Business context and reporting period
Globe Life Inc. is a U.S.-focused insurer selling primarily individual life and supplemental health insurance, alongside a small annuity business. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020; comparisons are with 2019. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total premium | $953.7 | $897.5 | $1,883.5 | $1,788.5 |
| Total revenue | $1,180.9 | $1,130.5 | $2,313.9 | $2,249.7 |
| Net investment income | $231.6 | $227.4 | $460.6 | $454.1 |
| Income before taxes | $212.2 | $228.8 | $415.2 | $456.9 |
| Net income | $173.0 | $186.6 | $338.6 | $371.9 |
| Diluted EPS | $1.62 | $1.67 | $3.13 | $3.32 |
For the first six months, life premium grew 5% and health premium 6%. Life underwriting margin was $340.5 million, down 1%, with margin as a share of premium declining to 26% from 27%. Health underwriting margin rose 5% to $127.7 million; its margin remained 23%. Excess investment income fell 5% to $123.9 million, while net investment income increased 1%. Management-reported net operating income, a non-GAAP measure excluding specified non-operating items, declined 2% to $365.6 million; diluted net operating income per share rose 2% to $3.38.
Operating cash flow was $769.3 million for the six months, versus $686.6 million in 2019. Investing activities used $960.7 million, mainly reflecting investment purchases and a $493.4 million increase in short-term investments; financing provided $222.0 million. Cash at period-end was $114.0 million. Cash plus short-term investments totaled $645.7 million, compared with $114.2 million at year-end 2019.
At June 30, total assets were $27.5 billion and shareholders’ equity was $7.8 billion. Fixed maturities had a fair value of $19.7 billion and a net unrealized gain of $3.0 billion. Debt totaled $2.10 billion at book value: $831.1 million short-term and $1.27 billion long-term. The reported debt-to-capitalization ratio was 21.1%; excluding the accounting effect of unrealized fixed-maturity gains, it was 14.5%.
Material changes versus the prior comparable period
- Six-month net income declined 9%, mainly because the company recorded a $25.8 million after-tax provision for credit losses on available-for-sale securities. Realized investment losses were $24.4 million after tax, versus $5.1 million of gains in 2019.
- Premium growth continued, but policyholder benefits increased faster in life insurance. Overall six-month total premium rose 5%.
- Fixed-maturity unrealized gains lifted reported equity and book value. Book value per diluted share was $73.26, including $22.05 per share attributable to the accounting effect of unrealized fixed-maturity gains; the comparable adjusted value was $51.21.
- Commercial paper outstanding rose to $450 million from $290 million at December 31, 2019. The company also borrowed $300 million under a new 364-day term loan in April to bolster liquidity.
- Management temporarily paused share repurchases in Q2 amid COVID-19 uncertainty. Six-month repurchases totaled $139.3 million from parent-company excess cash flow, in addition to purchases funded by option proceeds.
Outlook, commentary, risks and unusual items
- Management expected full-year sales to be relatively flat, while projecting life premium growth of about 5% and health premium growth of about 6%. It anticipated resuming repurchases in Q3 2020.
- Management estimated COVID-19 would add about $45 million to 2020 life policy obligations, partly offset by an expected $8 million reduction in health obligations from lower utilization, for an estimated net increase of about $37 million. Through June 30, the estimated additional life obligations were $22 million. These estimates depend on pandemic developments and related assumptions.
- Management reported no significant adverse effect on lapse rates or premium income through June 30. In-person sales and recruiting were disrupted, but operations shifted largely to virtual channels; Direct to Consumer reported record demand through internet and inbound-phone channels. Certain agencies expected weaker sales for the remainder of the year.
- Lower interest rates may constrain investment-income growth: management expected 2020 new-money yields on fixed-maturity acquisitions to be about 70 basis points below 2019 acquisition yields. The six-month effective yield on new fixed-maturity acquisitions was 4.16%, versus 4.91% a year earlier.
- Credit risk increased in selected investments. A $32.7 million allowance was recorded for an energy issuer; after quarter-end that issuer filed for Chapter 11, and Globe Life sold its holdings on August 3, 2020, realizing a $7 million loss. The company also increased its commercial mortgage loan allowance to $3.8 million and reported one loan in non-accrual status, including a loan considered probable of foreclosure.
- On July 31, 2020, the company repaid the remaining $82.5 million balance of an older term loan. Litigation is common in the insurance industry; management said a material adverse judgment was remote, while noting that punitive-damage outcomes can be unpredictable.
- COVID-19-related risks include mortality and morbidity changes, sales and premium disruptions, policy lapses or delayed payments, investment defaults or downgrades, liquidity and capital needs, remote-work and technology risks, and regulatory actions. Management targeted a 2020 consolidated Company Action Level RBC ratio of 300%–320%; the year-end 2019 ratio was 318%.
- The company adopted CECL accounting in 2020. The filing also says long-duration insurance accounting changes were expected to have a significant impact, but the company had not yet estimated that impact.
Important facts for investors to verify
- How COVID-19 mortality, health utilization, sales, premium collection and policy lapses compare with management’s full-year assumptions.
- Whether credit deterioration in energy, commercial real estate and other fixed-maturity holdings leads to additional provisions, downgrades or realized losses; review the post-quarter energy issuer sale and bankruptcy details.
- Whether investment yields and excess investment income continue to weaken as lower-yielding assets replace older holdings.
- Liquidity, debt maturities, commercial-paper access and the company’s progress toward its targeted RBC ratio, especially if pandemic impacts intensify.
- Whether sales recover through virtual distribution and whether the planned resumption of share repurchases proceeds as anticipated.