Business Context and Reporting Period
This summary covers the Form 10-Q filed by Torchmark Corporation (doing business as Globe Life Inc.) for the quarter and nine months ended September 30, 2008. Torchmark is a life and health insurance company marketing primarily individual life and supplemental health insurance products to middle-income Americans through niche distribution systems. The company also manages a significant investment portfolio to support its policy liabilities.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|
| Total Revenue | $2,486.3 million | $2,646.2 million |
| Net Income | $315.1 million | $395.2 million |
| Diluted EPS | $3.49 | $4.09 |
| Net Investment Income | $503.8 million | $486.4 million |
| Realized Investment Gains (Losses) | ($109.9 million) | $8.6 million |
| Operating Cash Flow | $613.9 million | $654.9 million |
| Total Assets | $13,950.4 million | $15,241.4 million |
| Total Liabilities | $11,509.4 million | $11,916.8 million |
| Shareholders' Equity | $2,441.0 million | $3,324.6 million |
| Short-term Debt | $345.3 million | $202.1 million |
| Long-term Debt | $498.9 million | $598.0 million |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased 20% year-over-year, primarily driven by a $109.9 million pre-tax realized investment loss in 2008 compared to an $8.6 million gain in 2007. This loss included $105 million in writedowns for other-than-temporarily impaired securities (notably Lehman Brothers, Washington Mutual, and Fannie Mae).
- Revenue Decrease: Total revenue fell 6% due to a 10% decline in health premiums and a 3% decline in total premiums. Health premium declines were attributed to increased agent turnover in the United American Branch Office Agency and a decrease in Medicare Part D enrollees.
- Life Insurance Growth: Despite the overall revenue decline, Life insurance premiums grew 3% to $1.2 billion, and Life underwriting margins increased 4% to $320 million.
- Equity Reduction: Shareholders' equity dropped significantly from $3.32 billion to $2.44 billion. This was caused by $383 million in share repurchases and $850 million in after-tax unrealized losses on the fixed-maturity portfolio due to market illiquidity and spread widening.
- Investment Portfolio: Net unrealized losses on fixed maturities increased from $103 million at year-end 2007 to $1.4 billion at September 30, 2008. Management attributes this largely to market illiquidity rather than credit deterioration, noting the intent to hold securities to maturity.
Guidance, Outlook, and Risks
- Management Commentary: Management expects 2008 full-year benefit ratios to be approximately the same as interim periods. They believe the unrealized losses in the investment portfolio are temporary and fully recoverable given the company's ability to hold assets to maturity.
- Share Repurchases: The company continues its ongoing share repurchase program. In the first nine months of 2008, it repurchased 6.4 million shares for $379 million. In October 2008 alone, an additional 1.4 million shares were purchased for $65 million.
- Liquidity: The company maintains strong liquidity with $614 million in operating cash flow for the nine-month period and a $600 million credit facility. It expects excess operating cash flow of approximately $350 million for the full year 2008.
- Risks and Contingencies:
- Investment Risk: Significant exposure to the financial sector (38% of fixed maturities), which has suffered substantial unrealized losses. Subsequent data for October 2008 showed gross unrealized losses increasing further to $2.3 billion.
- Health Segment Volatility: Continued agent turnover in the United American Branch Office Agency is impacting health sales. The company is shifting incentives to promote higher-margin products.
- Legal Proceedings: Ongoing litigation includes the Vesta Insurance Group securities class action (settled September 2008) and various class actions regarding health insurance practices in Alabama and Arkansas. Management does not believe these will have a material adverse effect, though punitive damages in certain jurisdictions remain a risk.
Investor Verification Checklist
- Investment Portfolio Quality: Verify the credit ratings and recovery potential of the $1.4 billion in unrealized losses, specifically the exposure to Lehman Brothers and Washington Mutual.
- Health Segment Turnover: Monitor the stabilization of the United American Branch Office Agency and the success of new product incentives in reversing the 40% decline in health net sales.
- Medicare Part D Outlook: Assess the impact of declining enrollees and regulatory changes on the Medicare Part D segment, which saw an 18% premium decrease.
- Share Repurchase Impact: Evaluate the sustainability of the aggressive share buyback program ($379 million in 9 months) against the backdrop of reduced net income and equity.
- Legal Settlements: Confirm the final terms and financial impact of the Vesta litigation settlement and the status of the Alabama/Arkansas class action suits.