Business context and reporting period
Entity note: The supplied filing is Torchmark Corporation’s Form 10-Q, not a filing under the name Globe Life Inc. It covers the unaudited quarter ended March 31, 2013; comparisons are with Q1 2012 unless stated otherwise. Amounts are in U.S. dollars, generally millions.
Torchmark primarily sells individual life and supplemental health insurance through specialized distribution channels and invests premiums to support policy obligations. Family Heritage Life, acquired November 1, 2012, contributed to the health segment.
Financial and operating results
- Revenue and earnings: Total GAAP revenue was $958.2 million, up 6.7%; premiums were $784.8 million, up 9.2%. Net investment income was $176.8 million, up 1.6%. Pretax income rose 1.7% to $173.1 million; net income increased 0.8% to $119.6 million. Diluted EPS increased 8.5% to $1.27, supported in part by fewer shares outstanding.
- Underwriting and expenses: Life underwriting income increased 5.5% to $133.1 million, with margin steady at 28% of life premium. Health underwriting income rose to $57.9 million from $47.7 million, with margin steady at 19%; Family Heritage contributed to the increase. Total benefits and expenses were $785.2 million, up 7.9%. Net income was approximately 12.5% of revenue.
- Investment profitability: Excess investment income fell 12.7% to $55.6 million; per diluted share it declined 6.3% to $0.59. Average fixed-maturity yield fell to 6.00% from 6.47%, while required interest on net insurance policy liabilities rose 10.6% to $106.6 million. New fixed-maturity purchases yielded 4.31% versus 4.76% a year earlier.
- Cash flow and liquidity: Operating cash flow was $290.4 million, versus $284.0 million. Investing activities used $267.8 million and financing activities used $63.0 million; cash declined $36.5 million to $25.3 million. Cash plus short-term investments was approximately $201.5 million at quarter-end, versus $156.6 million at year-end 2012. Management reported continued access to commercial paper and a $600 million credit facility; $127 million remained available after outstanding commercial paper and letters of credit.
- Debt and capital: Short-term debt was $368.9 million and long-term debt $990.0 million, or about $1.36 billion combined. Short-term debt included $94 million of notes due August 2013. Shareholders’ equity was $4.30 billion, down from $4.36 billion at year-end. GAAP debt-to-capitalization was 24.0%; interest coverage was 9.3 times, versus 9.7 times.
- Investment portfolio: Fixed maturities had $13.57 billion fair value and $12.12 billion amortized cost; 95% of fixed maturities at amortized cost were investment grade, with an overall rating of A-. Net unrealized gains declined to about $1.45 billion from $1.58 billion at year-end. Level 3 assets were 2.5% of fixed maturities and equity securities.
- Shareholder returns: Torchmark repurchased 1.60 million shares for $90.0 million using excess cash flow and paid $14.1 million in dividends. Dividends declared were $0.17 per share, compared with $0.15.
Material changes versus the prior period
- Health premium and underwriting results benefited from the Family Heritage acquisition. Excluding the acquired business, non-Part D health premium declined about 3% year over year; management attributed much of the reported growth to Family Heritage.
- Total net sales declined 9% to $117 million, but rose 5% excluding Medicare Part D. Life net sales declined 4%; non-Part D health net sales increased 57%, largely reflecting Family Heritage.
- Medicare Part D net sales fell 65%, following unusually strong 2012 enrollment growth. Part D premium increased 4% in the quarter.
- Reported net income grew only slightly, while diluted EPS rose more because diluted weighted-average shares fell to 94.6 million from 101.3 million.
- Other comprehensive loss was $75.2 million, mainly reflecting lower unrealized investment gains; comprehensive income fell to $44.4 million from $70.1 million. Shareholders’ equity also reflects share repurchases and market-value changes in available-for-sale securities.
Outlook, commentary, risks and unusual items
- Management expected a slight decline in Medicare Part D premium for full-year 2013, citing stronger price competition, fewer new automatic enrollees, and lost employer-group cases. It expected the Part D interim segment-versus-GAAP differences to reverse by year-end, as in 2012. No full-year EPS or revenue guidance is provided in the supplied text.
- Management identified sustained low interest rates as a pressure on investment income and excess investment income. It said the effect on portfolio yield should emerge gradually as only about 2%–3% of fixed maturities were expected to run off annually over the next five years. It also said it did not expect an extended low-rate environment to cause a loss-recognition event, based on underwriting margins and current investment spreads.
- Q1 included a $2.7 million pretax ($1.7 million after-tax) other-than-temporary impairment write-down of investment real estate. After-tax realized investment losses were about $3.8 million, or $0.04 per share, compared with gains of $3.3 million, or $0.03 per share, in Q1 2012.
- Risks cited include economic and competitive changes affecting sales, lapses, mortality and health claims; regulation and Medicare changes; interest-rate and issuer-credit risk; litigation; premium-rate approval delays; and the results of new products and marketing initiatives. Management said risk factors had not materially changed and that disclosure controls were effective.
- Management did not believe pending litigation would materially harm financial condition, results or liquidity, but acknowledged unpredictable punitive-damage exposure, particularly in Alabama and Mississippi. In the United American Arkansas class action, class certification and leave to file a further amended complaint were denied in April 2013; trial was continued to October 2013. In a separate telephone-solicitation case, dismissal motions were granted, with leave to amend against United American.
Important facts for investors to verify
- Confirm the issuer identity: this source filing is for Torchmark Corporation, despite the request metadata naming Globe Life Inc.
- Assess whether reported health growth and future sales momentum persist without Family Heritage’s acquired contribution.
- Monitor Part D enrollment, competitive pricing, risk-sharing adjustments, and the expected full-year decline in premium.
- Track fixed-maturity yields, investment calls, required interest on policy liabilities, and the effect of prolonged low rates on excess investment income.
- Review the August 2013 maturity of $94 million in notes, commercial-paper availability, and insurance-subsidiary capital and dividend capacity.
- Evaluate unrealized portfolio losses, below-investment-grade exposure, investment-real-estate impairment, and the development of the disclosed litigation.