Business context and reporting period
This is Torchmark Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The filing identifies Torchmark—not Globe Life Inc.—as the registrant; verify the entity and filing match your intended company.
Torchmark reports life, health, and annuity insurance operations, plus investment activities. Its Medicare Part D business was sold effective July 1, 2016; remaining related balances are being settled.
Financial results and position
- Revenue: Q2 revenue was $1.029 billion, up 3.8% from $991.9 million. Six-month revenue was $2.053 billion, up 4.2% from $1.970 billion. Six-month premiums rose 4.6% to $1.637 billion; net investment income increased 5.6% to $421.1 million.
- Profit: Q2 net income was $140.3 million versus $138.4 million; diluted EPS was $1.18 versus $1.13. Six-month net income was $273.8 million versus $262.5 million; diluted EPS was $2.29 versus $2.13. Six-month net operating income, a non-GAAP measure, rose 4% to $277.1 million.
- Underwriting: Six-month life underwriting income increased 1% to $291.4 million, with margin declining to 25% from 26%. Health underwriting income rose 4% to $108.6 million, with margin steady at 22%.
- Cash flow: Six-month operating cash flow was $739.1 million, compared with $604.9 million. Investing activities used $506.6 million and financing activities used $214.3 million. Ending cash was $97.7 million.
- Assets and liquidity: At June 30, total assets were $22.58 billion and shareholders’ equity was $5.05 billion. Cash and short-term investments totaled about $192 million. Available-for-sale fixed maturities had a fair value of $16.32 billion and a net unrealized gain of about $1.67 billion.
- Debt: Short-term debt was $306.3 million and long-term debt was $1.132 billion. Commercial paper outstanding was $303.6 million; $269.4 million remained available under the credit line. The company reported compliance with credit-facility covenants and six-month interest coverage of 10.4 times.
Material changes versus the prior comparable period
- Six-month diluted EPS rose 8%; net income increased about 4%. Realized investment results shifted from a $2.8 million after-tax gain in 2016 to a $2.0 million after-tax loss in 2017.
- Life premium increased 5%, while life underwriting margin narrowed, primarily because of higher policy obligations in Globe Life Direct Response. That channel’s six-month net sales and first-year collected premium each fell 7%; management said the declines were expected as marketing was refined to improve underwriting profitability.
- Health premium rose 3% and net sales rose 8%, but first-year collected health premium declined 4%, partly reflecting lower group sales in 2016.
- Excess investment income increased 11% to $120.8 million; per diluted share it rose 13% to $1.01. The fixed-maturity portfolio’s average effective yield declined to 5.70% from 5.81%.
- Operating cash flow increased, which management attributed primarily to timing of cash disbursements and fluctuations in other liabilities. Share repurchases totaled $203.8 million for the six months.
Outlook, commentary, risks, and unusual items
- Management expected 2017 cash dividends from insurance subsidiaries of approximately $455 million and said liquidity should be readily available for the foreseeable future. The company targeted an insurance-subsidiary RBC ratio of about 325%; the reported aggregate ratio was approximately 324% at December 31, 2016.
- Management expected average annual fixed-maturity portfolio turnover over the next five years not to exceed 1%–2%. It stated that a rise of roughly 90–95 basis points in interest rates would eliminate the portfolio’s June 30 unrealized gains, and said it had the intent and ability to hold securities to maturity.
- Six-month administrative settlements reduced pretax results by $2.1 million. The company recorded $245,000 of other-than-temporary investment impairment, versus none in the comparable 2016 period.
- Risks discussed include changes in mortality, morbidity, lapse rates, sales, interest rates, investment issuer credit quality, Medicare and other regulation, health premium-rate approvals, competition, litigation, operating efficiency, and cybersecurity. Management said litigation and unclaimed-property audits were not expected to materially affect results or liquidity, but noted that no loss range could be estimated for potential audit-related contingencies.
- The company expected 2017 qualified pension-plan contributions not to exceed $20 million; $12 million had been contributed in the first six months.
Important facts for investors to verify
- Confirm that Torchmark Corporation’s 2017 filing is the intended issuer, given the request names Globe Life Inc.
- Review the durability of life and health sales growth, especially Direct Response mortality experience and the decline in first-year collected health premium.
- Assess the impact of lower reinvestment yields, long portfolio duration, and credit exposure; 95% of fixed maturities at amortized cost were investment grade, while below-investment-grade holdings totaled $672 million.
- Monitor commercial paper usage, credit-line availability, insurance-subsidiary capital levels, and the timing of subsidiary dividends.
- Track settlement of the former Medicare Part D business’s remaining receivables and payables, and developments in litigation and unclaimed-property audits.