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TMK Beats, Affirms 2012 Guidance

Zacks Equity Research

Life and health insurer, Torchmark Corp. (TMK) reported fourth-quarter 2011 operating income of $1.25 per share, up 12% year over year, led by a higher insurance underwriting income coupled with increased investment income. Lower share count compared with last year, due to share repurchases, also buoyed the bottom-line.

Total insurance premium of Torchmark increased 0.7% year over year to $611.3 million, led by higher premium from the Life Insurance business partly offset by lower premium from the Health Insurance business.

Net investment income increased 2% year over year to $178.1 million due to higher invested assets. However, excess investment income, which is the measure of the segment’s profitability, went down 5% to $72.2 million.

Underwriting income increased 2.0% year over year to $121.5 million, primarily due to higher margins at Life, partially offset by a lower margin in Health and Health – Part D.

Administrative expenses were $41 million, up 1.5% from the year-ago quarter.

For the full year 2011, net operating income was $4.68 per share, compared with $4.27 per share in the year-ago period.

Segment Update    

In Life Insurance operations, premium revenue grew 4% year over year to $432 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 increased 6% to $121.4 million. Life net sales increased 5% year over year to $80 million.

Health insurance premium revenue declined 5% year over year to $179.2 million, while underwriting margin was down 5% to $33.8 million. Health net sales grew 7% to $21 million.

Premium revenue from Medicare part D declined 5% year over year to $48.5 million, while underwriting margin decreased 23% to $6.6 million. The company’s new lower cost part D plan helped it to pick up 76,000 low-income subsidized auto enrollees. The product will also enable the company to 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 $35.59 -- up 8.9% year over year. Return on equity (:ROE) was 14.2% for the quarter, compared  with 13.9%  in the year-ago quarter.

During the quarter, Torchmark repurchased 1.7 million shares at a total cost of $67.3 million at an average price of $40.44 per share.  For the fiscal year, the company repurchased 18.9 million shares.

Looking Ahead

Management reiterated its previously announced FY12 guidance. Earnings per share are expected to be in the $5.10 – $5.40 range. The guidance reflects a reduction of approximately 10 cents as a result of the revised accounting standards adopted by the company, effective January 2012.

Our Take

Overall, Torchmark recorded a strong performance in the fourth quarter as well as full year 2011. Operating results, reflected by earnings per share, return on equity and book value per share, all showed significant increases.

However, a closer look at the segment results shows that Torchmark’s Life Insurance segment, which accounts for the major chunk of its underwriting income, is the only segment to have registered premium growth during the year driven byhigher premiums written by two distribution channels (American Income Agency and Direct Response). The Health segment showed a lackluster performance throughout the year, but a slow recovery is expected in 2012.

On the balance sheet side, management has been able to maintain a sufficient risk-based capital ratio and adequate financial flexibility. Greater share repurchase activity is anticipated, which would support bottom-line earnings in the backdrop of a constrained top-line growth.

Based in Birmingham, Alabama, Torchmark closely competes with Prudential Financial Inc. (PRU), Unum Group (UNM) and others. The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. 

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