Total revenues rose 6% in 2012 to $3.59 billion. They were flat in 2011 at $3.38 billion compared with $3.37 billion in 2010. Life premium rose 5% or $82 million in 2012 to $1.81 billion. Life premium increased $63 million in 2011 to $1.73 billion. Net investment income was essentially flat at $694 million in 2012, after rising 2% or $17 million in 2011. Health premium increased 13% to $1.05 billion in 2012 and contributed $117 million to 2012 revenue growth, but health premium negatively affected revenue growth in 2011 as discussed below.
Life insurance premium rose 5% to $1.81 billion in 2012 after having increased 4% in 2011 to $1.73 billion. Life insurance products are marketed through several distribution channels. Premium income by channel for each of the last three years is as follows:
The Direct Response operation accounted for 35% of our life insurance premium during 2012, increasing 6% over 2011 premium. Life premium for this unit rose 5% in 2011 and 6% in 2010. Net sales rose 3% to $141 million in 2012 after being flat in 2011. First-year collected premium rose 5% to $93 million after a decline of 1% to $89 million in 2011. The average face amount of policies issued in 2012 was approximately $20 thousand.
Index to Financial Statements The UA Independent Agency is Torchmark’s largest in terms of health premium income and sales, producing 41% of health premium and 54% of health sales. This Agency is composed of independent agencies appointed with Torchmark whose size range from very large, multi-state organizations down to one-person offices. All of these agents generally sell for a number of insurance companies. Torchmark had 2,003 active producing agents at December 31, 2012 compared with 1,447 a year earlier. This Agency is our largest producer of Medicare Supplement insurance, with $272 million or 63% of our Medicare Supplement premium income in 2012. Net sales for this Agency increased 29% to $42 million in 2012, after having increased 2% in 2011 from $32 million in 2010. Total health premium income for the UA Independent Agency was $299 million in 2012, a 3% decline from 2011 premium of $306 million. Premium income also declined 3% in 2011. These declines in premium have resulted due to lapses of limited-benefit products being greater than new sales.
Direct Response, primarily a life operation, also offers health insurance, which is predominantly Medicare Supplements sold directly to employer or union sponsored groups. In all three years considered, net health sales were approximately $5 million. In 2012, net health sales for this group represented approximately 3% of Direct Response’s total life and health net sales. Direct Response health premium income has risen each year over the prior year. Health premium rose 2% in 2012 to $58 million and 5% in 2011.
Business: Torchmark Corporation (Torchmark or alternatively, the Company) through its subsidiaries provides a variety of life and health insurance products and annuities to a broad base of customers.
Allowed investments are limited to equities, fixed maturities, and short-term investments (invested cash). There is also a guaranteed annuity contract to fund the obligations of the American Income Pension Plan. The assets are to be invested in a mix of equity and fixed income investments that best serve the objectives of the pension plan. Factors to be considered in determining the asset mix include funded status, annual pension expense, annual pension contributions, and balance sheet liability. Equities include common and preferred stocks, securities convertible into equities, mutual funds that invest in equities, and other equity-related investments. Equities must be listed on major exchanges and adequate market liquidity is required. Fixed maturities consist of marketable debt securities rated investment grade at purchase by a major rating agency. Short-term investments include fixed maturities with maturities less than one year and invested cash. Short-term investments in commercial paper must be rated at least A-2 by Standard & Poor’s with the issuer rated investment grade. Invested cash is limited to banks rated A or higher. Investments outside of the aforementioned list are not permitted, except by prior approval of the Plan’s Trustees. At December 31, 2012, there were no restricted investments contained in the portfolio. Plan contributions have been invested primarily in fixed maturities during the three years ending December 31, 2012.
Letters of Credit: Torchmark has guaranteed letters of credit in connection with its credit facility with a group of banks. The letters of credit were issued by TMK Re, Ltd., a wholly-owned subsidiary, to secure TMK Re, Ltd.’s obligation for claims on certain policies reinsured by TMK Re, Ltd. that were sold by other Torchmark insurance companies. These letters of credit facilitate TMK Re, Ltd.’s ability to reinsure the business of Torchmark’s insurance carriers. The agreement expires in 2015. The maximum amount of letters of credit available is $250 million. Torchmark (parent company) would be liable to the extent that TMK Re, Ltd. does not pay the reinsured party. At December 31, 2012, $198 million of letters of credit were outstanding.