Business context and reporting period
Torchmark Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016. The filing reports life, health, annuity, and investment operations; the Medicare Part D business is presented as discontinued operations and was sold effective July 1, 2016. The request metadata identifies Globe Life Inc., while the filing itself names Torchmark Corporation.
Financial performance and condition
| Metric | Third quarter 2016 | Nine months 2016 | Comparison |
|---|---|---|---|
| Total revenue | $989.8 million | $2,959.3 million | Quarter: up 4.5%; YTD: up 4.5% |
| Continuing-operations income | $141.9 million | $414.8 million | Up 6.0% and 4.4%, respectively |
| Net income | $151.9 million | $414.3 million | Up 4.5% and 5.1%, respectively |
| Diluted EPS | $1.25 | $3.38 | Compared with $1.15 and $3.09 |
| Premium income | $783.4 million | $2,349.1 million | YTD up 5% |
| Net investment income | $202.7 million | $601.4 million | YTD up 4% |
| Operating cash provided | — | $971.9 million | Compared with $729.9 million; MD&A separately reports continuing-operations net cash inflows of $889 million versus $849 million |
- YTD life underwriting margin was $431.0 million, or 26% of life premium, versus $424.9 million and 27% a year earlier. Health underwriting margin was $157.2 million, or 22% of premium, versus $153.4 million and 22%. Excess investment income was $166.0 million, essentially flat; per diluted share it rose 4% to $1.35.
- At September 30, total assets were $22.1 billion, shareholders’ equity $5.1 billion, and cash plus short-term investments approximately $170.8 million. Fixed maturities had a $15.8 billion fair value and a $1.9 billion net unrealized gain, substantially higher than year-end, primarily because Treasury rates declined.
- Total debt was approximately $1.4 billion: $266.9 million short-term and $1.13 billion long-term. Commercial paper outstanding was $266 million, with $307 million remaining available under the credit line after letters of credit. The company reported compliance with debt covenants.
- YTD dividends declared were $0.42 per share; $311.4 million was spent on treasury-share purchases.
Material changes versus the prior comparable period
- Premium growth was led by life insurance, up 6% YTD to $1.64 billion; health premium increased 3% to $709.9 million. Total net sales increased slightly to $411 million, while first-year collected premium declined to $340 million from $342 million.
- Life underwriting margin as a share of premium fell one percentage point, with management citing higher-than-expected obligations in Globe Life Direct Response policies, particularly certain policies issued since 2011. Health underwriting margin percentage was unchanged.
- Net investment income rose more slowly than average invested assets; the fixed-maturity portfolio’s average effective yield declined to 5.80% from 5.84%. Financing costs increased 9% to $62.9 million.
- Shareholders’ equity increased from $4.1 billion at year-end 2015, reflecting net income and substantial after-tax unrealized investment gains, partly offset by share repurchases. These fair-value gains are reflected in GAAP equity and are not equivalent to realized earnings.
Outlook, management commentary, risks, and unusual items
- Management estimated 2016 insurance-subsidiary risk-based capital below its 325% target, citing lower starting capital and investment downgrades through June 30. It expected to meet responsible capital levels in 2016 and return to the 325% target in 2017, supported by debt proceeds, Medicare Part D sale proceeds, and potential investment upgrades.
- The Medicare Part D sale’s final purchase price remains subject to an enrollee-count adjustment based on CMS information expected in March 2017. The company retained certain assets, liabilities, and 2016 plan-year results; it estimated a $0.6 million pretax sale gain after contingent consideration and deferred acquisition-cost write-off.
- Early adoption of ASU 2016-09 contributed $14 million in YTD excess tax benefits to income tax expense and increased reported EPS by $0.09 for the nine-month period. Management cautioned that this accounting change may increase future earnings and EPS volatility.
- Management cited delayed CMS reimbursements and drug rebates related to Part D as a drag on investment income, with cash flows expected to improve in late 2016 and 2017 as receivables are collected. It also noted that information-technology investment contributed to higher administrative expenses.
- Investment risks include interest-rate movements, issuer credit deterioration, and downgrades. Approximately 95% of fixed maturities at amortized cost were investment grade; below-investment-grade holdings increased to $753 million, primarily because of downgrades. No other-than-temporary impairments were recorded in the periods reported.
- Unclaimed-property audits are being conducted across 48 states. No assessment or indicated liability had been reported, but the company could not estimate a loss range. Management said litigation was not expected to materially affect results, while acknowledging the possibility of unpredictable punitive-damage awards. No material changes to risk factors or market-risk exposure were reported.
Important facts for investors to verify
- Confirm the final Medicare Part D sale adjustment, settlement of retained 2016-related balances, and actual proceeds.
- Track Direct Response life claims and whether underwriting margins recover from the reported deterioration.
- Monitor credit-rating changes, below-investment-grade exposure, and the effect of interest rates on investment income and GAAP equity.
- Check progress toward the 325% RBC target and the company’s ability to maintain liquidity and debt-covenant compliance.
- Assess the recurring earnings impact separately from ASU 2016-09 tax benefits and unrealized fixed-maturity gains.
- Follow the outcomes of unclaimed-property audits and any material litigation developments.