reporting by year end 2014, as it relates to Medicare Part D. The increase in this adjustment in 2014 resulted primarily from the increase in volume.

Excess investment income per diluted share increased 7% in 2014 to $.63 from $.59, while the dollar amount of excess investment income rose 2% to $57 million. This is the first time since the second quarter of 2011 that the dollar amount of excess investment income has increased over the prior year period. The greater increase in per share excess investment income in relation to the increase in dollar amount resulted


Table of Contents

from share purchases over the past twelve months, as discussed later in this report. Net investment income rose $5 million or 3% to $188 million, even though our average investment portfolio at amortized cost grew 4% because of a decline in average yields. The average effective yield on the fixed-maturity portfolio, which represented 96% of our investments at amortized cost, decreased to 5.92% in the 2014 period from 6.00% in the prior period. This decline in yield was primarily due to the impact of calls of higher yielding securities in the first and second quarters of 2013, as discussed under the caption Investments (excess investment income) later in this report. Excess investment income is negatively impacted by the increase in required interest on net insurance policy liabilities. Required interest rose 5%, or $5.5 million, to $112 million, consistent with the growth in average net policy liabilities. Financing costs declined 9% in the period to $19 million, due to the maturity and repayment of our $94 million par amount 7.375% Notes during the third quarter of 2013. Please refer to the discussion under Capital Resources for more information on debt and interest expense.

In the first three months of 2014, we invested new money in our fixed-maturity portfolio at an effective annual yield on new investments of 5.37%, compared with 4.31% in the same period of 2013. The portfolio had an average rating of A-, the same as of the previous year end. Approximately 96% of the portfolio at amortized cost was investment grade at March 31, 2014. Cash and short-term investments were $149 million at that date, compared with $114 million at December 31, 2013.

The net unrealized gain position in our fixed-maturity portfolio grew from $390 million at December 31, 2013 to $1.0 billion during the first three months of 2014, largely due to a decline in market interest rates during 2014. The fixed-maturity portfolio contains no commercial mortgage-backed securities or securities backed by subprime or Alt-A mortgages (loans for which some of the typical documentation was not provided by the borrower). 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, and our only direct exposure to European sovereign debt is $11 million of German bonds.


Table of Contents

We have an on-going share repurchase program which began in 1986 and was reaffirmed by the Board of Directors at their August, 2013 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. These purchases are made at the Parent with excess cash flow. Share purchases are also made with the proceeds from option exercises by current and former employees, in order to reduce dilution. The following chart summarizes share purchases for the three-month periods ended March 31, 2014 and 2013.

                          Analysis of Share Purchases

                (Amounts in thousands, except per share amounts)



                                              For the three months ended March 31,
                                           2014                                   2013
                                                      Average                                Average
                            Shares       Amount        Price       Shares       Amount        Price
 Purchases with:
 Excess cash flow             1,419     $ 107,992     $  76.09       1,604     $  90,008     $  56.11
 Option exercise proceeds       228        17,643        77.60         687        39,316        57.27

 Total                        1,647     $ 125,635     $  76.30       2,291     $ 129,324     $  56.46

Throughout the remainder of this discussion, share purchases will only refer to those made from excess cash flow.

A detailed discussion of our operations by component segment follows.

Life insurance, comparing the first three months of 2014 with the first three months of 2013. Life insurance is our predominant segment, representing 62% of premium income and 70% of insurance underwriting margin in the first three months of 2014. 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 4% to $489 million. The following table presents Torchmark's life insurance premium by distribution method.


Table of Contents

                                 Life Insurance

                         Premium by Distribution Method

                         (Dollar amounts in thousands)



                                                   Three months ended March 31,                   Increase
                                                   2014                     2013                 (Decrease)
                                                          % of                     % of
                                            Amount       Total       Amount       Total       Amount        %
American Income Exclusive Agency           $ 185,891         38     $ 174,257         37     $ 11,634         7
Direct Response                              177,872         36       168,137         36        9,735         6
Liberty National Exclusive Agency             68,778         14        70,003         15       (1,225 )      (2 )
Other Agencies                                56,517         12        58,416         12       (1,899 )      (3 )


Total Life Premium                         $ 489,058        100     $ 470,813        100     $ 18,245         4

Net sales, defined earlier in this report as an indicator of new business production, grew 5% to $89 million. 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
                                                    2014                    2013                (Decrease)
                                                           % of                    % of
                                              Amount      Total       Amount      Total      Amount        %
American Income Exclusive Agency             $ 38,125         43     $ 37,607         44     $   518         1
Direct Response                                40,439         46       37,254         44       3,185         9
Liberty National Exclusive Agency               7,380          8        7,127          8         253         4
Other Agencies                                  2,835          3        2,937          4        (102 )      (3 )


Total Life Net Sales                         $ 88,779        100     $ 84,925        100     $ 3,854         5

First-year collected life premium, defined earlier in this report, was $66 million in the 2014 period, rising 1%. First-year collected life premium by distribution group is presented in the table below.


Table of Contents

                                 Life Insurance

              First-Year Collected Premium by Distribution Method

                         (Dollar amounts in thousands)



                                                    Three months ended March 31,                  Increase
                                                    2014                    2013                 (Decrease)
                                                           % of                    % of
                                              Amount      Total       Amount      Total      Amount         %
American Income Exclusive Agency             $ 31,528         48     $ 32,032         49     $  (504 )       (2 )
Direct Response                                25,303         39       23,898         37       1,405          6
Liberty National Exclusive Agency               6,353         10        6,619         10        (266 )       (4 )
Other Agencies                                  2,330          3        2,637          4        (307 )      (12 )


Total                                        $ 65,514        100     $ 65,186        100     $   328          1

The American Income Exclusive Agency has historically marketed primarily to members of labor unions. While labor unions are still the core market for this agency, American Income has diversified in recent years by focusing heavily on other affinity groups and referrals to help to ensure sustainable growth. The life business of this agency is Torchmark's highest margin business and is the largest contributor to life premium of any of Torchmark's distribution systems at 38% of Torchmark's total life premium. This group produced premium income of $186 million, an increase of 7%. First-year collected premium declined 2% to $32 million. However, net sales increased 1% to $38 million. Sales growth in our captive agencies are generally dependent on growth in the size of the agency force. The American Income agent count rose 4% to 5,500 at March 31, 2014 over the count at December 31, 2013 (5,302), but was down 2% when compared with the prior year (5,612). The average agent count for the first quarter of 2014 was 5,298. The American Income Agency has been focusing on growing and strengthening middle management to support sustainable growth of the agency force. To accomplish this, we have placed an increased emphasis on agent training programs and financial incentives that appropriately reward agents at all levels for helping develop and train personnel. The agency has also begun providing more home-office and webinar training programs. These programs are designed to provide each agent, from new recruits to top level managers, coaching and instruction specifically designed for each individual's level of experience and responsibilities. This agency has recently opened new offices in territories where there are existing offices, but where there is an excess capacity of leads. We believe that these initiatives will promote increased enthusiasm in the field and will drive increases in agent retention and sales activity.

The Direct Response Unit offers adult and juvenile life insurance through a variety of direct-to-consumer marketing approaches, which include direct mailings, insert media, and electronic media. These different approaches support and complement one another in the unit's efforts to reach the consumer. The Direct Response Unit's growth has been fueled by constant innovation. In recent years, electronic media production has grown rapidly as management has aggressively


Table of Contents

increased marketing activities related to internet, social media, and mobile technology, and has focused on driving traffic to the inbound call center. We have introduced certain new initiatives in this unit that have increased response rates. These initiatives include lower premium rates as well as offerings of higher face amounts on the adult products. The juvenile market is not only an important source of sales, but it also is a vehicle to reach the parents and grandparents of the juvenile policyholders, who 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.

Direct Response's life premium income rose 6% to $178 million, representing 36% of Torchmark's total life premium in the first quarter of 2014. Net sales of $40 million for this group increased 9%. First-year collected premium increased 6% to $25 million.

The Liberty National Exclusive Agency markets individual and group life insurance to middle-income customers. Life premium income for this agency was $69 million in the 2014 quarter, a 2% decline from $70 million in the 2013 quarter. First-year collected premium declined 4% to $6 million.

Net sales for the Liberty Agency increased 4% to $7 million. Liberty had 1,451 producing agents at March 31, 2014, compared with 1,375 a year earlier, an increase of 6%. The agent count has increased 1% since December 31, 2013, when it stood at 1,430. The average agent count for the first quarter of 2014 was 1,400. Our long term plans to grow this agency involve expansion from small-town markets in the southeast to more densely populated areas with larger pools of potential agent recruits and customers. We believe that expansion of this Agency's presence into more heavily populated, less-penetrated areas will help create long term agency growth. Additionally, a new prospecting training program has been implemented to improve the ability of agents to develop new worksite marketing business.

The Other Agencies distribution systems offering life insurance include the Military Agency, the UA Independent Agency (which predominantly writes health insurance), and various smaller distribution channels. The Other Agencies distribution group contributed $57 million of life premium income, or 12% of Torchmark's total in the first quarter of 2014, but contributed only 3% of net sales.


Table of Contents

                                 Life Insurance

                               Summary of Results

                         (Dollar amounts in thousands)



                                                   Three months ended March 31,
                                                 2014                        2013                   Increase
                                                        % of                        % of
                                         Amount        Premium       Amount        Premium       Amount       %
Premium and policy charges              $ 489,058           100     $ 470,813           100     $ 18,245       4
Net policy obligations                    189,665            39       180,125            38        9,540       5
Commissions and acquisition expense       158,774            32       157,578            34        1,196       1

Insurance underwriting income before
other income and administrative
expense                                 $ 140,619            29     $ 133,110            28     $  7,509       6

Life insurance underwriting income before insurance administrative expense was $141 million, increasing 6%. Increases in margin were due in large part to growth in premium income. Margin was also benefitted by a decreased rate of amortization of deferred acquisition costs due to improved persistency resulting from our conservation program, and the deferral of internet-related direct response acquisition costs which began in the second quarter of 2013. As a percentage of premium, underwriting income rose 1% of premium to 29% in the three months ended March 31, 2014 compared to the same period last year.


Table of Contents

Health insurance, comparing the first three months of 2014 with the first three months of 2013. Health insurance sold by Torchmark includes primarily Medicare Supplement insurance, cancer coverage, accident coverage, and other limited-benefit supplemental health products. In this discussion of health business, references to premium income, net sales, and underwriting will exclude our Medicare Part D health business, which will be discussed under another caption. In this analysis, all health coverage plans other than Medicare Supplement are classified as limited-benefit plans.

Health premium accounted for 28% of our total premium in the 2014 period, while the health underwriting margin accounted for 25% of total underwriting margin, reflective of the lower underwriting margin as a percent of premium for health compared with life insurance. As noted under the caption Life Insurance, we have emphasized life insurance sales relative to health, due to life's superior profitability and its greater contribution to excess investment income.

Health premium declined 1% to $219 million in the 2014 period. Medicare Supplement premium declined 1% to $107 million, while other limited-benefit health premium declined 1% to $112 million. Limited-benefit premium now provides Torchmark with the greatest amount of non-Part D health premium, representing 51% of such premium for the 2014 period.

Health net sales increased 34% to $32 million. Medicare Supplement net sales increased 104% to $16 million in the 2014 period. The increase in Medicare Supplement net sales was a result of stronger group sales, which vary from period to period at the United American Independent Agency. Limited-benefit net sales declined 1% to $16 million. Health first-year collected premium rose 3% to $25 million.


Table of Contents

The following table is an analysis of our health premium by distribution method.

Health Insurance

Premium by Distribution Method

(Dollar amounts in thousands)

                                                   Three months ended March 31,                   Increase
                                                   2014                     2013                 (Decrease)
                                                          % of                     % of
                                            Amount       Total       Amount       Total       Amount         %
United American Independent Agency
Limited-benefit plans                      $   5,889                $   8,009                $ (2,120 )      (26 )
Medicare Supplement                           72,267                   69,531                   2,736          4

                                              78,156         36        77,540         35          616          1
Liberty National Exclusive Agency
Limited-benefit plans                         37,320                   39,369                  (2,049 )       (5 )
Medicare Supplement                           21,297                   24,083                  (2,786 )      (12 )

                                              58,617         27        63,452         29       (4,835 )       (8 )
Family Heritage Agency
Limited-benefit plans                         49,468                   46,163                   3,305          7
Medicare Supplement                                0                        0                       0          0

                                              49,468         22        46,163         21        3,305          7
American Income Exclusive Agency
Limited-benefit plans                         19,167                   19,823                    (656 )       (3 )
Medicare Supplement                              120                      143                     (23 )      (16 )

                                              19,287          9        19,966          9         (679 )       (3 )
Direct Response
Limited-benefit plans                            231                       89                     142        160
Medicare Supplement                           13,676                   14,317                    (641 )       (4 )

                                              13,907          6        14,406          6         (499 )       (3 )
Total Health Premium
Limited-benefit plans                        112,075         51       113,453         51       (1,378 )       (1 )
Medicare Supplement                          107,360         49       108,074         49         (714 )       (1 )

Total                                      $ 219,435        100     $ 221,527        100     $ (2,092 )       (1 )


Table of Contents

Presented below is a table of health net sales by distribution method.

Health Insurance

Net Sales by Distribution Method

(Dollar amounts in thousands)

                                                    Three months ended March 31,                  Increase
                                                    2014                    2013                 (Decrease)
                                                           % of                    % of
                                              Amount      Total       Amount      Total      Amount         %
United American Independent Agency
. . .
  Add TMK to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for TMK - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.