Torchmark Corporation (now identified in the request as Globe Life Inc.) — Q2 2013 Form 10-Q
Important identification note: The supplied filing is Torchmark Corporation’s Form 10-Q for the quarter ended June 30, 2013, filed August 8, 2013. It does not identify Globe Life Inc. as the registrant. The summary below reflects the filing text provided.
Business context and reporting period
Torchmark sells individual life and supplemental health insurance, primarily through specialized distribution channels, and manages an investment portfolio supporting insurance obligations. The filing reports the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise stated.
- Family Heritage, a supplemental-health insurer acquired November 1, 2012, contributed to 2013 results and limits direct year-over-year comparability, particularly in health insurance.
Financial performance and position
- Q2 revenue and earnings: Total revenue was $950.3 million, up 7% from $885.8 million. Net income was $133.9 million, up 4% from $129.0 million. Diluted EPS was $1.44 versus $1.32.
- First-half revenue and earnings: Total revenue was $1.909 billion, up 7% from $1.784 billion. Net income was $253.5 million, up 2% from $247.7 million. Diluted EPS increased 9% to $2.70 from $2.48, supported in part by fewer shares outstanding.
- Premiums, first half: Total premium rose 9% to $1.551 billion. Life premium increased 5% to $945.9 million; health premium reported under GAAP rose 16% to $604.5 million. The health increase includes $94 million of Family Heritage premium. Excluding Family Heritage, non-Part D health premium declined 3%.
- Underwriting and investment results, first half: Life underwriting income increased 7% to $268.8 million, with a 28% margin as a percentage of premium. Health underwriting income rose 21% to $116.4 million, with a 20% margin; Medicare Part D underwriting income was $16.2 million under management’s segment presentation. Excess investment income fell 12% to $110.5 million, or 8% per diluted share to $1.17.
- Investment income and yield: First-half net investment income was $354.8 million, up 2%. Average fixed-maturity yield declined to 5.97% from 6.46%; the effective annual yield on new investments was 4.21% versus 4.64%.
- Cash flow and liquidity: Cash provided by operations was $492.5 million in the first half, compared with $447.1 million. Cash at June 30 was $44.9 million; cash and short-term investments together were about $148 million. Cash used for investment activities was $316.6 million and for financing activities was $196.8 million.
- Debt and capital: At June 30, short-term debt was $348.9 million and long-term debt was $990.3 million. Commercial paper outstanding was $255 million; $94 million of notes maturing in August 2013 was classified as short-term debt, and the company said it intended to redeem the notes using parent-company funds. The $600 million credit facility had $147 million of remaining availability after commercial paper and letters of credit. Debt to capitalization was 25.9% under GAAP, or 23.6% after removing the filing’s stated effect of available-for-sale investment revaluation.
- Equity and comprehensive income: Shareholders’ equity was $3.822 billion, down from $4.362 billion at year-end 2012. First-half comprehensive loss was $337.8 million, primarily reflecting a $591.4 million other comprehensive loss, largely from declining unrealized gains on fixed maturities as interest rates rose. The fixed-maturity portfolio’s net unrealized gain fell to $652 million from $1.578 billion.
- Capital returns: The company repurchased 3.0 million shares using $180.0 million of excess cash flow in the first half, at an average $59.26 per share. It also repurchased shares using option exercise proceeds. The quarterly dividend declared was $0.17 per share, versus $0.15 a year earlier.
Material changes versus the prior comparable period
- Family Heritage added health premium, sales, and expenses; excluding its premium, non-Part D health premium declined, while reported health growth was strong.
- Total net sales declined 5% to $241 million; excluding Medicare Part D, net sales increased 9% to $224 million. First-year collected premium was $219 million versus $226 million; excluding Part D, it increased 14%.
- Life premium and underwriting income advanced, but life net sales slipped 1%. Medicare Part D premium declined 2%, and management expected a slight full-year decline amid intensified pricing competition and fewer automatic enrollees.
- Required interest on net insurance policy liabilities rose 10% to $215.0 million, outpacing the 2% increase in net investment income and contributing to lower excess investment income. Financing costs increased 6% to $41.7 million.
- Higher market interest rates reduced the portfolio’s unrealized gains and reported equity. Management said it generally had the intent and ability to hold temporarily impaired fixed maturities until maturity.
Outlook, commentary, risks, and unusual items
- Outlook: Management anticipated a slight decline in Medicare Part D premium for full-year 2013 and expected the Part D segment-versus-GAAP interim adjustment to reverse by year-end. The filing does not provide a company-wide earnings or revenue guidance range.
- Investment risks: Management cited lower new-money yields, calls of higher-yielding securities, and possible continued pressure on excess investment income in a prolonged low-rate environment. Approximately 95% of fixed maturities at amortized cost were investment grade; below-investment-grade holdings were $585 million, or 5% of the portfolio.
- Unusual items: First-half results included a $2.7 million pretax ($1.7 million after-tax) investment real-estate impairment. Q2 also included a $1.2 million state guaranty fund assessment and a $0.5 million legal settlement on a non-insurance matter.
- Other risks and contingencies: The filing identifies sensitivity to economic conditions, policy lapses and claims, regulatory changes (especially Medicare), interest rates, credit quality, competition, litigation, and the ability to obtain timely health premium increases. Management did not expect pending litigation to have a material adverse effect, but noted the possibility of unpredictable punitive-damage judgments. Disclosed cases included a Telephone Consumer Protection Act class action with a pending motion to dismiss for a subsidiary, and a New York Medicare Supplement claims dispute with mediation scheduled for August 2013.
- Other disclosures: Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material changes to risk factors and no quantitative or qualitative changes in market risk exposure during the first half.
Most important facts for investors to verify
- Confirm the registrant and filing identity: the supplied 10-Q is for Torchmark Corporation, not a filing naming Globe Life Inc.
- Assess how much reported health growth and future premium potential depend on Family Heritage, and compare its contribution with legacy business trends.
- Review whether lower reinvestment yields, bond calls, and rising required interest continue to constrain excess investment income.
- Track fixed-maturity credit quality, unrealized losses, and the consequences of any need to sell securities rather than hold them to recovery or maturity.
- Verify completion and funding of the August 2013 debt maturity, and monitor commercial paper, credit-facility availability, and debt costs.
- Follow Medicare Part D enrollment, pricing, government risk-sharing, and the expected reversal of interim accounting differences.
- Monitor the disclosed litigation and any changes in management’s assessment of potential exposure.