Life and health insurer, Torchmark Corp. (TMK) reported third-quarter 2011 operating income of $1.22 per share, up 13% year over year, led by higher underwriting income, coupled with increased investment income. Lower share count than last year, due to share repurchases, also buoyed the bottom-line.
Total insurance premium of Torchmark remained unchanged relative to the prior-year quarter at $657.4 million. The increase in premium from Life business was mostly offset by lower premium from both Health and Medicare Part D businesses.
Net investment income increased 3% year over year to $176.8 million due to higher invested assets. However, excess investment income, which is the measure of the segment’s profitability, dropped 3% to $72.3 million.
Underwriting income inched up 2.0% year over year to $122.9 million, primarily due to higher margins at Life and Medicare part D.
Administrative expenses were $40 million, up 4% from the year-ago quarter. They were roughly $800,000 more than management’s projection, primarily as a result of additional salary expenses. For 2012, administrative expenses are expected to increase in the range of 1% to 2%.
Segment Update
In Life Insurance operations, premium revenue, excluding United Investors, grew 3% year over year to $430 million, led by higher premiums written by distribution channels, such as American Income Agency and Direct Response, partly offset by a slight decrease in premium written by LNL Agency. Life underwriting margins upped 5% to $121 million. Life net sales declined 1% in the quarter to $78 million.
Health insurance premium revenue declined 6% year over year to $177 million, while underwriting margin dropped 8% to $34 million. Health net sales grew 26% to $16 million.
Premium revenue from Medicare part D slipped 5% year over year to $50 million, whereas underwriting margin improved 18% to $7 million. For 2012, the company has developed a new lower cost part D plan that will allow it to pick up 76,000 low income subsidized auto enrollees as well as grow its individual sales. Management expects part D revenues to increase by 40% to 50% next year.
Book value per share, a measure of net worth, was $35.20, a 10% year-over-year increase.
Looking Ahead
For 2011, management projects net operating income per share to be in the range of $4.65 to $4.69 per share. For 2012, it anticipates net operating income per share to be between $5.10 and $5.40 per share. The company’s guidance reflects a reduction of 6–10 cents as a result of the changed NDAC accounting.
Management stated that in response to the low interest rate environment, it is planning to raise the rates on American Income’s Life products and the Direct Response products by 5%. This will help the company make up for the lower investment income that emanated from low interest rates to some extent.
Torchmark, which competes closely with Prudential Financial Inc. (PRU) and Unum Group (UNM), carries a long-term Neutral recommendation.
PRUDENTIAL FINL (PRU): Free Stock Analysis Report
TORCHMARK CORP (TMK): Free Stock Analysis Report
UNUM GROUP (UNM): Free Stock Analysis Report
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