Torchmark Corporation Form 10-Q — quarter ended September 30, 2010
Entity note: The supplied filing is for Torchmark Corporation, not Globe Life Inc. It reports the 2010 third quarter and first nine months; amounts below are in millions unless stated otherwise.
Business context and reporting period
Torchmark primarily marketed individual life and supplemental health insurance through direct-response and agency channels, alongside investment management. Results for United Investors Life Insurance Company (UILIC) were classified as discontinued operations because Torchmark had agreed to sell it. The filing expected the sale to close on December 31, 2010.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Continuing-operations revenue | $838.9 | $762.3 | $2,520.5 | $2,335.7 |
| Continuing-operations income | $138.1 | $98.6 | $373.3 | $279.3 |
| Net income | $114.5 | $100.8 | $362.3 | $291.6 |
| Diluted EPS | $1.41 | $1.22 | $4.39 | $3.51 |
| Operating cash flow | Not separately stated | Not separately stated | $745.0 | $588.8 |
- For the first nine months, total premium grew 2% to $1,998.3; life premium rose 5% to $1,248.3, while health premium declined 3% to $748.4. Net investment income increased 8% to $510.1.
- Continuing-operations pretax margin was approximately 24.8% in Q3 2010 versus 18.9% in Q3 2009; for the nine months it was approximately 22.3% versus 17.8%.
- Segment underwriting income for the first nine months rose 7% in life to $340.4, but fell 3% in health to $126.1. Excess investment income increased 5% to $221.1, or 6% to $2.68 per diluted share.
- At September 30, total assets were $17,716.5 and shareholders’ equity was $4,267.7. These figures include assets and liabilities of the subsidiary held for sale. Fixed maturities had fair value of $10,965.1 and net unrealized gains of $572.3, compared with net unrealized losses of $455.4 at year-end 2009.
- Short-term debt was $188.9; long-term debt including junior subordinated debentures was about $913.1. Reported debt-to-capitalization was 20.5%. Cash plus short-term investments was approximately $150 million, compared with $529 million at December 31, 2009.
Material changes versus the prior comparable period
- Nine-month net income increased 24% and diluted EPS rose 25%. Continuing-operations income improved substantially; 2009 results had included significant investment impairment losses, while 2010 included a small impairment charge and net realized investment gains.
- Operating cash flow increased 27% year over year. Management noted that 2009 included a $53 million payment to repurchase agent debit balances; excluding it, the increase was 14%.
- Life sales and first-year collected life premium strengthened, while non-Part D health premium, sales, and agent counts weakened. Management attributed health declines mainly to agent turnover, competition, and the decision to discontinue selected limited-benefit products.
- Equity increased from $3,398.9 at year-end 2009, reflecting improved investment-market valuations, partly offset by share repurchases. Torchmark repurchased 2.9 million shares for $147.8 million in the first nine months.
Outlook, commentary, risks, and unusual items
- Management expected 2010 insurance-subsidiary dividends to the parent of approximately $371 million and full-year excess operating cash flow of approximately $268 million before share repurchases. Its target for insurance-subsidiary risk-based capital was at least 325%; aggregate ratios were above 350% at December 31, 2009.
- The proposed UILIC sale was expected to yield approximately $338 million in cash net of transaction costs, after pre-closing distributions, if it had closed at September 30. The company recorded an estimated $31.1 million after-tax disposal loss; the final loss depended on closing. Liberty National expected to service transferred policies under an approximately 18-month agreement.
- Management expected Medicare Part D’s full-year benefit ratio to be about 84%, versus 82% in 2009, but said the 2010 ratio could change with experience. It expected no government risk-sharing premium for the full year.
- New fixed-maturity investments earned a 5.91% effective annual yield in the first nine months, below the portfolio’s 6.66% average yield. Management said lower reinvestment yields could constrain investment-income growth.
- The filing cited investment credit and valuation risk, interest-rate changes, insurance sales and persistency, health-care regulation, competition, litigation, and the ability to obtain timely premium-rate increases as uncertainties. A Florida regulator’s proceeding concerning Liberty National’s alleged underwriting practices remained pending after a June 2010 hearing; the company denied the allegations.
- The health-care legislation was expected to affect a limited set of products, representing about 1.5% of sales in the first three quarters and just over 3% of premium in force; those products were discontinued in September 2010. Management did not expect a material overall impact.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It said there had been no material changes to risk factors and no quantitative or qualitative changes in market-risk exposure during the quarter.
Important facts for investors to verify
- Confirm the filing entity: the supplied document is Torchmark Corporation’s 2010 Form 10-Q, despite the request metadata naming Globe Life Inc.
- Check subsequent completion terms and final proceeds and disposal loss for the UILIC sale, including the service agreement’s effects.
- Track life and health sales, agency headcount and persistency, particularly the recovery plan for the United American and Liberty National agencies.
- Review investment-portfolio credit quality and unrealized losses: 8% of fixed maturities were below investment grade at amortized cost, and unrealized losses included $37.2 million on CDOs.
- Assess liquidity and capital against management’s cash-flow outlook, the $600 million credit facility (expiring August 2011), and the 325% RBC target; reported year-end 2009 RBC data is not a September 2010 measure.