Business context and reporting period
The supplied filing is Torchmark Corporation’s Form 10-Q for the quarter ended March 31, 2012, filed May 9, 2012. Although the request identifies Globe Life Inc., the filing itself names Torchmark Corporation as the registrant; the summary below reflects the supplied filing.
Torchmark primarily sold individual life and supplemental health insurance through niche distribution channels, and managed the investment portfolio supporting policy obligations. Comparisons are with the first quarter of 2011 unless otherwise noted. Dollar amounts below are in millions except per-share data.
Financial results and key metrics
- Revenue: $897.9, up 8.3%. Premiums rose 5.7% to $718.5; life premiums increased 4.9% to $451.9 and health premiums increased 5.6% to $266.4. Net investment income was $174.1, up 1.4%.
- Profit: Pretax income from continuing operations was $170.2, up 15.4%; net income was $118.7, up 18.5%. Diluted EPS was $1.17, versus $0.84. The EPS comparison also reflects a lower share count following substantial repurchases, as well as a swing from investment losses to gains.
- Segment performance: Life underwriting income rose 12.9% to $126.1, with margin increasing to 28% of life premium from 26%. Health underwriting income declined 3.4% to $47.7, with margin down to 19% from 20%. Investment segment excess investment income declined 3.2% to $63.7, while excess investment income per diluted share rose 15% to $0.63.
- Cash flow: Operating cash flow was $284.0, down from $300.0. Investing activities used $195.4 and financing activities used $91.9. Cash ended the quarter at $78.3; cash plus short-term investments totaled approximately $134 million.
- Balance sheet and debt: Total assets were $16.7 billion and shareholders’ equity was $3.8 billion at March 31. Short-term debt was $224.9 million and long-term debt was $790.8 million on the balance sheet; management’s capital discussion includes junior subordinated debentures and reports total long-term debt of approximately $914.5 million. Debt to capitalization was 22.9% under GAAP. The company reported interest coverage of 9.7 times.
- Investments: Fixed maturities had a fair value of $12.0 billion, including a net unrealized gain of $874 million, down from $964 million at year-end 2011. Approximately 93% of fixed maturities at amortized cost were investment grade; the portfolio’s average rating was A-. The fixed-maturity portfolio yield was 6.46%, while new investments in the quarter yielded 4.76%.
- Capital returns: The company repurchased 1.9 million shares using excess cash flow for $89.8 million, at an average price of $47.77, and repurchased a further 2.1 million shares using option-exercise proceeds. The dividend declared increased from $0.12 to $0.15 per share, payable May 1, 2012.
Material changes versus the prior comparable period
- Total revenue and net income increased, with net income also benefiting from after-tax realized investment gains of $3.3 million versus realized losses of $15.5 million in first-quarter 2011. The prior-year quarter also included a $4.1 million after-tax state settlement estimate and a $0.7 million after-tax loss on equipment disposal; neither was recorded in 2012.
- Life premiums and life underwriting income grew, while non-Part D health premiums declined 6% to $180.6 million and non-Part D health underwriting income fell 10% to $39.8 million.
- Medicare Part D premiums, excluding risk-sharing premiums, increased 50% to $74.1 million, primarily because of low-income automatic enrollees. The filing’s segment measure showed Part D underwriting income of $7.9 million, while GAAP showed a loss of $11.9 million, reflecting interim timing adjustments.
- Operating cash flow decreased by $16.0 million. Fixed-maturity unrealized gains declined by $90 million during the quarter. Share purchases were lower than in first-quarter 2011 when measured using excess cash flow: $89.8 million versus $186.8 million.
- Torchmark adopted ASU 2010-26 retroactively, restricting which insurance acquisition costs could be deferred. The filing states this changes the timing of reported profit, not the ultimate profitability of business, and had no impact on cash flows, liquidity, or insurance-subsidiary statutory earnings. Adoption reduced first-quarter 2012 net income by $1.6 million; the restated first-quarter 2011 impact was a $5.4 million reduction.
Outlook, management commentary, risks and contingencies
- Management expected 2012 dividends and transfers from life insurance subsidiaries to total approximately $472 million. It also expected full-year Medicare Part D benefit ratios to be approximately in line with interim expectations and said segment-to-GAAP Part D reporting differences should eliminate by year-end.
- Management said it could not predict participation in the low-income automatic-enrollee Part D program beyond 2012. It described low interest rates as a pressure on excess investment income; new-money yields were below portfolio yields. The company had raised premiums on major life products in response to lower rates and said it did not expect an extended low-rate environment to trigger loss recognition, citing underwriting margins and positive investment spreads.
- The $600 million unsecured credit facility, which may be expanded by $200 million subject to conditions, backed commercial paper and letters of credit. At March 31, commercial paper was $225 million, letters of credit were $198 million, and reported remaining availability was $177 million. The company said it was in covenant compliance and had no difficulty accessing the commercial-paper market.
- Investment risks include interest-rate movements, credit deterioration and downgrades; below-investment-grade fixed maturities rose to 7% of amortized cost from 6% at year-end. The filing reported no direct European sovereign debt exposure, no credit default swaps or other derivatives, and no securities lending. Management said it generally intended and expected to be able to hold temporarily impaired securities to maturity.
- Forward-looking statements are subject to economic, competitive, regulatory, interest-rate, credit, pricing, lapse, mortality and morbidity risks, litigation outcomes, and the ability to obtain timely health-insurance rate increases. Management reported no material changes to risk factors, no material change in market-risk exposure, and effective disclosure controls.
- In a previously disclosed Arkansas class action involving United American, the parties executed a stipulated settlement agreement on April 4, 2012, and the court preliminarily approved it on April 9; a fairness hearing was scheduled for June 29, 2012. Management generally did not expect litigation to have a material adverse effect, but cautioned that punitive-damage outcomes, particularly in Alabama and Mississippi, could be unpredictable.
Most important facts for investors to verify
- Confirm the registrant and corporate reporting lineage: the supplied 2012 filing is for Torchmark Corporation, not a filing under the name Globe Life Inc.
- Track Part D enrollee volume and margins, and distinguish GAAP results from management’s interim segment presentation and its full-year expectations.
- Assess whether investment income and yields can keep pace with required interest on policy liabilities, and monitor credit downgrades and below-investment-grade holdings.
- Verify completion and final terms of the Arkansas class-action settlement after the scheduled fairness hearing.
- Review the impact of the acquisition-cost accounting change on reported earnings comparability, alongside cash generation, debt, share repurchases and the increased dividend.