Torchmark Corporation — Q1 2014 Form 10-Q
Filing identity: The supplied filing is for Torchmark Corporation, not Globe Life Inc. It covers the quarter ended March 31, 2014 and was signed May 9, 2014. The company reported life, supplemental health, Medicare Part D and annuity insurance, along with investment operations. Dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total GAAP revenue | $1,017.1 | $958.2 | +6% |
| Total premium (GAAP) | $819.0 | $784.8 | +4% |
| Net investment income | $181.0 | $176.8 | +2% |
| Income before taxes | $190.5 | $173.1 | +10% |
| Net income | $132.9 | $119.6 | +11% |
| Diluted earnings per share | $1.48 | $1.27 | +17% |
| Operating cash flow | $274.9 | $290.4 | -5% |
- Life premium rose 4% to $489.1 million; management-defined life underwriting income increased 6% to $140.6 million, a 29% margin on premium versus 28% a year earlier.
- Non-Part D health premium fell 1% to $219.4 million. Health underwriting income declined 1% to $49.5 million, with the margin steady at 23%.
- Medicare Part D premium, excluding risk-sharing adjustments under management’s segment presentation, grew 8% to $83.0 million. Segment underwriting income increased 19% to $9.6 million.
- Management-defined excess investment income was $56.9 million, up 2%; per diluted share it rose 7% to $0.63. Average fixed-maturity yield was 5.92%, versus 6.00% a year earlier. New investments yielded 5.37%, compared with 4.31%.
- GAAP net income included $16.6 million of pretax realized investment gains, compared with a $1.2 million loss in Q1 2013; after tax, the gains added about $0.12 per share versus a $0.04-per-share loss. Q1 2013 also included a $2.7 million pretax impairment.
Financial position and liquidity
- At March 31, total assets were $19.06 billion, total liabilities $14.88 billion and shareholders’ equity $4.19 billion. Equity increased from $3.78 billion at year-end, principally reflecting $394 million of after-tax unrealized investment gains and $133 million of net income, partly offset by share repurchases.
- Investments totaled $14.19 billion; fixed maturities had a $13.62 billion fair value and $12.62 billion amortized cost. The portfolio’s net unrealized gain increased to about $1.0 billion from $390 million at December 31, largely as market interest rates declined. Management cautioned that GAAP fair-value changes affect equity without a corresponding fair-value adjustment to policy liabilities.
- Cash and short-term investments were $149 million, versus $114 million at year-end. Commercial paper/short-term debt was $264.9 million; long-term debt was $991.2 million. Total debt was therefore about $1.26 billion. Interest coverage was 11.0 times, compared with 9.3 times a year earlier.
- Operating cash flow was $274.9 million; investing activities used $175.5 million and financing activities used $103.9 million. Cash ended the quarter at $40.0 million.
- The company had a $600 million credit facility, with $198 million of letters of credit outstanding and $137 million remaining available at quarter-end. The facility was due to terminate January 7, 2015; the company reported compliance with its covenants and no difficulty accessing commercial paper markets.
- Insurance subsidiaries’ consolidated risk-based capital ratio was 341% at December 31, 2013; management’s target was approximately 325% of Company Action Level capital.
Changes, outlook and notable matters
- Net sales rose 29% to $152 million, but this included increased Medicare Part D enrollment; excluding Part D, net sales increased 11% to $121 million. First-year collected premium was $109 million versus $110 million.
- Management attributed Part D enrollment and sales growth partly to automatic enrollees and employer-group activity. It expected the 2014 full-year benefit ratio to be approximately the same as interim periods (about 80%) and expected the difference between its segment presentation and GAAP results to unwind by year-end, as it did in 2013. Management did not expect government risk-sharing premium for the full year.
- Management said lower interest rates and calls of higher-yielding bonds have pressured investment income, but expected only modest further portfolio-yield declines over the next few years. Issuer calls remain a risk to future investment income.
- The company repurchased 1.4 million shares for $108.0 million using excess cash flow; total treasury-share purchases, including shares purchased with option proceeds, were $125.6 million. The Board’s repurchase program had no specified share limit or expiration date. The quarterly dividend declared per share was $0.19, versus $0.17.
- A three-for-two stock split was declared as a 50% stock dividend, with a June 2, 2014 record date and July 1 payment date. Per-share figures in this summary are as reported before the split adjustment.
- Q1 included a net $3.7 million pretax litigation accrual for certain cases not directly related to insurance operations, partly offset by $1.2 million of investment-litigation settlement proceeds; the segment reconciliation shows a $2.5 million legal-settlement expense. Management said pending litigation was not expected to have a material adverse effect, but noted that punitive-damage outcomes can be unpredictable.
- Audits by private entities acting for 47 states concerning unclaimed life-policy and limited annuity property had produced no state financial assessment or indicated liability. The filing said potential administrative-penalty exposure could not then be estimated.
- No formal company-wide earnings guidance is provided in the supplied text. Management expected subsidiary cash dividends to the parent to total approximately $479 million in 2014 and pension contributions to be no more than $20 million for the remainder of 2014.
- Principal disclosed risks include economic changes affecting sales, lapses, mortality and health claims; Medicare and other regulatory or tax changes; interest rates and investment credit quality; competition and pricing; 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.
Most important facts to verify
- Confirm issuer identity: the filing is explicitly Torchmark Corporation, although the request metadata names Globe Life Inc.
- Reconcile the different premium presentations: GAAP total premium was $819.0 million, while MD&A cites $792 million excluding the Medicare Part D risk-sharing premium adjustment.
- Review the Part D segment-to-GAAP timing adjustment and management’s expectation that it reverses by year-end.
- Assess the sustainability of earnings growth excluding realized investment gains, and the effects of lower reinvestment yields and callable bonds.
- Verify the investment portfolio’s credit quality, unrealized-gain sensitivity, available credit-line capacity and debt maturities.
- Monitor the unclaimed-property audits, litigation and administrative-penalty exposure, as the filing provides no estimate for potential penalty losses.