Globe Life Inc. (filing identifies Torchmark Corporation) — 2018 Form 10-K
Entity note: The supplied filing is Torchmark Corporation’s annual report for the fiscal year ended December 31, 2018, not a filing under the name Globe Life Inc. It describes Globe Life as one of Torchmark’s insurance subsidiaries. The summary below follows the filing as provided.
Business context and reporting period
Torchmark is an insurance holding company focused primarily on individual life and supplemental health insurance for lower-middle- to middle-income households. Its main distribution channels include direct response, exclusive agencies, and independent agents. The report covers the year ended December 31, 2018, with 2017 as the principal comparable period.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $4.304 billion | $4.156 billion |
| Premium revenue | $3.422 billion | $3.283 billion |
| Net investment income | $882.5 million | $847.9 million |
| Net income | $701.5 million | $1.454 billion |
| Diluted EPS | $6.09 | $12.22 |
| Net operating income from continuing operations, non-GAAP | $707.0 million | $573.7 million |
| Cash from continuing operations | $1.276 billion | $1.351 billion |
| Total assets | $23.096 billion | $23.475 billion |
| Shareholders’ equity | $5.415 billion | $6.231 billion |
| Short-term and long-term debt, carrying value | $1.665 billion | $1.460 billion |
Life premium rose 4% to $2.407 billion and health premium rose 4% to $1.015 billion. Life underwriting margin increased 8% to $652.3 million (27% of life premium, versus 26% in 2017); health underwriting margin increased 8% to $236.1 million (23% of health premium, versus 22%). Excess investment income, a company-defined measure, grew 2% to $245.1 million; per diluted share it rose 6% to $2.13.
The filing reports return on equity of 12.3% and net operating income return on equity, excluding net unrealized fixed-maturity gains, of 14.6%. These are management-presented measures; net operating income and related return measures are non-GAAP.
At year-end, cash and short-term investments were approximately $184 million. Fixed maturities had a fair value of $16.298 billion, and total cash and invested assets were $17.240 billion. The company reported $293 million of additional borrowing capacity under its credit facility and a consolidated Company Action Level RBC ratio of 326%.
Material changes versus the prior period
- Net income fell 52% and diluted EPS fell 50%, principally because 2017 included an approximately $874 million benefit from the U.S. tax law change. The 2018 effective tax rate was 18.8%, compared with a 2017 tax benefit and reported effective rate of negative 75.6%.
- Excluding the tax-reform item and other specified non-operating items, net operating income from continuing operations increased 23% to $707.0 million.
- Revenue rose 4%; life and health underwriting margins each grew 8%. Administrative expenses increased 6.3%, with the ratio to premium rising to 6.5% from 6.4%, partly due to employee costs and technology spending.
- Net cash from continuing operations declined to $1.276 billion from $1.351 billion. Shareholders’ equity declined 13%, reflecting about $1.1 billion of after-tax unrealized investment losses and share repurchases, partly offset by net income.
- The net unrealized gain on fixed maturities fell from approximately $1.974 billion to $544 million, primarily as market interest rates rose. The company said it had the intent and ability to hold the securities to maturity.
- In September, Torchmark issued $550 million of 4.55% senior notes due 2028, using proceeds in part to redeem $293 million of 9.25% notes, capitalize insurance subsidiaries by $150 million, and repay commercial paper. Total debt increased year over year.
Outlook, management commentary, risks, and unusual items
- Management expected 2019 consolidated Company Action Level RBC to be targeted at 300%–320%, versus 326% at year-end 2018. It projected $465 million of subsidiary dividends and $360 million of parent-company excess cash flows for 2019.
- Management expected Globe Life Direct Response life sales in 2019 to be relatively flat or increase slightly. It indicated share repurchases could remain a primary use of excess parent-company cash when market conditions are favorable. No formal earnings guidance is provided in the supplied text.
- Investment income growth faces reinvestment-yield pressure: new and reinvested funds may earn less than maturing or called securities. The portfolio is predominantly fixed-rate and long-duration, leaving reported equity sensitive to interest rates and credit-market conditions.
- Other significant risks include differences from assumed mortality, morbidity, and persistency; delays in obtaining regulated health-insurance rate increases; competition and economic weakness affecting customers and agents; regulatory or tax changes; cyber and information-security events; litigation; and restrictions on dividends from insurance subsidiaries.
- Several California putative class actions filed in 2018 and early 2019 challenge the classification of American Income sales agents as independent contractors. The company stated it could not reasonably estimate potential liability; management considered a material adverse judgment remote. Unclaimed-property audits involving 47 states were ongoing, with no assessment or liability indicated to date and no loss range estimated.
- Unusual items included a $11.1 million pretax loss on redemption of debt and $3.6 million of administrative settlements in 2018. Quarterly Q4 2018 net income was $164.7 million, or $1.45 diluted EPS; Q4 2017 net income was $1.027 billion, or $8.71 diluted EPS, heavily affected by the tax-reform benefit.
Most important facts for investors to verify
- Confirm the issuer and security identity: this source is Torchmark Corporation (NYSE: TMK), despite the request naming Globe Life Inc.
- Reconcile reported GAAP net income and EPS to management’s non-GAAP operating results, especially the large 2017 tax-reform benefit and the 2018 debt-redemption loss.
- Track insurance sales and persistency by distribution channel, including the decline in Globe Life Direct Response net sales and agent-force growth at American Income.
- Review fixed-maturity credit quality, unrealized losses, interest-rate sensitivity, and any deterioration in issuer fundamentals; 96% of fixed maturities were investment grade at year-end.
- Assess debt maturities, commercial-paper reliance, subsidiary dividend capacity, and the sustainability of repurchases and dividends against capital targets.
- Monitor California agent-classification litigation, multistate unclaimed-property audits, and the timing and adequacy of Medicare Supplement rate approvals.