Globe Life Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative period is Q1 2020. Globe Life sells individual life and supplemental health insurance primarily in the United States, through life, health, annuity, and investment segments. Dollar figures below are in U.S. dollars; financial statement figures are generally in millions.
Financial results and position
- Revenue: $1,266.6 million, up 11.8% from $1,133.1 million. Premium revenue was $1,002.3 million, up 7.8%; life premium rose 9.0% to $708.1 million and health premium rose 5.0% to $294.2 million. Net investment income increased 3.0% to $235.8 million.
- Earnings: Net income was $178.5 million, up 7.8%; diluted EPS was $1.70 versus $1.52. Net operating income, a company-defined non-GAAP measure excluding realized investment gains and other items, fell 15.2% to $160.1 million; diluted net operating income per share declined to $1.53 from $1.73.
- Segment margins: Life underwriting margin fell 23.6% to $136.6 million, or 19% of life premium versus 28%. Health underwriting margin grew 13.7% to $72.2 million, or 25% of health premium versus 23%. Excess investment income declined 3.5% to $60.5 million; per diluted share it increased 2% to $0.58.
- Cash flow: Operating cash flow was $371.8 million versus $343.6 million. Investing activities used $269.7 million and financing activities used $113.3 million. Cash ended the quarter at $81.5 million; cash plus short-term investments totaled approximately $174.9 million.
- Balance sheet and debt: Total assets were $28.1 billion and shareholders’ equity was $7.8 billion at March 31, 2021. Long-term debt was $1.668 billion and short-term debt, primarily commercial paper, was $274.9 million; total debt book value was $1.943 billion. Commercial paper outstanding was $275 million, with $340 million remaining under the credit line after letters of credit.
- Investment and capital measures: Fixed maturities had a fair value of $20.2 billion and a net unrealized gain of $2.743 billion. The portfolio was 95% investment grade at amortized cost, with an average composite rating of A-. Book value per share was $75.10, including $20.74 attributable to net unrealized gains on fixed maturities. Year-end 2020 statutory RBC ratio was 309%; the company’s 2021 target is 300%–320%.
Material changes versus Q1 2020
- Premium growth and stronger realized investment results lifted GAAP net income, while COVID-19 claims reduced core operating performance. The company estimated $38 million of Q1 net life claims related to COVID-19.
- Realized investment results shifted to a $28.2 million pretax gain from a $26.1 million loss. Management reported the after-tax contribution as a $22.2 million gain versus a $20.6 million loss.
- Shareholders’ equity declined from $8.8 billion at December 31, 2020, largely due to $1.0 billion of after-tax unrealized investment losses as market interest rates rose. Fixed-maturity fair value fell from $21.2 billion at year-end.
- Life net sales increased 16% to $128.2 million, but health net sales fell 6% to $39.6 million. Total net sales increased 10% to $168 million.
- Operating cash flow increased, while cash and short-term investments declined from $202.6 million at year-end 2020 to $174.9 million at March 31, 2021.
Outlook, risks, contingencies, and unusual items
- Outlook: At the midpoint of 2021 guidance, management projected approximately $50 million of COVID-19 net life claims for the full year, based on an estimate of approximately 270,000 U.S. deaths. Management anticipated higher full-year life net sales; it also expected pandemic-related mortality to keep life underwriting margins somewhat below normal. The filing does not provide a clear numerical EPS or revenue guidance range.
- Investment outlook: Management expects low interest rates to constrain investment-income growth as new investments and reinvested proceeds earn less than the existing portfolio. It estimated 2021 new-money yields on fixed-maturity purchases would be about 10 basis points below 2020 acquisition yields. A sustained rise in rates may reduce fair values, though management said it intends and is able to hold securities to recovery.
- Liquidity and capital: The company expected $270–$280 million of additional Parent Company excess cash flow during the remainder of 2021, in addition to $270 million of liquid assets available at quarter-end. It said it expected readily available funds to support operations and targeted subsidiary capital levels.
- Unusual items: Fixed-maturity exchanges totaling $85.8 million were noncash transactions and contributed $25.2 million of pretax realized gains. Shareholders’ equity and reported book value were materially affected by available-for-sale investment mark-to-market accounting. The company repurchased 944,000 shares for approximately $90.1 million using Parent Company excess cash flow; additional repurchases funded with option proceeds brought total share purchases to 1.379 million shares, or $132.7 million.
- Risks and contingencies: Risks include COVID-19 impacts on mortality, morbidity, sales, lapses, operations, and investment issuers; interest-rate and credit-market changes; regulation; competition; premium-rate approvals; litigation; and cybersecurity or system disruption. Management said it did not believe pending litigation was reasonably likely to have a material adverse effect, while noting that litigation outcomes—particularly punitive-damage awards—are uncertain. A $135 million letter-of-credit balance supports reinsurance obligations under a facility with a maximum $250 million letter-of-credit capacity. The company reported no material change in risk factors.
- Accounting change: The company is implementing the long-duration insurance accounting standard, effective January 1, 2023. Management expects a significant financial-statement impact but had not estimated it; it does not expect to early adopt.
Important facts for investors to verify
- How COVID-19 mortality and claims develop relative to the company’s full-year estimate, and the resulting effect on life underwriting margins and earnings.
- Whether life-sales growth continues and whether health-sales weakness persists, especially in first-year collected premium.
- Investment portfolio credit quality, unrealized losses, yield trends, and the sensitivity of reported equity to interest rates; also review commercial mortgage exposures and unfunded investment commitments.
- Parent Company liquidity, commercial-paper access, debt maturities, subsidiary dividend capacity, and progress toward the targeted 300%–320% RBC ratio.
- Developments in agent-classification litigation and implementation of the 2023 long-duration contract accounting standard.