Torchmark Corporation (now identified in the request as Globe Life Inc.) — Q3 2011 Form 10-Q
Entity and period: The filing names Torchmark Corporation as the registrant and covers the quarter ended September 30, 2011; comparisons are with 2010. The filing describes a life and supplemental health insurer serving primarily middle-income customers. Financial statement amounts below are in U.S. dollars; “million” amounts are rounded.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $837.2 million | $838.9 million | $2,543.8 million | $2,520.5 million |
| Income from continuing operations | $136.9 million | $138.1 million | $392.0 million | $373.3 million |
| Net income | $137.1 million | $114.5 million | $391.5 million | $362.3 million |
| Diluted net income per share | $1.30 | $0.94 | $3.49 | $2.93 |
- Revenue mix, nine months: Premium was $2.003 billion, nearly flat year over year. Life premium rose 4% to $1.294 billion; health premium fell 6% to $702.8 million. Net investment income rose 4% to $518.2 million.
- Profitability: Nine-month continuing income increased 5%; diluted continuing EPS rose 16%, helped by substantially fewer shares outstanding following repurchases. Life underwriting income rose 7% to $364.9 million, while health underwriting income declined 4% to $121.6 million. Investment-segment excess income was nearly unchanged at $220.4 million, but rose 9% per diluted share to $1.96.
- Cash flow: Operating cash provided was $684.5 million for nine months, down from $745.0 million. Cash used in investing was $120.6 million, versus $696.0 million in 2010. Financing used $752.7 million, principally reflecting $790.3 million of treasury-stock purchases. Ending cash was $176.0 million.
- Balance sheet and liquidity: At September 30, total assets were $16.971 billion and shareholders’ equity was $4.183 billion. Cash plus short-term investments was about $224.5 million, versus $582.4 million at year-end 2010. Short-term commercial paper was $225.7 million; the balance-sheet long-term debt line was $790.3 million. Management separately reports $914.1 million of long-term funded debt including junior subordinated debentures classified as due to affiliates. A $600 million credit facility was available, subject to outstanding letters of credit and commercial paper; the company said it complied with covenants.
- Investment portfolio: Fixed maturities had $11.658 billion fair value and a $942 million net unrealized gain at quarter-end, compared with a $108 million net gain at year-end 2010. These unrealized changes materially affected reported equity. About 93% of fixed maturities at amortized cost were investment grade; the portfolio’s average rating was A-. The average fixed-maturity yield was 6.53%, and new-money yield was 5.79%.
- Margins and capital: Life underwriting margin was 28% of premium, up from 27%; health underwriting margin remained 17% overall and 19% excluding Medicare Part D. Debt to capitalization was 21.4% under the filing’s stated calculation. Quarterly dividends declared were $0.12 per share, versus $0.11 a year earlier.
Material changes versus prior comparable periods
- Q3 total revenue was essentially flat and continuing income edged down, while net income and diluted EPS increased largely because 2010 included a discontinued-operations loss and 2011 had fewer shares outstanding. For the nine months, continuing income grew 5% and net income grew 8%.
- Nine-month total premium was stable, but new-business indicators weakened: total net sales fell 5% to $305 million and first-year collected premium fell 12% to $245 million. Life net sales decreased 3%; health net sales excluding Part D decreased 4%.
- Life premium growth and improved mortality lifted life underwriting results. Health premium and underwriting income declined, reflecting discontinued limited-benefit products and lower Medicare Part D premium. Third-quarter health net sales excluding Part D improved 26% year over year, which management attributed partly to a new cancer product and Medicare Supplement sales.
- Cash and short-term investments fell substantially from year-end, while the company repurchased 17.2 million shares using excess cash flow for $720.4 million, at an average $41.79 per share. Including purchases funded by option-exercise proceeds, total treasury-stock acquisitions were $790.3 million.
- The net unrealized gain on fixed maturities expanded sharply as market yields declined. The change increased reported equity but was not presented as realized operating income.
Outlook, commentary, risks and unusual items
- Management expected full-year Medicare Part D benefit ratios to be approximately in line with interim assumptions, with segment-versus-GAAP timing differences eliminated by year-end. It anticipated significant Part D growth in 2012 following a new lower-cost plan, while noting government-program regulatory risk.
- Management said it planned to raise premium rates on major life products to help offset potential pressure from low investment yields and did not expect the increases to harm sales. It cautioned that an extended low-rate environment could gradually reduce portfolio yields and pressure excess investment income.
- Management expected 2011 subsidiary dividends and transfers to the parent of approximately $788 million, including $731 million received in the first nine months. It stated that liquidity should be sufficient from operating cash flow, investment maturities and credit availability.
- 2011 nine-month earnings included after-tax realized investment gains of $13.7 million, a $3.9 million after-tax estimated state administrative settlement charge, a $0.6 million after-tax loss on aviation equipment, and a $3.8 million after-tax Medicare Part D interim accounting adjustment. The state settlement related to issues arising over many years; management excluded the settlement and equipment loss from its core-results analysis.
- The company sold United Investors Life Insurance Company on December 31, 2010; its prior-period results were reported as discontinued operations. A three-for-two stock split was paid July 1, 2011, and share and per-share figures were adjusted retrospectively.
- Effective January 1, 2012, the company planned retrospective adoption of new policy-acquisition-cost guidance. Management estimated potential reductions of 3%–5% in assets, 9%–15% in shareholders’ equity, and 1%–2% in 2012 earnings, with no cash-flow or liquidity effect.
- Risks highlighted include interest-rate and investment-credit exposure, mortality and morbidity, sales and lapse trends, Medicare and other regulatory changes, competition, litigation, and delays in obtaining health premium-rate increases. The filing reported no material change in risk factors. Management said litigation was not expected to materially affect financial condition, results or liquidity, but noted possible unpredictable punitive-damage awards. A purported class action against United American retained a breach-of-contract claim after other claims were dismissed in September 2011.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing reported no quantitative or qualitative change in market-risk exposure during the quarter.
Important facts for investors to verify
- Confirm the issuer identity and corporate-name continuity: this 2011 filing is filed under Torchmark Corporation, while the request identifies Globe Life Inc.
- Review the causes and sustainability of declining health premiums and new-business measures, and whether the third-quarter sales improvement continues.
- Assess sensitivity of investment income and insurance-liability costs to persistently low interest rates, alongside the portfolio’s credit quality, unrealized gains and below-investment-grade holdings.
- Reconcile debt presentation across short-term debt, long-term debt and junior subordinated debentures classified as due to affiliates; monitor commercial-paper use and credit-facility availability.
- Evaluate the effect of the 2012 acquisition-cost accounting change and distinguish one-time charges, realized gains and fair-value movements from recurring operating performance.
- Track Medicare Part D enrollment, expected 2012 growth and regulatory developments, as well as the status and potential exposure of the United American litigation and state administrative settlement.