Torchmark Corporation (now Globe Life Inc.) — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The filing identifies the registrant as Torchmark Corporation, not Globe Life Inc.; the company name and historical filing identity should be verified.
Financial results and position
- Third quarter: Total revenue was $877.1 million, up 4.8% year over year. Net income was $130.7 million versus $131.4 million; diluted EPS increased to $1.36 from $1.25, reflecting a lower share count. Premium revenue rose 7.6% to $699.9 million; net investment income declined 2.4% to $169.4 million.
- Nine months: Total revenue was $2.661 billion, up 4.6%; net income was $378.3 million, up 1.1%. Diluted EPS increased 15.3% to $3.84. Total premiums grew 6.0% to $2.124 billion.
- Segment performance, nine months: Life underwriting income increased 11% to $380.6 million, with margin rising to 28% of premium from 27%. Health underwriting income was nearly flat at $142.9 million; margin eased to 19% from 20%. Investment segment profit declined 7% to $180.9 million. These are management’s segment measures, not consolidated operating margins.
- Cash flow and liquidity: Operating cash flow was $697.7 million for nine months, versus $684.5 million. Cash and short-term investments totaled $684.9 million at quarter-end, versus $105.4 million at December 31, 2011; management attributed much of the increase to debt proceeds and called securities awaiting reinvestment. Commercial paper was $225.9 million, and $176.1 million remained available under the credit facility after letters of credit.
- Debt and capital: Balance-sheet short- and long-term debt totaled $1.285 billion, versus $1.015 billion at year-end 2011. The company issued $300 million of 3.8% senior notes and $125 million of 5.875% junior subordinated debentures. Shareholders’ equity was $4.309 billion. The reported debt-to-capitalization ratio was 24.6%, including the effect of unrealized investment gains; management’s adjusted ratio was 19.3%.
- Investment portfolio: Fixed maturities had $12.503 billion fair value and a $1.574 billion net unrealized gain at September 30, 2012. Approximately 94% of fixed maturities at amortized cost were investment grade; the portfolio’s average rating was BBB+. The average yield on new investments was 4.54%, versus 5.79% a year earlier.
Changes versus prior comparable periods
- Life premium increased 5% for nine months, while health premium excluding Medicare Part D declined 5%. Medicare Part D premium rose 58%, primarily due to a large increase in low-income automatic enrollees; management expected only minimal Part D premium growth in 2013.
- Net sales increased 22% overall, but only 5% excluding the increase in Medicare Part D. First-year collected premium rose 42% overall and 6% excluding Part D.
- Excess investment income fell 7% to $180.9 million as required interest on insurance liabilities rose 7% and investment yields declined. Excess investment income per diluted share nevertheless increased 5% to $1.83, aided by share repurchases.
- Share repurchases totaled $466.1 million for nine months, including $318.2 million funded from excess cash flow. This was below the prior-year total of $790.5 million. Dividends declared per share increased to $0.45 from $0.34.
- Results reflect retroactive adoption of accounting guidance limiting deferral of insurance acquisition costs. Management said adoption delays recognition of new-business profit but does not change ultimate profitability or cash flows; 2011 comparatives were adjusted.
Outlook, commentary, and risks
- The company completed its acquisition of Family Heritage Life on November 1, 2012, after the quarter-end, for approximately $232 million and assumed $20 million of debt. Management expected the acquisition to be accretive to earnings and EPS in 2012 and 2013, excluding acquisition costs; approximately $2 million of additional fourth-quarter costs were expected.
- Management expected 2012 dividends and transfers from life insurance subsidiaries of approximately $492 million. It stated that liquidity should be sufficient for operations and target subsidiary capital levels. The subsidiaries’ reported RBC ratio was 336% at December 31, 2011, against a stated target of about 325%.
- Management identified prolonged low interest rates as a pressure on investment income and described possible reinvestment losses if callable bank hybrid securities are redeemed. It estimated an annual after-tax income reduction of about $5.8 million if $296 million of securities expected to be callable at par were called and reinvested at 4.25%.
- Other stated risks include insurance sales, lapse, mortality and morbidity experience; Medicare and other regulatory changes; pricing competition; investment credit quality and interest rates; litigation; and the ability to obtain timely health premium increases.
- Management said pending litigation was not expected to have a material adverse effect, while acknowledging potentially unpredictable punitive-damage exposure, particularly in Alabama and Mississippi. It reported no material change in risk factors, no material change in market-risk exposure, and effective disclosure controls.
Important facts for investors to verify
- Confirm the registrant identity and relationship between Torchmark Corporation and Globe Life Inc. for this historical filing.
- Assess whether earnings growth is supported by recurring insurance performance, given flat third-quarter net income, lower investment income, and the EPS benefit from fewer shares.
- Review Medicare Part D enrollment, benefit ratios, government-program exposure, and management’s expectation of minimal premium growth in 2013.
- Track investment yields, callable bank hybrid securities, credit ratings, and the sustainability of excess investment income in a low-rate environment.
- Verify the final Family Heritage purchase accounting, funding, acquisition costs, and realized contribution to earnings.
- Reconcile reported debt, management-adjusted capitalization, post-quarter debt redemptions, and liquidity available after acquisition funding.