Business Context and Reporting Period
This Form 10-Q covers Torchmark Corporation (doing business as Globe Life Inc.) for the quarter and nine months ended September 30, 1999. Torchmark operates primarily in life insurance, health insurance, and annuities. The reporting period reflects the company's ongoing operations following the 1998 divestitures of its asset management subsidiary, Waddell & Reed, and its preneed funeral insurer, Family Service. Results for these divested entities are presented as discontinued operations.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 1999 | Nine Months Ended Sep 30, 1998 |
|---|---|---|
| Total Revenue | $1,640.5 million | $1,617.4 million |
| Total Premiums | $1,404.6 million | $1,310.3 million |
| Net Investment Income | $333.7 million | $349.8 million |
| Realized Investment Losses | ($104.0 million) | ($44.8 million) |
| Net Income | $205.0 million | $170.6 million |
| Diluted EPS | $1.52 | $1.20 |
| Net Operating Income (Continuing Ops) | $254.3 million | $239.7 million |
| Cash Flow from Operations | $294.9 million | $279.1 million |
| Total Assets | $11.38 billion | $11.25 billion |
| Total Debt | $774.0 million | $742.0 million |
| Shareholders' Equity | $2.01 billion | $2.26 billion |
Material Changes vs. Prior Period
- Revenue Growth: Total premiums increased 7% to $1.4 billion, driven by growth in Life (6%) and Health (8%) segments. Net investment income declined 5% due to asset reductions from share repurchases and the prior year's inclusion of Family Service assets.
- Profitability: Net income rose 20% to $205 million. Net operating income from continuing operations increased 6% to $254 million. Operating expenses declined 3% to $87 million, improving the expense ratio to 5.0% of operating revenues.
- Investment Portfolio: The fixed maturity portfolio held an unrealized loss of $153 million at period end, compared to an unrealized gain of $249 million at year-end 1998, due to rising interest rates. Realized losses of $104 million were recorded, including $64 million from a writedown of investment real estate and $26 million from bond sales to recover prior capital gains taxes.
- Capital Structure: Shareholders' equity decreased to $2.01 billion, impacted by the spin-off of Waddell & Reed and $175 million in share repurchases. Debt-to-capitalization ratio remained stable at 25%.
Guidance, Outlook, and Risks
- Management Commentary: Management focuses on "net operating income from continuing operations" to evaluate performance, excluding non-recurring items like realized investment losses and discontinued operations. The company continues to emphasize purchasing investment-grade fixed maturity bonds with an average yield of 7.32%.
- Share Repurchases: Torchmark acquired 5.4 million shares for $175 million in the first nine months of 1999 and intends to continue repurchases when prices are attractive, provided ratings are not jeopardized.
- Year 2000 Compliance: The company reported full compliance as of November 1, 1999, with total project costs of approximately $5.8 million within the $6 million budget.
- Risks and Contingencies:
- Litigation: The company faces approximately 141 active lawsuits, primarily in Alabama, involving punitive damages. While management does not currently consider these liabilities material, the potential for unpredictable large awards exists.
- Regulatory and Market Risks: Risks include changes to the Federal Medicare program, interest rate fluctuations affecting investment yields and policy lapses, and increased pricing competition.
- Health Segment Margins: Underwriting margins for health insurance declined from 18% to 17% due to increased loss ratios on a block of cancer insurance, prompting rate increases.
Investor Verification Checklist
- Verify the impact of the $64 million investment real estate writedown and $104 million in realized investment losses on the reported net income versus the underlying operating performance.
- Confirm the status of the $141 active lawsuits, particularly those seeking punitive damages in Alabama, and any updates on the Battle and Hipp litigation outcomes.
- Monitor the effectiveness of premium rate increases in the Health segment to offset the declining underwriting margins on cancer insurance.
- Assess the sustainability of the 7.32% yield on new fixed maturity acquisitions in a rising interest rate environment.
- Review the company's ability to maintain "excellent to superior" claims-paying ratings while continuing its aggressive share repurchase program.