Business context and reporting period
Torchmark Corporation (the issuer named in this filing; the request identifies Globe Life Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2017. Its core business is life and supplemental health insurance, supported by an investment portfolio. Comparisons below are with Q1 2016 unless stated otherwise. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Prior comparable |
|---|---|---|
| Total revenue | $1,023.6 million | $977.6 million |
| Income before tax | $191.7 million | $195.4 million |
| Income from continuing operations | $137.2 million | $133.6 million |
| Net income | $133.5 million; diluted EPS $1.11 | $124.0 million; diluted EPS $1.01 |
| Operating cash flow | $460.8 million | $340.7 million |
| Cash and short-term investments | $182.7 million | $148.2 million at Dec. 31, 2016 |
| Total debt | $1,459.8 million book value | Not stated as a comparable total in the filing text |
| Shareholders’ equity | $4,744.8 million | $4,566.9 million at Dec. 31, 2016 |
Premium revenue was $820.6 million, up 5%; life premiums rose 6% to $575.8 million and health premiums rose 4% to $244.8 million. Net investment income increased 6% to $208.3 million, while realized investment losses were $5.7 million pretax. The fixed-maturity portfolio had $15.9 billion fair value and $1.3 billion net unrealized gains. About 95% of fixed maturities at amortized cost were investment grade.
Life underwriting margin was $144.1 million, or 25% of premium, versus $144.3 million and 27%. Health underwriting margin was $53.4 million, or 22% of premium, versus $51.5 million and 22%. Excess investment income rose 8% to $59.3 million; per diluted share it increased 11% to $0.49. The fixed-maturity portfolio’s average effective yield was 5.70%, compared with 5.83% a year earlier.
Operating cash flow exceeded investing outflows of $410.7 million; financing used $67.3 million. Cash declined $14.4 million during the quarter. Short-term debt was $327.0 million and long-term debt $1,132.8 million. Commercial paper outstanding was $324.9 million; the company reported $248.1 million remaining under its credit facility after outstanding letters of credit and commercial paper. Interest coverage was 10.3 times, down from 11.1 times.
Material changes versus the prior period
- Net income rose 8% and diluted EPS rose 10%, despite lower pretax income; continuing-operations income increased to $137.2 million.
- Operating cash flow increased by $120.0 million, which management attributed primarily to timing of cash disbursements and fluctuations in other liabilities.
- Life premium growth was offset by a lower life margin, reflecting higher Globe Life Direct Response policy obligations. Health margin remained steady.
- Insurance administrative expenses increased 7.1% to $51.9 million, and were 6.3% of premium versus 6.2%.
- Share repurchases totaled $113.7 million, compared with $85.1 million in Q1 2016. The declared quarterly dividend increased to $0.15 per share from $0.14.
- Unrealized gains on available-for-sale investments lifted accumulated other comprehensive income and equity. These fair-value gains are distinct from earnings.
Outlook, management commentary, risks and unusual items
No specific earnings or revenue guidance was provided. Management expected 2017 cash dividends from insurance subsidiaries of approximately $455 million and targeted subsidiary regulatory capital of about 325% of Company Action Level RBC; the reported year-end 2016 ratio was approximately 324%. Management stated it expected readily available liquidity for the foreseeable future and intended to hold temporarily impaired fixed maturities to recovery.
Management highlighted lower reinvestment yields as a constraint on investment-income growth. New fixed-maturity purchases in Q1 yielded 4.92% on average and were rated BBB+ on average. The company noted that higher interest rates could benefit future investment income but reduce portfolio fair values; it estimated that a 70–75 basis-point increase would eliminate current net unrealized gains.
The Medicare Part D business, sold in July 2016, remained in discontinued operations and recorded a $3.6 million Q1 2017 loss after tax, versus a $9.5 million loss in Q1 2016. Remaining related receivables and payables were expected to settle in 2017 and 2018.
Litigation and multistate audits concerning unclaimed insurance property were disclosed. Management did not expect a material adverse effect based on information available, but stated it could not estimate a range for possible audit-related losses. The filing also identifies risks involving policy lapses, mortality and morbidity, regulation, Medicare Supplement alternatives, interest rates, investment credit quality, pricing, litigation, operating efficiency, premium-rate approvals, customer response, estimates, and cybersecurity. Management reported no material change in risk factors and no material change in market-risk exposure.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for Torchmark Corporation, not under the name Globe Life Inc.
- Track life policy obligations and Direct Response mortality experience, which pressured life underwriting margin.
- Assess the quality and concentration of the fixed-maturity portfolio, including below-investment-grade holdings and long duration.
- Monitor reinvestment yields, debt costs, commercial-paper funding, and the gap between reported liquidity and insurance obligations.
- Review the outcome and potential financial exposure of unclaimed-property audits and litigation; the filing provides no loss-range estimate for the audits.
- Separate recurring operating performance from realized investment losses, discontinued operations, and unrealized portfolio gains.