Filing Summary
Entity and period: The supplied filing is Torchmark Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013—not a filing under the name Globe Life Inc. The company’s business was life and supplemental health insurance, with investment management supporting policy liabilities. Dollar amounts below are in millions unless stated otherwise.
Financial performance
- Third quarter: Total revenue was $932.8, up 6.4% from $877.1 a year earlier. Net income was $132.1, up 1.1%; diluted EPS was $1.43 versus $1.36. Net margin was approximately 14.2%, compared with 14.9%.
- Nine months: Revenue was $2,841.3, up 6.8%; net income was $385.7, up 1.9%; diluted EPS rose 7.3% to $4.12 from $3.84. Net margin was approximately 13.6%, versus 14.2%.
- Premiums: Nine-month total premiums increased 8.4% to $2,301.7. Life premiums rose 4.4% to $1,416.9; health premiums rose 15.3% to $884.4. The November 2012 Family Heritage acquisition contributed $142 million of nine-month health premiums.
- Underwriting: Nine-month life underwriting income increased 7% to $407.8, with margin improving to 29% of premium from 28%. Health underwriting income increased 21% to $172.4, with margin of 20% versus 19%; growth included Family Heritage.
- Investment results: Nine-month net investment income rose 2.8% to $531.5 under GAAP. Management’s segment measure, excess investment income, fell 9% to $164.1; per diluted share it declined 4% to $1.75. Management attributed pressure to lower investment yields and higher required interest on policy liabilities.
- Cash flow: Operating cash flow for the first nine months was $771.0, up from $697.7. Investing activities used $388.3 and financing activities used $408.3. Cash ended the period at $38.8; cash plus short-term investments was approximately $174.8.
- Debt and equity: September 30 short-term debt was $227.9 and long-term debt $990.6. Shareholders’ equity was $3,776.9, down from $4,361.8 at year-end 2012. The company repurchased $342.8 of shares in the nine-month period and paid $45.5 in dividends. A $94 million 7.375% note was repaid at maturity in August.
- Investment marks: Fixed maturities had fair value of $12,756.9 and a net unrealized gain of about $490, down from $1,578 at year-end 2012, principally reflecting higher market interest rates. This drove a substantial decline in accumulated other comprehensive income and reported equity.
Changes versus the prior period
- Premium growth and higher life and health underwriting results supported higher earnings, while diluted EPS growth also benefited from fewer shares outstanding after repurchases.
- Health growth was materially acquisition-related: excluding Family Heritage, non-Part D health premiums declined 4% according to management. Medicare Part D premiums fell 3% and its net sales fell 62%.
- New-business indicators were mixed: total net sales fell 5% to $353 million, but increased 8% excluding Medicare Part D. First-year collected premium was $323 million versus $348 million; excluding Part D and Family Heritage, it increased 1%.
- Excess investment income declined despite higher net investment income, as required interest on net policy liabilities rose 10% to $324.6 and financing costs increased 4% to $61.4.
Outlook, risks and unusual items
- Management expected a slight decline in full-year 2013 Medicare Part D premiums. For the 2014 plan year, Torchmark qualified for automatic enrollees in 15 regions, compared with 7 in 2013, which management expected to support higher Part D sales and premiums.
- Management said higher market interest rates should benefit investment income over time, while prolonged low rates could pressure yields as higher-yielding bonds mature or are called. It expected only modest further portfolio-yield declines in the near term and did not expect low rates to cause a loss-recognition event.
- Management expected approximately $488 million in subsidiary dividends to the parent for full-year 2013. The company reported compliance with credit-facility covenants and said it expected adequate liquidity; the $600 million facility was scheduled to terminate January 2015.
- Unusual 2013 items included a $1.2 million pretax state guaranty fund assessment, a $0.5 million pretax non-insurance legal settlement, an $8.6 million pretax prior-year litigation charge, and a $522,000 after-tax favorable Family Heritage acquisition-accounting adjustment. The filing also reported a $2.7 million pretax real-estate impairment earlier in 2013 and an additional $245,000 pretax loss when the property was sold in the third quarter.
- The filing described litigation risks, including potentially unpredictable punitive-damage awards in Alabama and Mississippi. It reported settlements or dismissals in several matters, including a confidential settlement of the Maimonides matter on October 4, 2013. Management did not expect litigation to materially affect financial condition, results or liquidity, but noted outcomes are uncertain. Risk factors were reported as unchanged.
- Other stated risks include insurance sales and lapse trends, mortality and health-care utilization, Medicare and other regulatory changes, pricing competition, interest rates and investment-credit quality, litigation outcomes, and delays in obtaining health premium-rate increases.
Important facts for investors to verify
- Confirm the issuer and filing identity: this source is Torchmark Corporation’s 2013 Form 10-Q, although the request identifies Globe Life Inc.
- Assess how much reported health growth and underwriting improvement depended on the Family Heritage acquisition, and review comparable organic sales and premium trends.
- Track Medicare Part D enrollment, margins, government risk-sharing adjustments and the expected benefit of qualification in 15 regions for 2014.
- Monitor investment yields, calls and maturities, credit downgrades, unrealized gains or losses, and their effect on equity and excess investment income.
- Review share-repurchase pace and funding against operating cash flow, debt obligations, dividends and subsidiary capital needs.
- Check subsequent developments and ultimate costs relating to the disclosed litigation and unusual charges.