Torchmark Corporation (now Globe Life Inc.) — Q2 2010 Form 10-Q
Filing identity: The supplied filing is filed by Torchmark Corporation, for the quarter ended June 30, 2010; it is not filed under the Globe Life Inc. name. Financial amounts below are in U.S. dollars; unless noted, millions.
Business context and reporting period
Torchmark’s principal business is marketing life and supplemental health insurance to middle-income customers through direct response, independent agencies, and captive agencies. It also manages a large investment portfolio supporting long-term insurance liabilities. The filing reports Q2 and first-half 2010 results against the corresponding 2009 periods, and balance-sheet figures against December 31, 2009.
Financial and operating highlights
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Total revenue | $865.0 | $819.7 | $1,739.8 | $1,629.4 |
| Total premiums | $688.1 | $681.5 | $1,377.5 | $1,368.0 |
| Net investment income | $181.6 | $167.4 | $358.9 | $336.4 |
| Income before tax | $190.0 | $160.4 | $373.4 | $286.7 |
| Net income | $126.0 | $114.1 | $247.7 | $190.8 |
| Diluted EPS | $1.53 | $1.38 | $2.98 | $2.29 |
- Q2 revenue rose about 6% and net income about 10%; first-half revenue rose about 7% and net income about 30%. Net margin, calculated as net income divided by revenue, was approximately 14.6% in Q2 2010 versus 13.9% in Q2 2009.
- First-half operating cash flow was $474.9, up from $360.4. Investing activities used $514.0 and financing activities used $164.7; cash declined $204.6 to $27.3. Cash plus short-term investments totaled approximately $281.5 at June 30.
- Total assets were $17.0 billion and shareholders’ equity $3.9 billion, compared with $16.0 billion and $3.4 billion at year-end 2009. The increase in equity included a substantial recovery in unrealized investment values.
- Balance-sheet short-term debt was $200.5 and long-term debt $789.2. Management separately described $912.9 of long-term funded debt including junior subordinated debentures. Commercial paper outstanding was $200; $200 remained available under the $600 million credit facility after letters of credit.
- Fixed maturities had fair value of $10.9 billion and a net unrealized gain of $178 million, versus a net unrealized loss of $456 million at year-end 2009. The portfolio was rated BBB+ overall; 92% at amortized cost was investment grade and 8% below investment grade.
- First-half dividends declared were $0.30 per share. The company repurchased approximately 1.5 million shares for $77 million during the first half.
Material changes versus the prior comparable period
- Life premium increased 4% to $864.1 million for the first half; life underwriting income increased 7% to $235.7 million. Life net sales rose 6%, while first-year collected life premium rose 13%.
- Health premium fell 4% to $506.5 million, including Medicare Part D. Excluding Part D, health premium declined 8%; non-Part D health net sales fell 20%, with management citing agent turnover, competition, and its decision to deemphasize certain limited-benefit products. Medicare Part D premium increased 15% to $105.2 million.
- Investment-segment excess investment income increased 1% to $157.2 million, despite a 10% increase in average invested assets. Management attributed the modest growth partly to lower yields on new investments and higher interest costs on policy liabilities and debt.
- First-half realized investment results improved sharply: a $1.5 million after-tax gain versus a $52.8 million after-tax loss in 2009. Other-than-temporary impairment charges were $1.7 million in 2010 versus $87.1 million in 2009, as reported in the income statement.
- Variable annuity underwriting results deteriorated, producing a $2.2 million loss versus $0.4 million income in the prior-year first half. The company no longer markets variable annuities; market declines, guarantee reserves, and deferred acquisition cost adjustments affected results.
Outlook, management commentary, risks, and unusual items
- No formal earnings guidance is provided. Management expected approximately $371 million of 2010 dividends from life insurance subsidiaries and about $280 million of full-year excess operating cash flow before share repurchases.
- Management said it expected 2010 Medicare Part D benefit ratios to be approximately consistent with interim results, but noted the ratio could change as experience emerges. Interim segment results differ from GAAP because of benefit timing and risk-sharing adjustments; management expected the difference to reverse by year-end.
- Management said it generally intends and expects to hold temporarily impaired fixed maturities to maturity, citing insurance cash flows and liquidity. The portfolio remains exposed to issuer credit quality, interest rates, and market valuation; $455.6 million of gross unrealized fixed-maturity losses remained at June 30.
- Management was evaluating the effects of federal health-care legislation. It identified a limited set of products potentially affected, representing about 1.7% of first-half sales and less than 4% of premium in force, and planned to discontinue their sale in September 2010.
- Management was contemplating the sale of United Investors Insurance Company, which underwrites variable life and annuity products. For the first half, UIL represented $77 million of revenue, $22 million of net income, and $1.9 billion of assets, including separate-account assets.
- Notable items included a $1.6 million pretax loss on repurchase of senior notes, favorable settlement of certain previously reserved litigation costs, and higher stock-compensation expense. Management reported effective disclosure controls and no identified material weaknesses.
- Risks include insurance claims and persistency experience, agent recruitment and retention, competition, premium-rate approvals, regulation (including Medicare and health-care changes), investment impairments and interest rates, and litigation. A Florida insurance-regulatory proceeding concerning Liberty National remained pending after a June 2010 hearing; proposed orders were expected in August. A separate Driver Privacy Protection Act case was affirmed dismissed by the appeals court in July 2010.
Most important facts for investors to verify
- Confirm the issuer and corporate-name history: the filing is Torchmark Corporation’s 2010 second-quarter report.
- Track life and health sales, agent counts, and persistency—particularly the sharp declines in Liberty National and United American agency forces and non-Part D health sales.
- Review investment credit exposure, especially financial-sector holdings, below-investment-grade securities, unrealized losses, and the small Level 3 portfolio.
- Reconcile GAAP and segment Medicare Part D results and monitor full-year benefit ratios and government risk-sharing payments.
- Assess liquidity and capital distributions alongside share repurchases, commercial-paper exposure, credit-facility availability, and the stated RBC capital target.
- Monitor the potential UIL sale, health-care legislation effects, and the unresolved Florida regulatory proceeding.