Business context and reporting period
This summary covers the fiscal year ended December 31, 2011, with comparisons to 2010. The supplied filing is Torchmark Corporation’s Form 10-K, not a filing under the requested company name Globe Life Inc.; verify the issuer and intended filing before relying on this summary. Torchmark was an insurance holding company selling individual life and supplemental health insurance, primarily to middle-income customers, through subsidiaries including Globe Life And Accident Insurance Company.
Financial performance and condition
| Metric | 2011 | 2010 | Change or context |
|---|---|---|---|
| Total revenue | $3.377 billion | $3.368 billion | Essentially flat |
| Premium revenue | $2.656 billion | $2.652 billion | Life premiums increased 4%; health premiums decreased 6% |
| Net investment income | $693.0 million | $676.4 million | Up 2% |
| Income from continuing operations | $518.3 million | $522.3 million | Down slightly |
| Net income | $517.9 million | $517.1 million | Nearly unchanged |
| Diluted earnings per share | $4.72 | $4.20 | Up 12%; lower average share count contributed |
| Cash provided from operations | $859.5 million | $1.029 billion | Down about $169 million |
| Total assets | $17.156 billion | $16.160 billion | Up about $1.0 billion |
| Shareholders’ equity | $4.229 billion | $4.016 billion | Up $213 million |
| Debt | $1.139 billion | $1.112 billion | Includes $224.8 million short-term debt and $914.3 million funded debt |
Life underwriting margin rose 7% to $486.2 million, or 28% of life premium, while health underwriting margin fell 5% to $162.0 million. Excess investment income decreased 2% to $292.6 million, although it increased 10% per diluted share to $2.66. Consolidated health premium in the GAAP statements was $929.5 million; the segment presentation reports $930.5 million, reflecting accounting adjustments described in the filing.
At year-end, cash and short-term investments were approximately $105 million, and fixed maturities had a fair value of $11.9 billion. The fixed-maturity portfolio was 95% investment grade by fair value, with an average rating of A-. Insurance subsidiaries’ aggregate risk-based capital ratio was approximately 336%, against management’s stated 325% target.
Material changes versus the prior comparable period
- Life premiums grew, supported by continued growth in annualized life premium in force, which reached $1.814 billion, up 3%. Life underwriting margin improved with premium growth and better mortality.
- Health premiums declined as the company discontinued certain limited-benefit hospital-surgical products after September 2010, while agent counts and Medicare Supplement sales faced pressure. Medicare Part D premiums declined 6% in 2011, but new 2012 plan enrollment reached about 225,000, up 56% from the 2011 plan year.
- Low interest rates constrained investment yields and excess investment income. New fixed-maturity purchases earned an average 5.65%, below the 2010 average of 5.89%.
- Net unrealized gains on fixed maturities increased to $964 million from $108 million, contributing to higher reported equity. The filing cautions that fair-value movements in investments are not matched by similar remeasurement of policy liabilities.
- The company repurchased 18.9 million shares for $788 million using excess cash flow and borrowings; additional repurchases funded with option proceeds totaled $185 million. Average diluted shares declined to 109.8 million from 123.1 million.
Outlook, risks, contingencies, and unusual items
- Management expected approximately $470 million of subsidiary dividends and transfers to the parent in 2012, with roughly $360 million available as excess cash flow. It also expected Medicare Part D premium growth in 2012 at approximately the same rate as the prior year, based on increased enrollment.
- Effective January 1, 2012, a revised accounting standard for policy acquisition costs was expected to reduce deferred acquisition costs about 16%, total assets about 3%, and shareholders’ equity about 10% at adoption; management expected a less-than-2% reduction in 2012 earnings and no effect on cash flow, liquidity, or statutory earnings.
- Key risks include adverse mortality, morbidity or persistency experience; competition and agent retention; Medicare program or regulatory changes; delays in health premium rate approvals; prolonged low interest rates; credit downgrades, defaults or impairments in a concentrated fixed-income portfolio; and limits on subsidiary dividends that support parent-company liquidity.
- 2011 results included a $6.9 million pretax state administrative settlement and a $12.0 million pretax accrual for an expected litigation settlement, both relating to older matters, plus a $979,000 pretax loss on sale of equipment. After-tax effects reported by management were $4.5 million, $7.8 million and $636,000, respectively.
- United American’s Arkansas class-action case reached a settlement agreement in principle in January 2012, subject to class notice and court consideration. A separate United American policy-benefit class action remained in discovery. Management said pending litigation was not expected to materially affect financial condition, results or liquidity, while warning that litigation outcomes are uncertain.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported no material weaknesses.
Important facts for investors to verify
- Confirm the issuer: the text is Torchmark Corporation’s 2011 10-K, despite the request naming Globe Life Inc.
- Review whether continuing earnings growth, excluding investment gains and unusual settlements, is consistent with the reported segment trends.
- Assess whether the increase in Part D enrollment translates into premium growth and underwriting results as management expected.
- Examine investment-portfolio credit quality, financial-sector exposure, unrealized losses and the assumptions behind impairment assessments.
- Verify parent-company liquidity, subsidiary dividend capacity, debt maturities and the sustainability of share repurchases and dividends.
- Track the 2012 policy-acquisition-cost accounting transition and the resolution and financial impact of disclosed litigation matters.