GLOBE LIFE INC. quarterly report, Q3 FY2015

Business context and reporting period

This is Torchmark Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. Torchmark’s insurance businesses market life and supplemental health products through direct-response, captive and independent-agency channels. The request identifies Globe Life Inc.; the filing itself is for Torchmark Corporation, which includes Globe Life and its subsidiaries.

Financial performance

Amounts below are in U.S. dollars; “$ million” figures are converted from the filing’s thousands.

For the first nine months, total premiums increased 3% to $2.465 billion. Life premiums rose 5% to $1.552 billion, while health premiums declined 2% to $913 million, including Medicare Part D. Q3 net income rose about 10% year over year; nine-month net income slipped about 1%, while diluted EPS increased 4%, reflecting fewer shares outstanding. Nine-month dividends declared were $0.41 per share versus $0.38.

Segment underwriting income before administrative expenses for the first nine months was $424.9m for life (27% of premium, versus 29% a year earlier), $153.4m for health (22%, versus 23%), and $19.9m for Medicare Part D (9%, unchanged). Excess investment income was $166.4m, down 2%; per diluted share it increased 3% to $1.31.

Financial position, liquidity and capital

At September 30, 2015, total assets were $20.119bn and shareholders’ equity was $4.283bn, compared with $20.215bn and $4.697bn at December 31, 2014. Investments totaled $14.640bn, including $14.080bn fair value of available-for-sale fixed maturities. Cash plus short-term investments were approximately $123m, versus $82m at year-end.

Short-term debt was $618m and long-term debt $744m, compared with $238m and $992m at year-end. Short-term debt included $369m of commercial paper and the $250m senior note due June 2016. The company reported $183m remaining under its $750m credit facility after outstanding letters of credit and commercial paper. Management said the facility was accessible and covenants were met. Nine-month interest coverage was 11.2 times, versus 11.3 times.

Fixed maturities were 96% investment grade, with an average rating of A-. The portfolio’s net unrealized gain declined to $914m from $1.669bn at year-end, principally as market interest rates rose. This reduced equity and comprehensive income; management said it intended and was able to hold temporarily impaired securities to maturity. The insurers’ latest reported consolidated risk-based capital ratio was 327% at December 31, 2014, against a stated target of approximately 325%.

Material changes and management commentary

• Life sales strengthened: nine-month life net sales increased 11% to $313m. Health net sales fell 11% to $97m, mainly due to lower Medicare Supplement group sales after unusually strong group activity in 2014.
• Medicare Part D premium declined 10% to $232m, and net sales declined 46% to $41m, primarily due to fewer auto-enrollees. CMS placed United American and First United American on an enrollment sanction during Q3; management said the 2015 impact on membership and premium would not be material. CMS had accepted a remediation plan, and management was seeking to have the sanction lifted.
• Life underwriting margin narrowed, reflecting higher-than-expected Globe Life Direct Response policy obligations and greater acquisition costs. Management said mortality improvement on certain policies issued since 2011 had been less than expected.
• Investment yields remained under pressure: the average fixed-maturity yield was 5.84% for the nine-month period, versus 5.91%. Management estimated delayed Medicare Part D reimbursements and drug rebates reduced investment income by about $6m in the period and expected a further $2m reduction for the rest of 2015.
• Shareholders’ equity also declined due to $276m of repurchases funded from excess cash flow. The company repurchased 4.9m shares through that program during the first nine months; the broader reported treasury-stock purchases were $330m, including shares acquired with option exercise proceeds.
• S&P changed its outlook from negative to stable and affirmed the insurers’ AA- financial-strength ratings and Torchmark’s A senior-debt rating. Management expected subsidiary dividends of approximately $466m for full-year 2015 and planned to address capital levels alongside refinancing the 2016 note.

Outlook, risks and contingencies

No formal consolidated earnings guidance is provided in the supplied filing text. Management expected Part D segment and GAAP reporting differences to wash out by year-end 2015, as they had in 2014, and said the Part D sanction’s 2015 premium and membership impact would not be material. Management also stated that it expected readily available liquidity for the foreseeable future.

Principal stated risks include changes in mortality, morbidity, policy lapses and sales; interest rates and investment credit quality; regulation of Medicare and insurance rates; competition; litigation; and the success of products and marketing initiatives. The filing reports multi-state unclaimed-property audits covering 47 states; no state assessment or indicated liability had resulted, and the company could not estimate a range of possible loss. A putative class-action case concerning premiums retained on lapsed policies remained pending; the court denied remand to state court but allowed amendment of the complaint. Management did not believe litigation overall would materially adversely affect financial condition, results or liquidity, while cautioning that punitive-damage outcomes can be unpredictable.

The adoption of new affordable-housing investment accounting guidance reclassified amounts between net investment income and income tax expense, with no effect on net income, cash flows or liquidity. The filing reported no other-than-temporary investment impairments in the first nine months of 2015.

Important facts for investors to verify

• Confirm the issuer and entity scope: this filing is Torchmark Corporation’s, not a filing titled Globe Life Inc.’s.
• Track the CMS enrollment sanction, remediation progress, and subsequent Part D enrollment and premium trends.
• Assess whether elevated Direct Response policy obligations persist and whether expected mortality improvements emerge.
• Monitor interest rates, portfolio credit ratings, unrealized losses, and the impact of delayed Part D reimbursements on investment income.
• Review the 2016 debt refinancing, commercial-paper dependence, available credit capacity, and insurance-subsidiary capital position.
• Follow the unclaimed-property audits and lapsed-policy class-action litigation for assessments, exposure estimates, or material developments.