Business context and reporting period
Registrant: Torchmark Corporation (now Globe Life Inc.); the supplied filing is Torchmark’s Form 10-Q for the quarter ended June 30, 2012, filed August 8, 2012. It reports life, supplemental health, and annuity insurance operations and investment management. Amounts below are in millions unless noted.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $885.8 | $877.3 | $1,783.7 | $1,706.6 |
| Income before tax from continuing operations | $186.4 | $209.1 | $356.6 | $356.6 |
| Net income | $129.0 | $142.8 | $247.7 | $242.9 |
| Diluted EPS | $1.32 | $1.27 | $2.48 | $2.10 |
| Operating cash flow | Not separately stated | Not separately stated | $447.1 | $452.7 |
- For the first half, total premiums rose 5% to $1,424.1; life premiums increased 4% to $902.8 and health premiums increased 7% to $521.0. Net investment income rose 1% to $349.3. Realized investment gains were $9.7, versus $8.5 a year earlier. In Q2, realized gains were $4.7 versus $31.3, contributing to lower year-over-year quarterly pretax and net income.
- First-half policyholder benefits increased to $997.5 from $918.8. Life underwriting income rose 10% to $250.3, with margin increasing to 28% of life premium from 26%. Health underwriting income was nearly flat at $96.2; health margin declined to 19% from 20%.
- Management’s segment measure of excess investment income declined 4% to $126.2, while excess investment income per diluted share rose 12% to $1.27, reflecting fewer shares outstanding after repurchases. The fixed-maturity portfolio’s average yield was 6.46% for the first half versus 6.59% in 2011; yield on new purchases was 4.64% versus 5.84%.
- At June 30, total assets were $17,185, total liabilities $13,187, and shareholders’ equity $3,998. Fixed maturities had $12,309 fair value and a $1,234 net unrealized gain. The increase in unrealized gains helped lift equity and comprehensive income, but is not equivalent to realized earnings.
- Cash was $70.7; cash and short-term investments together were approximately $180. Short-term commercial paper was $319.8, and long-term debt was $791.1 on the balance sheet; management also reported total long-term debt including junior subordinated debentures of about $915. The $600 credit facility had $82 available after letters of credit at quarter-end. Debt-to-capitalization was 23.6% under GAAP.
Changes, outlook, risks and unusual items
- First-half net income increased 2% and diluted EPS increased 18% year over year. Management attributed EPS growth in part to share repurchases; the company repurchased 5.8 million shares with excess cash flow for $273.8 million and bought 8.2 million shares in total, including purchases funded by option exercise proceeds. The quarterly dividend was raised from $0.12 to $0.15 per share.
- Medicare Part D premium increased 55% to $152.2, primarily due to low-income automatic enrollees. The GAAP interim Part D result differed from management’s segment presentation, producing a $13.9 after-tax charge to first-half earnings ($0.14 per share), versus $3.7 million ($0.03 per share) in 2011. Management expected the interim difference to reverse by year-end and anticipated a full-year benefit ratio of approximately 84% for 2012. Participation in the automatic-enrollee program for 2013 was not yet known.
- On July 31, 2012, Torchmark agreed to acquire Family Heritage Life for approximately $218.5 million, subject to closing adjustments, funded internally and expected to close early in Q4. Management expected the acquisition to be accretive to earnings and EPS, with minimal effect, if any, on repurchases and subsidiary capital ratios.
- Management said low interest rates were pressuring investment income and expected the pressure to continue as new money is invested at lower yields. Banks had notified the company that $301 million of trust preferred securities, yielding an average 7.18%, would be called during July and August. Reinvestment at about 4.25% was expected to reduce annual after-tax investment income by approximately $6 million. Additional calls among roughly $300 million of similar securities were uncertain; management expected most to be called by the end of 2013.
- Investment risks include $764 million of below-investment-grade fixed maturities (7% of the portfolio at amortized cost), with downgrades contributing to the increase from $701 million at year-end. The portfolio was rated BBB+ overall; 93% was investment grade. Management reported no direct European sovereign debt exposure, no credit default swaps or other derivatives, and no commercial mortgage-backed or subprime/Alt-A-backed securities.
- ASU 2010-26, adopted retroactively, restricted which insurance acquisition costs could be deferred. It reduced 2011 first-half net income by $12 million and diluted EPS by $0.10; management said it changes the timing, not ultimate profitability or cash flow. 2011 also included a $6 million pretax state administrative settlement accrual and a $979,000 pretax loss on aviation equipment sales; neither recurred in 2012.
- A previously disclosed Arkansas class action against United American reached final court approval of its settlement in June 2012; implementation was underway. Other litigation remained, including a California agent classification case and an Arkansas policy-benefit class action. Management did not believe litigation would materially adversely affect financial condition, results, or liquidity, while acknowledging potentially unpredictable punitive awards. The filing reported no material change in risk factors and no material change in market-risk exposure.
- No specific consolidated earnings or EPS guidance was provided. Management cited general risks including interest rates, credit quality, insurance claims and lapse experience, Medicare and other regulatory changes, competition, litigation, and the ability to obtain health premium rate increases.
Important facts for investors to verify
- Confirm the entity and period: this is a Torchmark Corporation filing for Q2 2012, not a filing issued under the Globe Life name.
- Track Part D results separately from management’s segment measure, and verify the expected year-end reversal and 2013 automatic-enrollee participation.
- Assess the income impact and timing of trust preferred calls, reinvestment yields, and further below-investment-grade downgrades.
- Review the Family Heritage acquisition’s closing, final price, funding, and realized earnings contribution against management’s accretion expectation.
- Distinguish realized earnings from the large, interest-rate-sensitive unrealized portfolio gains reflected in equity and comprehensive income.
- Follow commercial-paper usage and credit availability, subsidiary dividend capacity and capital ratios, share repurchases, and the status and potential exposure of outstanding litigation.