Torchmark Misses Q3 Earnings Estimate, Cuts Guidance

Torchmark Corp. (TMK) reported third-quarter 2014 net operating income of 99 cents per share, missing the Zacks Consensus Estimate of $1.02. Earnings were, however, up 4.2% year over year.

Torchmark reported total premium revenue of $792.3 million, up 5% 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 4% year over year to $189.6 million.

Excess investment income, a measure of the segment’s profitability, went up 3% year over year to $55.3 million.

Torchmark reported underwriting income of $149.5 million, which moved down 1.5% year over year. The decrease stemmed from a decline in margins in Medicare Part D operations.

Administrative expenses increased 1% year over year to $45 million. The ratio of administrative expenses to premiums was 5.7%, down 20 basis points year over year.

Agents, the major drivers of premium growth, saw a 13%, 22% and 6% increase, respectively, in American Income, Liberty National and Family Heritage distribution channels.

Segment Update

At Torchmark's Life Insurance operations, premium revenue increased 4% year over year to $491.7 million, attributable to higher premiums written by distribution channels – American Income Agency (up 7%) and Direct Response (up 6%) – partially offset by a 2% decline in premiums written by Liberty National Life Agency. Life Insurance underwriting income remained unchanged year over year at $139.3 million. Net sales of life insurance went up 14% year over year.

Health Insurance premium revenue (excluding Medicare Part D) was up by just 1% year over year to $210.2 million while underwriting income was up 5% year over year to $49.2 million. Total net health sales, excluding Medicare Part D were $48 million, up from $23 million reported in the year-ago quarter.

Premium revenue from the Medicare Part D business increased 17% year over year to $90.3 million. Underwriting income declined by a substantial 50% year over year to $4.5 million.

Share Repurchase Update

During the quarter, Torchmark repurchased 1.8 million shares at a total cost of $97.6 million.

Financial Update

Shareholders’ equity as of Sep 30, 2014 increased 4.3% year over year to $3.6 billion.

Torchmark reported book value per share of $27.57, which was up 10.0% year over year.

For the reported quarter, return on equity was 15.1%, down 50 basis points year over year.

Earnings Guidance Update

For 2014, management reduced its earnings guidance to the range of $4.00 to $4.04 per share from the earlier expectation of $4.05 to $4.15 per share. The guidance cut reflects adverse effects of Medicare Part D claims and investment income.

Torchmark carries a Zacks Rank #3 (Hold).

Our Take

While Torchmark has missed earnings estimates for the second quarter in a row, we expect the company’s niche market focus, steady capital deployment and strong operating fundamentals to aid its solid performance over the long term.

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 will also aid Torchmark's earnings going forward.

Peer Performance

Better-ranked stocks include Fidelity & Guaranty Life Common (FGL), Sun Life Financial Inc. (SLF) and Symetra Financial Corporation (SYA). While Fidelity carries a Zacks Rank #1 (Strong Buy), Sun Life and Symetra holds a Zacks Rank # 2 (Buy).