GLOBE LIFE INC. quarterly report, Q1 FY2015

Business context and reporting period

The filing is Torchmark Corporation’s unaudited Form 10-Q for the three months ended March 31, 2015, compared with the same period in 2014. The filing identifies Torchmark—not Globe Life Inc.—as the registrant; investors should verify the company/filing match in the request metadata.

Torchmark primarily sells individual life and supplemental health insurance through specialized distribution channels and manages the investments supporting policy obligations.

Financial results and key metrics

Life underwriting income was $141.4 million, up 1%, with margin easing to 28% of premium from 29%. Health underwriting income increased 4% to $51.6 million, with margin steady at 23%. Medicare Part D underwriting income fell 43% to $5.5 million; its reported segment margin declined to 7% from 12%. Segment profitability is a management measure and does not equal GAAP pretax income.

At March 31, 2015, total assets were $20.7 billion, shareholders’ equity $4.9 billion, and policy liabilities $12.3 billion. Investments totaled $15.5 billion, including $14.9 billion of fixed maturities at fair value. The portfolio’s net unrealized gain was approximately $1.9 billion. Short-term debt was $258.9 million and long-term debt $992.5 million. Cash was $3.1 million, while cash plus short-term investments totaled about $95 million. Consolidated cash from operations exceeded investment and financing outflows; cash declined $62.9 million during the quarter.

Material changes versus the prior comparable period

• Net income and pretax income declined, principally reflecting substantially lower realized investment gains; management reported after-tax realized gains of $77,000 versus $10.8 million in Q1 2014.
• Life premiums increased 5% and health premiums excluding Part D increased 4%; Part D premiums declined 4%. Management reported total net sales up 4%, or 13% excluding Part D, and first-year collected premium of $144 million versus $109 million.
• Excess investment income declined 3% to $55.1 million, while excess investment income per diluted share rose 2% to $0.43, supported by share repurchases.
• Fixed-maturity acquisitions increased to $291.8 million from $158.3 million, while the yield on new investments fell to 4.47% from 5.37%. The average effective portfolio yield decreased to 5.87% from 5.92%.
• Shareholders’ equity rose from $4.7 billion at year-end, aided by $171 million of after-tax unrealized investment gains and quarterly earnings, partly offset by share repurchases.

Outlook, management commentary, risks and contingencies

• Management expected 2015 Medicare Part D benefit obligations of approximately 84% of premium, versus 83% for full-year 2014. It said the interim GAAP/segment reporting difference would reverse by year-end. Part D results remain exposed to drug utilization and government program changes.
• Management expected subsidiary dividends to the parent of approximately $466 million for full-year 2015. It stated that operating cash flows, investment maturities, and credit availability should provide funds for foreseeable needs. The $750 million credit facility had $198 million of letters of credit and $259 million of commercial paper outstanding; $293 million remained available at quarter-end. The company reported compliance with facility covenants.
• The company’s target insurance-subsidiary risk-based capital ratio was approximately 325%; the latest reported consolidated ratio was 327% at December 31, 2014. The filing does not provide a March 31, 2015 RBC ratio.
• Management cited low interest rates, lower reinvestment yields, and delayed CMS reimbursements for Part D claims as pressures on investment income. It estimated the reimbursement delays reduced Q1 investment income by about $2 million and could reduce it by about $5 million for the remainder of 2015.
• Key stated risks include mortality and morbidity experience, policy lapses and sales, regulation and Medicare changes, interest rates and investment credit quality, competition, litigation, and delays in obtaining health-policy rate increases.
• Litigation is typical of the insurance industry; management did not expect it to materially adversely affect financial condition, results, or liquidity, but cautioned that punitive-damage outcomes are uncertain. Multi-state unclaimed-property audits were ongoing; no state assessment or indicated liability had resulted, and the company could not estimate a loss range.
• The quarterly dividend was raised from $0.1267 to $0.135 per share beginning with the May 1, 2015 payment. The continuing repurchase program has no specified maximum amount or expiration date.
• Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material changes to risk factors or market-risk exposures were reported.

Most important facts to verify

• Confirm that this Torchmark Corporation 2015 Q1 filing is the intended filing for the Globe Life Inc. request.
• Reconcile GAAP premiums of $830.1 million with management’s stated 4% premium growth; the segment presentation treats Part D risk-sharing amounts differently.
• Assess the drivers and sustainability of lower earnings, especially realized investment gains and Part D benefit costs.
• Review investment portfolio credit exposure, including the increase in below-investment-grade holdings to $604.5 million at amortized cost, and the sensitivity of reported equity to interest-rate changes.
• Verify liquidity and capital support, including commercial-paper refinancing access, subsidiary dividend capacity, and the latest RBC ratio after year-end.
• Monitor the outcome and potential financial impact of unclaimed-property audits and other litigation; the filing provides no estimated audit loss range.