Torchmark Corp. (TMK) reported fourth-quarter 2014 net operating income of $1.00 per share, in line with the Zacks Consensus Estimate. On a year-over-year basis, earnings improved 3%.
For 2014, net operating income came in at $4.03, beating the Zacks Consensus Estimate by a penny and improving 6% year over year.
Behind the Headlines
Torchmark reported total premium revenue of $807.9 million, up 7% year over year, led primarily by higher premium from Medicare Part D operations followed by premium growth in the Life and Health Insurance business.
Net investment income increased 3% year over year to $190.7 million.
Excess investment income, a measure of profitability, increased 2% year over year to $55.6 million.
Torchmark reported underwriting income of $147.7 million, which moved down 3% year over year. The decrease stemmed from a decline in margins in Medicare Part D operations.
Administrative expenses decreased 2% year over year to $45 million. The ratio of administrative expenses to premiums was 5.6%, down 40 basis points year over year.
Agents, the major drivers of premium growth, saw a 21%, 5% and 13% increase, respectively, in American Income, Liberty National and Family Heritage distribution channels.
Segment Update
Torchmark's Life Insurance operations saw premium revenue increase of 5% year over year to $493.6 million, attributable to higher premiums written by the distribution channels American Income Agency (up 8%) and Direct Response (up 7%). Life Insurance underwriting income declined 1% year over year to $135.9 million. Net sales of Life Insurance went up 17% year over year.
Health Insurance premium revenue (excluding Medicare Part D) was up 5% year over year to $224.7 million, while underwriting income was up 3% year over year to $50.8 million. Total net health sales, excluding Medicare Part D were $72 million, up from $40 million reported in the year-ago quarter.
Premium revenue from the Medicare Part D business increased 22% year over year to $89.6 million. Underwriting income saw a drastic 55% year over year decline to $4.5 million.
Share Repurchase Update
During the quarter, Torchmark repurchased 1.7 million shares at a total cost of $87.3 million, taking the full-year tally to 7.2 million shares bought back for about $377 million.
Financial Update
Shareholders’ equity as of Dec 31, 2014 increased 2.7% year over year to $3.6 billion.
Torchmark reported book value per share of $27.91, which was up 8% year over year.
Return on equity was 14.9% in 2014, down 60 basis points year over year.
Guides 2015
Management now expects earnings between $4.20 and $4.40 per share. The new guidance represents a 5-cent decrease in the midpoint from the previous guidance primarily due to an increase in pension expense, a reduction in the expected Part D margin and lowering of the expected earnings from Canadian operations to account for the recent change in the Canadian exchange rate.
Our Take
Torchmark’s niche market focus, steady capital deployment and strong operating fundamentals position it well for long-term outperformance.
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.
A strong capital position and effective capital management are among other positives.
Zacks Rank
Torchmark carries a Zacks Rank #3 (Hold).
Peer Performance
Bottom lines at StanCorp Financial Group Inc. (SFG) and Reinsurance Group of America Inc. (RGA) outperformed their respective Zacks Consensus Estimate in the fourth quarter. A better-ranked stock, Lincoln Financial Group (LNC) with Zacks Rank #2 (Buy) will report on Feb 4.
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