Business context and reporting period
This is Torchmark Corporation’s unaudited Form 10-Q for the quarter ended March 31, 2011, comparing results with Q1 2010. The request identifies Globe Life Inc.; the filing itself names Torchmark Corporation, so confirm the issuer identity and filing before relying on this summary.
Torchmark primarily sold individual life and supplemental health insurance through direct-response, independent and captive-agency channels, and managed a substantial investment portfolio. United Investors Life was sold on December 31, 2010; its prior-period results are presented as discontinued operations.
Financial results and key metrics
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Total revenue | $829.3 million | $845.7 million; down 2% |
| Premium revenue (GAAP statements) | $679.9 million | $670.9 million; up 1% |
| Net investment income | $171.6 million | $167.1 million; up 3% |
| Continuing-operations pretax income | $155.8 million | $174.1 million; down 10% |
| Continuing-operations net income | $106.1 million | $115.4 million; down 8% |
| Net income | $105.5 million | $121.7 million; down 13% |
| Diluted earnings per share | $1.33 | $1.46; down 9% |
| Cash provided by operations | $300.0 million | $303.3 million |
Q1 2011 life underwriting income was $119.1 million, a 28% margin on life premium, versus $111.1 million and 27% a year earlier. Health underwriting income was $41.9 million, a 17% margin on health premium, versus $40.5 million and 16%. Excess investment income rose 3% to $74.2 million; per diluted share it increased 7% to $0.93. The effective tax rate was 31.9%, versus 33.7%.
At March 31, total assets were $16.3 billion, shareholders’ equity $4.0 billion, and cash plus short-term investments approximately $554.7 million. Short-term debt was $200.4 million. Long-term debt was reported as $789.9 million on the balance sheet; management described total long-term debt, including junior subordinated debentures, as $913.6 million. Interest coverage was 9.0 times, down from 10.2 times in Q1 2010. The insurance subsidiaries’ consolidated risk-based capital ratio was 421% at December 31, 2010; management’s target was at least 325%.
Material changes versus the prior comparable period
- Revenue and continuing earnings fell, with reported results affected by a $22.7 million pretax realized investment loss in 2011 versus $9.0 million in gains in 2010. The 2011 loss was largely from selling MBIA fixed-maturity securities; there were no other-than-temporary impairment writedowns in Q1 2011.
- Life premium increased 4% to $430.7 million and life underwriting margin increased 7%, primarily due to premium growth and improved mortality. Total net sales fell 13% to $103 million; first-year collected premium declined 7% to $83 million.
- Health premium declined 5% to $249.1 million on the GAAP statements. Excluding Medicare Part D, health premium fell 5% to $191.8 million; non-Part D health net sales declined 16%. Medicare Part D enrollment fell 9%.
- Share repurchases rose sharply: 3.7 million shares were purchased for $235.9 million, versus 256,000 shares for $13.5 million. The quarterly dividend declared increased to $0.16 per share from $0.15.
- Cash declined to $283.7 million from $365.7 million at year-end. Total shareholders’ equity declined to $4.0 billion from $4.02 billion, with buybacks a major use of capital.
Outlook, commentary, risks and unusual items
- Management expected 2011 Medicare Part D benefit ratios to be approximately consistent with interim-period ratios and said the segment-versus-GAAP reporting difference should eliminate by year-end. It expected no government risk-sharing premium for the full contract year. This is not broad earnings guidance.
- Management expected approximately $778 million of dividends and transfers from life insurance subsidiaries to the parent during 2011, including $403 million received in Q1. The parent reported $409 million of liquid assets at quarter-end.
- Management cited lower agent counts, discontinued limited-benefit health products, healthcare reform developments, and weaker new-business sales as pressures on health sales and premium growth. Liberty National producing agents declined 17% year over year; American Income agents declined 4%.
- A $6.0 million pretax estimated state administrative settlement charge and a $979,000 pretax loss on aviation-equipment sale were unusual Q1 expenses. The final settlement amount could differ from the accrual. A $599,000 after-tax loss was recorded on disposal of discontinued operations.
- The fixed-maturity portfolio was $10.7 billion at fair value, with a $156 million net unrealized gain. It was 93% investment grade at amortized cost; 7% was below investment grade. Management said it generally intended and expected to be able to hold temporarily impaired securities to maturity. Portfolio risks include credit quality, interest rates, and fair-value estimates; most fair values relied on third-party pricing-service data.
- Disclosed risks include economic and insurance-experience changes, regulation (including Medicare), interest rates, issuer credit deterioration, competition, litigation, and delays in obtaining health-premium rate increases. Management reported no material change in risk factors and no material change in market-risk exposure during the quarter.
- Legal matters include a certified multistate class action concerning association health policies, with trial scheduled for January 2012; a newly filed purported agent-class action alleging employment misclassification; and a Florida regulatory matter concluded with a $60,000 fine paid in March. Management said it did not believe litigation would materially adversely affect the company, while noting potential unpredictability of punitive-damage awards.
- Subsequent to quarter-end, the company declared a 3-for-2 stock split, payable as a 50% stock dividend on July 1, 2011, to shareholders of record June 1.
Important facts for investors to verify
- Confirm that the Torchmark 10-Q, rather than a filing identified as Globe Life Inc., is the intended issuer and reporting period.
- Reconcile GAAP premium revenue of $679.9 million with MD&A references to approximately $672 million; the filing uses different segment and GAAP treatments, including for Medicare Part D.
- Review the drivers and repeatability of the realized investment loss, the MBIA sale, unrealized portfolio marks, and below-investment-grade exposures.
- Track life and health net sales, agent counts, persistency, and the effect of discontinued products and Medicare Part D enrollment on future premiums.
- Assess the impact of $235.9 million of Q1 repurchases on liquidity and equity, and verify the stated subsidiary-dividend outlook and capital position.
- Monitor the health-policy class action, agent misclassification case, and the final cost of the accrued state settlement.