|Edgar Online, Inc.|
Results of Operations
Acquisition. As disclosed in Note H-Acquisition,
Torchmarkacquired Family Heritage on November 1, 2012for approximately $232 million. As noted, Family Heritage is a specialty insurer focused primarily on selling individual supplemental health insurance products through a captive agency force, consisting of approximately 1,200 agents. We were attracted to the company because it sells protection-oriented insurance to middle income families through a captive agency force that we believe we can help grow. We currently intend to operate the company as a stand-alone operation. We expect that the addition of this acquisition will be accretive to earnings and earnings per share in both 2012 and 2013, excluding the effects of acquisition costs of the transaction as described in Note G-Business Segments and Note H-Acquisition. These costs must be expensed in their entirety in 2012 under applicable accounting guidance. The transaction will have a minimal effect, if any, on our share repurchase program and the regulatory capital ratios of the insurance subsidiaries. Debt Transactions. As discussed in Note I-Debt Transactions, we closed two separate debt issues on September 24, 2012- a ten-year $300 million3.8% Senior Note issue and a forty-year $125 million5.875% Junior Subordinated Debt issue that is callable at par after five years. The Senior Notes were issued to provide approximately $200 millionto fund the acquisition of Family Heritage and $94 millionto pre-fund the eventual retirement of our August 20137 3/8% Senior Notes. As we wanted to fund the majority of the Family Heritage acquisition internally, the Parent Company issued $150 millionof these Senior Notes to two of our insurance companies. The $125 millionin Junior Subordinated Notes were issued to refinance our $120 millionTrust Preferred Securities, which carried an interest rate of 7.1%. The Trust Preferred Securities were called on October 24, 2012. The $150 millionin the 3.8% Senior Notes owned by our insurance companies are eliminated in consolidation and thus are not treated as outstanding debt or as invested assets in our consolidated financial statements. Therefore, the issuance of these two instruments resulted in net additional proceeds to the Company of $268 millionduring September, 2012. After the older issues are retired, the addition of these new debt issues will result in a small increase in our debt to capitalization ratio and a reduction in interest cost. These issuances will have no material effect on our debt covenants. Effect of New Accounting Standard. As discussed in Note F - Adoption of New Accounting Standard, Torchmarkadopted ASU 2010-26, a new accounting rule concerning the deferral of policy acquisition costs. Note F describes the effect that this new guidance has on Torchmark. The new standard was adopted effective January 1, 2012, but was adopted retroactively, meaning that all prior periods give effect to the change as if we had always accounted for deferred acquisition costs under the new guidance. Therefore, the results for prior periods presented in this discussion have been restated as if the new rule had been in effect in those periods. 25
Table of Contents
Summary of Operations.
Torchmark'soperations are segmented into its insurance underwriting and investment operations as described in Note G-Business Segments. The measures of profitability described in Note G are useful in evaluating the performance of the segments and the marketing groups within each insurance segment, because each of our distribution units operates in a niche market. These measures enable management to view period-to-period trends, and to make informed decisions regarding future courses of action. The tables in Note G-Business Segments demonstrate how the measures of profitability are determined. Those tables also reconcile our revenues and expenses by segment to major income statement line items for the nine-month periods ended September 30, 2012and 2011. Additionally, a table in that note, Analysis of Profitability by Segment, provides a summary of the profitability measures that demonstrates year-to-year comparability and reconciles those measures to our net income. That summary represents our overall operations in the manner that management views the business, and is a basis of the following highlights discussion. A discussion of operations by each segment follows later in this report. These discussions compare the first nine months of 2012 with the same period of 2011, unless otherwise noted. The following discussions are presented in the manner we view our operations, as described in Note G-Business Segments. Highlights, comparing the first nine months of 2012 with the first nine months of 2011. Net income per diluted share increased 15% to $3.84from $3.33. Included in net income in 2012 were realized investment gains of approximately $11 millionafter tax, or $.11per share compared with $14 millionor $.12per share in 2011. Realized investment gains and losses are presented more fully under the caption Realized Gains and Losses in this report. Earnings in 2011 were also negatively affected by two non-operating charges, a charge for a state administrative matter in the estimated after tax amount of $3.9 million( $.03per share) and the loss on sale of aviation equipment of $636 thousandafter tax ( $.01per share). We use three statistical measures as indicators of future premium growth: "annualized premium in force," "net sales," and "first-year collected premium." Annualized premium in force is defined as the premium income that would be received over the following twelve months at any given date on all active policies if those policies remain in force throughout the twelve-month period. Annualized premium in force is an indicator of potential growth in premium revenue. Net sales is defined as annualized premium issued, net of cancellations in the first thirty days after issue, except for Direct Response, where net sales is annualized premium issued at the time the first full premium is paid after any introductory offer has expired. Annualized premium issued is the gross premium that would be received during the policies' first year in force, 26