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TMK > SEC Filings for TMK > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for TORCHMARK CORP

Form 10-Q for TORCHMARK CORP


8-Aug-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 six month periods ended June 30, 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 six 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 six months of 2014 with the first six months of 2013. Net income per diluted share increased 9% to $1.97 from $1.80. Included in net income in 2014 were after-tax realized investment gains of $11 million ($.08 per share) compared with gains of $76 thousand or $0 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 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.


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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 $1.6 billion. Total net sales rose 26% to $303 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 12% to $251 million. First-year collected premium was $226 million for the 2014 period, compared with $219 million for the 2013 period. Excluding Part D, there was a 2% increase in first-year collected premium.

Life insurance premium income grew 4% to $981 million. Life net sales increased 8% to $190 million. First-year collected life premium gained 2% to $133 million. Life underwriting margins increased 5% to $281 million.

Health insurance premium income, excluding Medicare Part D premium, declined 1% to $435 million. Health net sales, led by sales of Medicare Supplement, rose 28% to $61 million for the six-month period. First-year collected health premium rose 4% to $51 million. Health margins declined 1% to $99 million.

In the manner we view our Medicare Part D prescription drug business as described in Note F-Business Segments, policyholder premium was $168 million in 2014 compared with $150 million in 2013, an increase of 12%. 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 $17 million to $52 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 $17 million after-tax charge to earnings in 2014 ($.12 per share) and a $10 million charge in 2013 ($.07 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 9% in 2014 to $.85 from $.78, while the dollar amount of excess investment income rose 3% to $114 million. The greater increase in per share excess investment income in relation to the increase in dollar amount resulted from share purchases over the past twelve months, as discussed later in this report. Net investment income rose $11 million or 3% to $378 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 5.97% in the prior period, as the impact of the low-interest-rate environment on average yield has moderated.


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Excess investment income is negatively impacted by the increase in required interest on net insurance policy liabilities. Required interest rose 5% or $11 million to $226 million, consistent with the growth in average net policy liabilities. Financing costs declined 9% in the period to $38 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 six months of 2014, we invested new money in our fixed-maturity portfolio at an effective annual yield on new investments of 5.00%, compared with 4.21% 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 June 30, 2014. Cash and short-term investments were $94 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 $1.4 billion during the first six months of 2014, largely due to a decline in market interest rates during 2014. The fixed-maturity portfolio contains no commercial mortgage-backed securities. 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 $10 million of German bonds.


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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 six-month periods ended June 30, 2014 and 2013.

                          Analysis of Share Purchases

                (Amounts in thousands, except per share amounts)



                                                For the six months ended June 30,
                                           2014                                   2013
                                                      Average                                Average
                            Shares       Amount        Price       Shares       Amount        Price
 Purchases with:
 Excess cash flow             3,682     $ 190,104     $  51.63       4,557     $ 180,008     $  39.50
 Option exercise proceeds       910        48,208        53.01       1,664        66,395        39.90

 Total                        4,592     $ 238,312     $  51.90       6,221     $ 246,403     $  39.61

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 six months of 2014 with the first six months of 2013. Life insurance is our predominant segment, representing 62% of premium income and 70% of insurance underwriting margin in the first six 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 $981 million. The following table presents Torchmark's life insurance premium by distribution method.


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                                 Life Insurance

                         Premium by Distribution Method

                         (Dollar amounts in thousands)



                                                     Six months ended June 30,                    Increase
                                                   2014                     2013                 (Decrease)
                                                          % of                     % of
                                            Amount       Total       Amount       Total       Amount        %
American Income Exclusive Agency           $ 376,221         38     $ 352,634         37     $ 23,587         7
Direct Response                              354,710         36       337,328         36       17,382         5
Liberty National Exclusive Agency            137,048         14       139,436         15       (2,388 )      (2 )
Other Agencies                               113,031         12       116,525         12       (3,494 )      (3 )


Total Life Premium                         $ 981,010        100     $ 945,923        100     $ 35,087         4

Net sales, defined earlier in this report as an indicator of new business production, grew 8% to $190 million. An analysis of life net sales by distribution group is presented below.

                                 Life Insurance

                        Net Sales by Distribution Method

                         (Dollar amounts in thousands)



                                                      Six months ended June 30,                   Increase
                                                    2014                     2013                (Decrease)
                                                           % of                     % of
                                             Amount       Total       Amount       Total       Amount       %
American Income Exclusive Agency            $  82,753         44     $  78,380         44     $  4,373        6
Direct Response                                84,857         45        76,781         44        8,076       11
Liberty National Exclusive Agency              16,112          8        15,314          9          798        5
Other Agencies                                  6,570          3         5,596          3          974       17


Total Life Net Sales                        $ 190,292        100     $ 176,071        100     $ 14,221        8


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First-year collected life premium, defined earlier in this report, was $133 million in the 2014 period, rising 2%. 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)



                                                      Six months ended June 30,                   Increase
                                                    2014                     2013                (Decrease)
                                                           % of                     % of
                                             Amount       Total       Amount       Total      Amount        %
American Income Exclusive Agency            $  64,670         48     $  64,654         49     $    16         0
Direct Response                                50,822         38        47,892         37       2,930         6
Liberty National Exclusive Agency              12,769         10        13,134         10        (365 )      (3 )
Other Agencies                                  4,904          4         5,258          4        (354 )      (7 )


Total                                       $ 133,165        100     $ 130,938        100     $ 2,227         2

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 life business and it is the largest contributor to life premium of any of Torchmark's distribution systems at 38% of Torchmark's total. This group produced premium income of $376 million, an increase of 7%. First-year collected premium was $65 million, flat with the prior year. Net sales increased 6% to $83 million. Sales growth in our captive agencies is generally dependent on growth in the size of the agency force. The American Income agent count rose 6% to 5,890 at June 30, 2014 over the count a year earlier (5,540), and rose 11% when compared with the count at December 31, 2013 (5,302). The average agent count for the first half of 2014 was 5,521. 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.

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 increased marketing activities related to internet 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.


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While the juvenile market is an important source of sales, 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 5% to $355 million, representing 36% of Torchmark's total life premium in the first six months of 2014. Net sales of $85 million for this group increased 11%. First-year collected premium increased 6% to $51 million.

The Liberty National Exclusive Agency markets individual and group life insurance to middle-income customers. Life premium income for this agency was $137 million in the 2014 period, a 2% decline from $139 million in the 2013 six months. First-year collected premium declined 3% to $13 million.

Net sales for the Liberty Agency increased 5% to $16 million. Liberty had 1,500 producing agents at June 30, 2014, compared with 1,283 a year earlier, an increase of 17%. The agent count has increased 5% since December 31, 2013, when it stood at 1,430. The average agent count for the first half of 2014 was 1,446. 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 helped 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 $113 million of life premium income, or 12% of Torchmark's total in the first six months of 2014, but contributed only 3% of net sales.


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                                 Life Insurance

                               Summary of Results

                         (Dollar amounts in thousands)



                                                     Six months ended June 30,
                                                 2014                        2013                   Increase
                                                        % of                        % of
                                         Amount        Premium       Amount        Premium       Amount       %
Premium and policy charges              $ 981,010           100     $ 945,923           100     $ 35,087       4
Net policy obligations                    378,983            38       364,634            39       14,349       4
Commissions and acquisition expense       320,692            33       312,449            33        8,243       3

Insurance underwriting income before
other income and administrative
expense                                 $ 281,335            29     $ 268,840            28     $ 12,495       5

Life insurance underwriting income before insurance administrative expense was $281 million, increasing 5%. 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 to 29% of premium in the six months ended June 30, 2014, compared with 28% in the same period last year.


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Health insurance, comparing the first six months of 2014 with the first six 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 27% 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 $435 million in the 2014 period. Medicare Supplement premium declined 1% to $212 million, while other limited-benefit health premium declined 1% to $223 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 28% to $61 million. Medicare Supplement net sales increased 72% to $26 million in the 2014 period. The increase in Medicare Supplement net sales was primarily a result of stronger group sales, which vary from period to period at the United American Independent Agency. Limited-benefit net sales increased 7% to $35 million. Health first-year collected premium rose 4% to $51 million.


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

Health Insurance

Premium by Distribution Method

(Dollar amounts in thousands)

                                                    Six months ended June 30,                     Increase
                                                  2014                     2013                  (Decrease)
                                                         % of                     % of
                                           Amount       Total       Amount       Total       Amount          %
United American Independent Agency
Limited-benefit plans                     $  10,576                $  14,155                $  (3,579 )      (25 )
Medicare Supplement                         143,359                  139,700                    3,659          3

                                            153,935         36       153,855         35            80          0
Liberty National Exclusive Agency
Limited-benefit plans                        72,761                   77,720                   (4,959 )       (6 )
Medicare Supplement                          41,541                   47,207                   (5,666 )      (12 )

                                            114,302         26       124,927         29       (10,625 )       (9 )
Family Heritage Agency
Limited-benefit plans                       100,262                   93,680                    6,582          7
Medicare Supplement                               0                        0                        0          0

                                            100,262         23        93,680         21         6,582          7
American Income Exclusive Agency
Limited-benefit plans                        38,678                   39,312                     (634 )       (2 )
Medicare Supplement                             250                      298                      (48 )      (16 )

                                             38,928          9        39,610          9          (682 )       (2 )
Direct Response
Limited-benefit plans                           390                      168                      222        132
Medicare Supplement                          26,716                   27,511                     (795 )       (3 )

                                             27,106          6        27,679          6          (573 )       (2 )
Total Health Premium
Limited-benefit plans                       222,667         51       225,035         51        (2,368 )       (1 )
Medicare Supplement                         211,866         49       214,716         49        (2,850 )       (1 )

Total                                     $ 434,533        100     $ 439,751        100     $  (5,218 )       (1 )


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

Health Insurance

Net Sales by Distribution Method

(Dollar amounts in thousands)

                                                      Six months ended June 30,                   Increase
                                                    2014                    2013                 (Decrease)
                                                           % of                    % of
                                              Amount      Total       Amount      Total       Amount         %
United American Independent Agency
Limited-benefit plans                        $    458                $    460                $     (2 )        0
Medicare Supplement                            22,612                  12,720                   9,892         78

                                               23,070         38       13,180         28        9,890         75
Liberty National Exclusive Agency
Limited-benefit plans                           7,916                   6,304                   1,612         26
Medicare Supplement                               133                     211                     (78 )      (37 )

                                                8,049         13        6,515         14        1,534         24
Family Heritage Agency
. . .
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