Globe Life Inc. (filing registrant: Torchmark Corporation) — Q1 2018 Form 10-Q
Entity note: The supplied filing is Torchmark Corporation’s unaudited quarterly report for the three months ended March 31, 2018. It describes an insurer focused primarily on individual life and supplemental health insurance. The filing does not identify the registrant as Globe Life Inc.; investors should verify the entity and ticker before relying on this summary. Unless stated otherwise, dollar figures below are in millions.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $1,070.4 | $1,023.6 | +4.6% |
| Total premiums | $850.1 | $820.6 | +3.6% |
| Net investment income | $218.1 | $208.3 | +4.7% |
| Income before income taxes | $212.8 | $191.7 | +11.0% |
| Income from continuing operations | $173.7 | $137.2 | +26.7% |
| Net income | $173.6 | $133.5 | +30.0% |
| Diluted earnings per share | $1.49 | $1.11 | +34.2% |
| Operating cash flow | $382.4 | $460.8 | −17.0% |
| Dividends declared per share | $0.16 | $0.15 | +6.7% |
Premium growth was led by life (+4%) and health (+3%). Life underwriting margin increased 7% to $154.8 million; health underwriting margin rose 9% to $58.0 million. Those margins were 26% and 23% of respective premiums, versus 25% and 22% a year earlier. Excess investment income, a company-defined non-GAAP measure, grew 4% to $61.9 million, or 8% per diluted share to $0.53.
Cash from operations declined mainly because of lower cash flows from discontinued operations and timing changes in certain other-liability settlements. Investing activities used $313.9 million and financing activities used $103.3 million. Cash ended the quarter at $88.6 million.
Financial position, debt and liquidity
- At March 31, 2018, total assets were $23.18 billion, total liabilities $17.36 billion, and shareholders’ equity $5.82 billion.
- Investments totaled $17.42 billion, including $16.64 billion of available-for-sale fixed maturities at fair value. Approximately 95% of fixed maturities at amortized cost were investment grade; the portfolio’s reported overall rating was BBB+.
- Short-term debt was $365.2 million and long-term debt $1.13 billion, for total debt of approximately $1.50 billion. Interest coverage was 10.8 times, compared with 10.3 times in Q1 2017.
- Cash plus short-term investments were approximately $168.6 million. Management cited operating cash flows, investment maturities, and an available credit facility as liquidity sources; it reported compliance with facility covenants and no difficulty accessing the commercial-paper market.
- Commercial paper outstanding was $361.3 million at a 2.17% annualized rate. Letters of credit outstanding were $155 million, leaving $233.7 million available under the facility at quarter-end.
Material changes and unusual items
- Net income growth reflected, in large part, the lower U.S. corporate tax rate (21% versus 35% in Q1 2017). The effective tax rate was 18.4%, compared with 28.4%. The company had recorded an estimated $877 million tax benefit in 2017 from remeasuring deferred taxes and said its tax accounting was not yet complete; no estimate adjustment was made in Q1.
- Comprehensive income was a loss of $310.5 million, despite positive net income, driven by $484.1 million of after-tax other comprehensive losses. Rising interest rates reduced the fixed-maturity portfolio’s net unrealized gains to $1.36 billion from $1.97 billion at year-end and reduced equity by $484 million after tax.
- Fixed-maturity gross unrealized losses increased to $152.0 million from $82.7 million at year-end. Management reported no other-than-temporary impairments and said it had the intent and ability to hold temporarily impaired securities to recovery.
- The company repurchased 1.0 million shares using parent-company excess cash flow for $86.5 million, averaging $86.32 per share. Including purchases funded by employee option proceeds, total repurchases were 1.27 million shares for $110.0 million.
- Administrative expenses rose 6.9%, partly due to pension and other employee costs and increased information-technology spending. The newly adopted pension-cost accounting standard added $831,000 of expense in the quarter; the company estimated approximately $3.5 million of additional expense for 2018.
Outlook, commentary and risks
- Management expected 2018 cash dividends from insurance subsidiaries of approximately $440 million and parent-company excess cash flow of approximately $325 million to $335 million, after shareholder dividends, debt interest and other expenses.
- Management expected average annual fixed-maturity portfolio turnover over the next five years not to exceed 2%–3%. It said higher long-term rates could benefit investment income, while approximately 70–75 basis points of further rate increases would eliminate the portfolio’s quarter-end net unrealized gains.
- Direct-response life net sales fell 17%, which management attributed to changes intended to improve new-business profitability; it expected the decline to moderate over the remainder of 2018. Total net sales declined 1%, while first-year collected premium increased 2%.
- The consolidated risk-based capital ratio was 314% at December 31, 2017, below the company’s historical target of around 325% but reported as 6.3 times regulatory-required capital. Management was still evaluating the appropriate 2018 target and potential NAIC capital-factor changes.
- Risks highlighted include interest-rate and investment-credit changes; shifts in policy sales, lapses, mortality and morbidity; Medicare and other regulatory changes; competition and customer response; litigation; and cybersecurity or data-access events.
- A putative Fair Labor Standards Act class action alleged that certain American Income sales agents were employees rather than independent contractors. The company had moved to compel arbitration and was awaiting the court’s decision. Management did not expect current litigation or unclaimed-property audits to materially affect financial condition, results or liquidity; it said no estimate could be made for certain unaccrued contingencies.
Most important facts for investors to verify
- Confirm whether this Torchmark Corporation filing is the intended filing for Globe Life Inc., including the applicable registrant, ticker and corporate history.
- Review the sustainability of premium and underwriting-margin growth, especially the weaker life direct-response sales measures and management’s expectation that their decline would moderate.
- Assess the sensitivity of equity and investment values to interest rates, the increase in unrealized losses, portfolio credit quality, and management’s ability to hold securities through recovery.
- Verify the expected subsidiary dividends, parent-company excess cash flow, commercial-paper refinancing capacity, and the appropriate insurance capital target as regulatory requirements evolve.
- Track completion of the 2017 tax-accounting estimate, the agent-classification lawsuit and arbitration motion, and the effect of higher operating and pension costs.