Globe Life Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Globe Life, formerly Torchmark Corporation, is an insurance holding company offering life and supplemental health insurance, with a smaller annuity business. This unaudited report covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. The company changed its name in August 2019 and its NYSE ticker to GL.
Financial performance
Amounts below are in millions except per-share data. Growth rates are year over year unless noted.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $1,141.3 | $1,083.8 | $3,391.0 | $3,239.0 |
| Total premiums | $900.0 | $860.8 | $2,688.5 | $2,564.8 |
| Net investment income | $228.9 | $221.6 | $683.0 | $658.3 |
| Income before tax | $247.3 | $220.3 | $704.2 | $660.0 |
| Net income | $201.8 | $178.7 | $573.7 | $536.7 |
| Diluted EPS | $1.82 | $1.55 | $5.14 | $4.64 |
- Q3 revenue rose 5.3% and net income rose 12.9%; diluted EPS increased 17.4%. For the nine months, revenue grew 4.7%, net income 6.9%, and diluted EPS 10.8%.
- Management’s non-GAAP net operating income was $564.0 million for nine months, up 6%; diluted net operating income per share was $5.05, up 10%. The filing reports nine-month ROE of 12.0% on net income and 14.7% on net operating income excluding unrealized fixed-maturity gains.
- Nine-month life underwriting margin was $526.3 million, up 9%, with margin at 28% of premium versus 27%. Health underwriting margin was $182.6 million, up 3%, at 23% of premium in both periods. Annuity underwriting margin was $7.1 million, down 8%. Excess investment income rose 6% to $195.0 million; per diluted share it rose 11% to $1.75.
- Insurance administrative expenses increased 7.6% to $179.2 million, or 6.7% of premium versus 6.5%. Management attributed the increase primarily to information technology spending, including data analytics, systems modernization, and information security.
Financial position, cash flow, and liquidity
- At September 30, 2019, total assets were $25.8 billion, shareholders’ equity $7.3 billion, and total policy liabilities $14.9 billion. Cash was $66.7 million and short-term investments $77.6 million.
- Fixed maturities available for sale had a fair value of $18.8 billion, compared with $16.3 billion at December 31, 2018. The portfolio’s net unrealized gain increased to $2.6 billion from $544.5 million, principally as interest rates declined. This boosted GAAP equity; equity excluding the accounting effect of unrealized fixed-maturity gains was $5.3 billion.
- Nine-month operating cash flow was $1.03 billion, versus $937.3 million. Investing activities used $568.6 million and financing activities used $509.4 million. Cash declined by $54.4 million to $66.7 million.
- Total debt at book value was approximately $1.585 billion: $233.3 million short-term and $1.351 billion long-term. Commercial paper outstanding was $225 million, with $375 million remaining available under the credit line after letters of credit. The company reported compliance with credit covenants and no difficulty accessing the commercial paper market.
- Management said operating cash flow, investment maturities, and credit availability should provide sufficient liquidity for 2020 and the foreseeable future. Nine-month interest coverage was 12.0 times, up from 10.9 times.
- The company repurchased 3.0 million shares for $257.2 million from parent-company excess cash flow during the first nine months; total repurchases including option-related purchases were 3.9 million shares for $334.5 million. Quarterly dividends declared were $0.1725 per share.
Material changes, outlook, and risks
- Premium growth was broad-based: nine-month life premium increased 4% and health premium 6%; total net sales increased 5% to $451 million. Life net sales rose 3%, while health net sales rose 11%. Health growth included both limited-benefit products and Medicare Supplement.
- Management targeted a consolidated Company Action Level RBC ratio of 300%–320% for 2019 and 2020; the 2018 year-end ratio was 326%. No specific earnings guidance is provided in the supplied filing text.
- Management noted that low interest rates can constrain investment-income growth as new funds are invested at yields below the existing portfolio average. The nine-month fixed-maturity portfolio yield was 5.50%, versus 5.57% a year earlier. The company expects fixed-maturity turnover of 4%–6% in 2019, partly from municipal bond calls, and expects average annual turnover of 1%–2% over the following five years.
- Interest-rate changes can materially affect the fair value of available-for-sale securities and reported equity. Management said an increase of about 120–125 basis points would eliminate the portfolio’s September 2019 net unrealized gains; it stated it had the intent and ability to hold securities to maturity and did not expect forced sales for liquidity.
- Credit exposure warrants attention: 96% of fixed maturities were investment grade, while 56% were rated BBB-category. The portfolio’s weighted-average composite rating improved to A- from BBB+ at year-end 2018. No other-than-temporary impairments were recorded in the first nine months.
- Four related California agent-classification cases had a proposed settlement covering the claims; preliminary approval was granted in August 2019, with final approval hearing scheduled for January 9, 2020. Management considered a material adverse judgment remote. The company also described general litigation and the potential for unpredictable punitive-damage awards.
- The company identified mortality, morbidity, lapses, regulation and Medicare-market changes, pricing competition, investment credit and interest-rate conditions, litigation, premium-rate approvals, technology and cybersecurity, and estimates and assumptions as risks. Management stated there were no material changes to risk factors and that disclosure controls were effective.
- Adoption of the long-duration insurance accounting standard was expected to have a significant impact; the company was evaluating the effect and had no estimate. The filing discussed a proposed effective-date deferral to January 1, 2022; the corresponding accounting update had not yet been issued.
Investor verification priorities
- Track whether premium and new-sales growth persist by product and distribution channel, particularly the differing trends in life and health.
- Assess underwriting margins, claims experience, and administrative spending, including the return on expanded technology investment.
- Separate recurring operating earnings from realized investment gains and from the large, interest-rate-driven unrealized gains in GAAP equity.
- Review portfolio credit quality, BBB and below-investment-grade exposures, realized losses, and the impact of rates on investment income and fair value.
- Verify capital and liquidity against the targeted RBC range, debt maturities, commercial-paper usage, share repurchases, and dividend commitments.
- Monitor final approval and financial consequences of the California agent settlement, and the implementation impact of the long-duration insurance accounting standard.