Torchmark Misses on Q2 Earnings, Up Y/Y on Premium Growth

Torchmark Corp. TMK reported second-quarter 2014 net operating income of $1.02 per share, missing the Zacks Consensus Estimate by a penny. Earnings were up 7.4% year over year. Strong results came on the back of higher premium revenues as well as an improvement in investment income.
 

Torchmark reported total premium revenue of $792.1 million, up 3% year over year, led primarily by higher premium from Medicare Part D operations followed by premium growth in the Life Insurance business.

Net investment income increased 3% year over year to $189.9 million.

Excess investment income, a measure of the segment's profitability, went up 4% year over year to $57.2 million.

Torchmark reported underwriting income of $155.6 million, which moved up 3.0% year over year. The increase came on the back of higher margins in Life Insurance, as well as Medicare Part D operations.

Agents, the major drivers of premium growth, saw a 6%, 17% and 4% increase respectively in American Income, Liberty National and Family Heritage distribution channels.

Segment Update

At Life Insurance operations, premium revenue increased 4% year over year to $492.0 million, attributable to higher premiums written by distribution channels – American Income Agency (up 7%) and Direct Response (up 5%) – partially offset by a 2% decline in premiums written by Liberty National Life Agency. Life Insurance underwriting income increased 4.0% year over year to $140.7 million. Net sales of life insurance went up by 11% year over year.

Health Insurance premium revenue (excluding Medicare Part D) decreased 1% year over year to $215.1 million while underwriting income also saw the same decline to $49.8 million. Total net health sales, excluding Medicare Part D, increased 21% year over year.

Premium revenue from the Medicare Part D business increased 16% year over year to $85.0 million. Underwriting income rose 6% year over year to $9.0 million.

Share Repurchase Update

During the quarter, Torchmark repurchased 1.6 million shares at a total cost of $82.1 million.

Financial Update

Shareholders' equity as of Jun 30, 2014 increased 5.4% year over year to $3.6 billion.

Torchmark reported book value per share of $27.02, which was up 10.4% year over year.

For the reported quarter, return on equity was 15.4%, almost unchanged year over year.

Earnings Guidance Update

For 2014, management expects earnings in the range of $4.05 to $4.15 per share. The guidance reflects adverse effects of Medicare Part D claims and investment income.

Torchmark carries a Zacks Rank #3 (Hold).

Our Take

We expect the company's niche market focus, steady capital deployment and strong operating fundamentals to aid its solid performance in the upcoming quarters.

Among the company's distribution channels, American Income Agency and Direct Response are performing well. Liberty National is, however, underperforming despite restructuring efforts undertaken for its turnaround.

We are also optimistic about the company's acquisition of Family Heritage Life, which is accretive to its earnings.

A strong capital position and good capital management make Torchmark a favorite among investors.

Peer Performance

Other insurers like UnitedHealth Group Inc. UNH, ACE LIMITED ACE and Assurant Inc. AIZ reported second-quarter earnings ahead of the respective Zacks Consensus Estimate.