Business context and reporting period
This is Torchmark Corporation’s unaudited Form 10-Q for the quarter ended September 30, 2018, comparing the three- and nine-month periods with 2017. The supplied filing identifies Torchmark—not Globe Life Inc.—as the registrant; verify the company and ticker before relying on this summary. Torchmark is an insurance holding company focused primarily on individual life and supplemental health insurance.
Financial performance and position
| Metric | Q3 2018 | Nine months 2018 |
|---|---|---|
| Total revenue | $1.084 billion, up 4% | $3.239 billion, up 5% |
| Total premiums | $861 million, up 5% | $2.565 billion, up 4% |
| Net investment income | $222 million, up 4% | $658 million, up 4% |
| Income before income taxes | $220 million, essentially unchanged | $660 million, up 7% |
| Net income | $179 million, up 17%; diluted EPS $1.55, versus $1.29 | $537 million, up 26%; diluted EPS $4.64, versus $3.58 |
| Operating income (non-GAAP) | Not clearly stated for the quarter in the supplied text | $530 million, up 24% |
| Operating cash flow | Quarterly figure not provided | $937 million, versus $1.086 billion |
Nine-month life premium increased 5% to $1.806 billion; health premium increased 4% to $758 million. Life underwriting margin rose 9% to $485 million, with margin improving to 27% of premium from 26%. Health underwriting margin rose 8% to $178 million and remained 23% of premium. Excess investment income, a non-GAAP segment measure, increased 1% to $183 million; per diluted share it rose 4% to $1.58.
At September 30, total assets were $23.469 billion, total liabilities $17.931 billion, and shareholders’ equity $5.539 billion. Cash was $77 million and cash plus short-term investments totaled $711 million. Total debt was approximately $1.974 billion, comprising $615 million short-term and $1.359 billion long-term debt. The company reported interest coverage of 10.9 times for the first nine months and compliance with credit-facility covenants.
Changes versus the prior comparable period
- Nine-month net income rose 26%, while diluted EPS rose 30%; management attributed much of the net-income increase to the reduction in the federal corporate tax rate from 35% to 21%. The effective tax rate was 18.7%, compared with 29.9% in 2017.
- Premium growth and higher life and health underwriting margins supported operating income. Life net sales declined 1%; health net sales increased 11%.
- Operating cash flow declined to $937 million from $1.086 billion, primarily due to lower discontinued-operations cash flows and timing fluctuations in certain other liabilities.
- Shareholders’ equity fell from $6.231 billion at year-end 2017, primarily reflecting $949 million of after-tax unrealized losses on fixed maturities as interest rates rose, partly offset by net income. Fixed-maturity net unrealized gains decreased to $769 million from $1.974 billion.
- Insurance administrative expenses rose 6.9% year over year for the nine-month period, with management citing employee and pension costs and investment in information technology.
Outlook, commentary, risks and unusual items
- No formal earnings or revenue guidance is provided. Management expected 2018 subsidiary dividends to the parent of about $420 million and approximately $340 million of parent excess cash flow after specified payments and expenses.
- Management said Direct Response life net-sales declines were expected to moderate over the remainder of 2018. It noted that low reinvestment yields continued to constrain investment-income growth; it expects fixed-maturity turnover to average 1%–3% annually over the next five years. Management stated that a 45–50 basis-point rate increase would eliminate the portfolio’s September 30 net unrealized gains, but said it had the intent and ability to hold securities to maturity.
- On September 27, Torchmark issued $550 million of 4.55% senior notes due 2028, receiving approximately $543 million net. It subsequently redeemed $293 million of 9.25% notes on October 29, 2018, including an approximately $11 million make-whole premium, and used about $150 million to add capital to insurance subsidiaries. The filing expected fourth-quarter interest expense to be slightly higher due to carrying the redeemed debt for part of the quarter.
- The company repurchased 2.9 million shares for $250 million from excess parent cash flow during the first nine months; total repurchases, including purchases funded by option exercises, were 3.474 million shares for $298 million. The quarterly dividend was $0.16 per share.
- Unrealized investment losses reflect market valuation changes; management reported no other-than-temporary impairments for the first nine months of 2018 and said it did not expect forced securities sales for liquidity.
- Risks include changes in mortality, morbidity, lapses and sales; regulation and Medicare-market developments; interest rates and issuer credit quality; competition; health premium-rate approvals; litigation; operational efficiency; and cybersecurity. Employment-classification lawsuits involving American Income sales agents were disclosed; management said potential liabilities for newer California cases could not yet be reasonably estimated. A separate 2018 federal case was ordered to arbitration. Management did not believe current litigation would materially adversely affect the company, while acknowledging litigation outcomes are uncertain.
- The company recorded $3.6 million of administrative settlements related to state regulatory examinations in Q3. It also adopted accounting guidance affecting investments and pension-cost presentation; the filing says adoption of long-duration insurance accounting guidance, effective in 2021, was still under evaluation and its impact could not yet be estimated.
Important facts for investors to verify
- Confirm the filing’s registrant identity: the source is a Torchmark Corporation 10-Q, despite the request metadata naming Globe Life Inc.
- Assess the effect of tax reform on reported earnings and distinguish GAAP net income from management’s non-GAAP operating income.
- Review the magnitude and drivers of unrealized fixed-maturity losses, portfolio credit quality, and the company’s ability to hold securities through maturity.
- Track premium and new-business trends, particularly declining life net sales in Direct Response and the growth in health sales.
- Review debt and liquidity after the post-quarter note redemption, including commercial paper balances and the use of new-debt proceeds.
- Monitor agent-classification litigation and related legal or regulatory developments, whose potential financial exposure was not clearly quantifiable in the filing.