Globe Life Inc. — Q2 2022 Form 10-Q
Business context and period. Globe Life provides life and supplemental health insurance, primarily to lower- and middle-income U.S. households, through exclusive and independent agencies and direct-to-consumer channels. This unaudited report covers the quarter and six months ended June 30, 2022; comparisons are with 2021 unless noted.
Financial performance and position
| Metric | Q2 2022 | Six months 2022 |
|---|---|---|
| Total revenue | $1.293 billion, up 1.7% | $2.601 billion, up 2.5% |
| Total premium | $1.079 billion, up 5.4% | $2.151 billion, up 6.2% |
| Net investment income | $243.6 million, up 2.2% | $487.5 million, up 2.8% |
| Net income | $177.0 million, down 11.3%; diluted EPS $1.79 versus $1.92 | $341.4 million, down 9.7%; diluted EPS $3.43 versus $3.62 |
| Net operating income (non-GAAP) | Not provided in the supplied filing text for the quarter | $374.9 million, up 6%; diluted amount $3.76 versus $3.38 |
| Operating cash flow | Quarterly figure not provided | $693.4 million versus $702.0 million |
Six-month life underwriting margin rose 10% to $348.0 million, with margin at 23% of premium versus 22%. Health underwriting margin rose 8% to $158.8 million; its margin rate remained 25%. Excess investment income, the company’s investment-segment measure, declined 1% to $118.8 million, while excess investment income per diluted share rose 3% to $1.19. These segment measures are management-defined and should not be equated with GAAP net income.
At June 30, total assets were $26.0 billion, total liabilities $20.7 billion, and shareholders’ equity $5.3 billion. Cash plus short-term investments were $288.1 million. Total debt was $2.12 billion, including $495.1 million of short-term debt and $1.63 billion of long-term debt. The company issued $400 million of 4.8% senior notes due 2032 in May; $150 million was held by its insurance subsidiaries and eliminated in consolidation. Commercial paper outstanding was $180 million, and $445 million remained available under the credit line after letters of credit.
Material changes and notable items
- Rising market interest rates reduced the fair value of available-for-sale fixed maturities to $17.2 billion from $21.3 billion at year-end 2021. The portfolio’s net unrealized position shifted from a $3.5 billion gain to an $814 million loss. Six-month after-tax unrealized investment losses were $3.4 billion; shareholders’ equity consequently fell from $8.6 billion to $5.3 billion. Management said strong operating cash flows make forced bond sales unlikely and generally intends to hold securities to recovery or maturity.
- Realized investment results reversed: a $37.7 million pretax loss for the first six months of 2022 compared with a $36.8 million gain in 2021. Management attributed 2022 losses in part to sales made as yields rose, to reinvest in higher-grade investments and improve risk-adjusted returns. These results contributed to GAAP net income falling even as net operating income increased.
- Total net sales increased 5% to $366 million for the first six months. Life premium rose 5% and health premium 8%. Life sales growth included a 19% increase at American Income, while Direct to Consumer life net sales fell 19%, which management linked partly to prior-year record sales and inflation-related mailing and customer-cost pressures.
- The company repurchased 2.3 million shares for $223 million from parent-company excess cash flow during the six months, at an average $98.22 per share. Total treasury-share purchases, including purchases funded by option exercises, were $263.4 million.
Outlook, risks, and contingencies
- COVID-19: Net life claims were $45 million for the first six months, versus $49 million a year earlier. Management estimated approximately $62 million of full-year 2022 COVID life claims at the midpoint of its guidance, based on an estimated 215,000–275,000 U.S. COVID deaths and other assumptions. Actual claims depend on mortality, variants, vaccines, treatments, and the ages and locations of deaths.
- Long-duration insurance accounting: Globe Life plans to adopt LDTI on January 1, 2023, with retrospective restatement of 2021 and 2022. It estimated a $7.5–$8.5 billion after-tax reduction to opening AOCI using transition-date assumptions, largely from remeasuring policy liabilities at current discount rates. Using June 30, 2022 rates, the estimated increase in future policy benefits would instead be $3–$4 billion. Management expects near- to intermediate-term DAC amortization reductions to increase net income by $120–$145 million after tax; the standard does not affect statutory capital, statutory earnings, or policy cash flows.
- Liquidity and capital: Management expects readily available funds from operating cash flow, liquid assets, and credit facilities for 2022 and the foreseeable future. Projected 2022 subsidiary dividends and excess cash flows were $410 million and $280 million, respectively; management expected both to be lower than 2021, partly due to COVID claims and agency-sales growth. The company reported covenant compliance and no difficulty accessing commercial paper during the period. Its stated 2022 target consolidated Company Action Level RBC ratio is 300%–320%; the reported year-end 2021 ratio was 315%.
- Investments: The fixed-maturity portfolio was 97% investment grade, with an A- weighted-average composite rating. Management identified interest rates, credit spreads, issuer creditworthiness, and the possibility of needing to sell securities as relevant risks. The portfolio’s unrealized losses were primarily market-related; the filing reported no fixed maturities in non-accrual status.
- Legal and other contingencies: The company reported a $125 million outstanding letter of credit supporting reinsurance obligations; the parent is liable to the extent the reinsurer does not pay. A putative class and collective action filed July 22, 2022 alleges agent misclassification and wage-law violations against Arias Agencies and American Income Life. The company said it intends to dispute the claims. Management did not believe litigation was reasonably likely to materially harm financial condition, operating results, or liquidity, while cautioning that punitive-damage outcomes can be unpredictable.
- Other stated risks include inflation and economic conditions affecting sales, persistency, mortality and morbidity; regulatory and Medicare changes; competition and product pricing; interest-rate and investment-market changes; cyber events; catastrophe exposure; and access to debt markets. Management reported effective disclosure controls and no material changes to risk factors.
Important facts for investors to verify
- Whether premium growth, new sales, and life and health underwriting margins remain strong, particularly given weaker Direct to Consumer life sales and agency recruiting challenges.
- How much reported earnings and equity are affected by investment realized losses and rate-driven unrealized losses, and whether the bond portfolio can be held without liquidity-driven sales.
- Actual COVID-related claims compared with the company’s 2022 estimate, and the effect of mortality and persistency experience on results.
- Final LDTI transition assumptions and impacts on AOCI, reserves, DAC amortization, and restated 2021–2022 results; estimates are sensitive to discount rates.
- Debt refinancing and liquidity needs, including the September 2022 note maturity, commercial paper exposure, and the company’s ability to maintain targeted insurance-subsidiary capital.
- Developments and potential exposure in the agent-classification litigation and other legal proceedings.