Torchmark Earnings Ebb

Torchmark(TMK - Analyst Report) reported third quarter operating earnings of $1.48 per share compared to $1.51 per share in the year-ago quarter. Results were affected by lower underwriting as well as lower excess investment income.

Life premium revenue was $414.4 million versus $406.1 million in the prior year period. This was due to strong L ife sales in the quarter, primarily driven by the growth in its distribution channels: American Income Agency and Direct Response. Net sales of life insurance increased 9% year-over-year. Life insurance accounted for 72% of the company's insurance underwriting margin for the quarter and 62% of total premium revenue.

Health premium revenue was $247.8 million versus $272.4 million in the prior year quarter, led by a decline in health sales. The company has experienced a drop in its LNL Agency. Health sales, excluding Medicare Part D, fell 39% year-over-year.

Excess investment income − a measure to evaluate the performance of the Investment segment − declined 14% year-over-year to $71.2 million. Net investment income was flat even though average invested assets were up 6% over the year-ago quarter because the company held significantly more cash throughout the reported quarter than the year-ago quarter.

For the full fiscal year 2009, Torchmark expects net operating income per share in the range of $5.90–$5.95, assuming no share repurchases. The previous guidance was $5.93−$6.08 per share. For 2010, earnings are expected to lie in the range of $6.05–$6.25 per share.

Torchmark’s Life Insurance segment, which accounts for a major chunk of its underwriting income, is expected to remain under pressure due to recessionary market conditions. Higher debt costs and lower margins at Liberty National have pressured earnings. However, strong competitive position in attractive niche markets, an effective use of capital and low-cost operating structure will likely enable Torchmark to maintain superior returns. Therefore we retain a Neutral rating on the shares for now.