Business context and reporting period
Entity and period: The supplied filing is Torchmark Corporation’s Form 10-K for the fiscal year ended December 31, 2017—not a filing under the name Globe Life Inc. The company was an insurance holding company focused primarily on individual life and supplemental health insurance for middle-income households, distributed through exclusive agencies, independent agents, and direct response. Medicare Part D was sold effective July 1, 2016 and is reported as discontinued operations.
Financial results and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $4.156 billion | $3.935 billion |
| Premium revenue | $3.283 billion | $3.137 billion |
| Net investment income | $848 million | $807 million |
| Net income | $1.454 billion | $550 million |
| Diluted earnings per share | $12.22 | $4.49 |
| Net operating income from continuing operations (non-GAAP) | $574 million | $549 million |
| Operating cash flow | $1.429 billion | $1.399 billion |
| Total assets | $23.475 billion | $21.436 billion |
| Shareholders’ equity | $6.231 billion | $4.567 billion |
| Total debt, book value | $1.460 billion | $1.398 billion |
Life premium rose 5% to $2.307 billion; health premium rose 3% to $976 million. Life underwriting margin increased 5% to $604 million, with margin at 26% of premium; health underwriting margin increased 4% to $220 million, at 22% of premium. Excess investment income, a non-GAAP management measure, rose 7% to $239 million. Cash and short-term investments totaled $246 million at year-end. The company reported $249 million of remaining credit-facility capacity and a 314% aggregate insurance-subsidiary risk-based capital ratio.
Material changes versus the prior comparable period
- Reported net income rose sharply, but chiefly because the Tax Cuts and Jobs Act generated an $877 million one-time tax benefit from remeasuring deferred taxes. Excluding tax reform, the filing gives net income of approximately $581 million and diluted EPS of $4.88; these are substantially below the reported figures.
- Revenue increased 6%; continuing-operations net operating income increased 4%. Premium growth and higher investment income supported results, while operating expenses rose 11% to $257 million and insurance administrative expense rose 7.1%.
- Fixed-maturity investments had a $2.0 billion net unrealized gain at year-end, versus $1.1 billion in 2016, mainly reflecting lower credit spreads. This increased reported equity but is subject to market movements.
- Shares repurchased under the program totaled 4.1 million for $325 million; total share purchases, including purchases to offset option dilution, were $413 million. The quarterly dividend was raised to $0.15 per share.
- Globe Life Direct Response life net sales fell 10% to $136 million; management expected further declines through 2018. American Income and Liberty National life sales grew.
Outlook, management commentary, risks and contingencies
- Management expected a 2018 effective tax rate on net operating income before stock compensation of 19%–20%, while noting that near-term current tax expense might not fall significantly because other tax-law provisions could offset the lower rate. Tax-reform accounting remained subject to completion in 2018.
- Management forecast approximately $450 million of subsidiary dividends and transfers to the parent in 2018, with $320–$330 million of parent excess cash flow. Share repurchases were expected to remain a primary potential use of excess cash, subject to capital needs and market conditions.
- Management said the company expected adequate liquidity and ability to maintain insurance-subsidiary capital, but RBC levels for 2018 remained under review; anticipated NAIC factor changes could reduce the ratio further.
- Key risks include deviations in mortality, morbidity, persistency, and claims; interest-rate and credit risks in the predominantly fixed-maturity portfolio; competition and delays in health premium-rate approvals; regulatory and tax changes; cybersecurity and operational disruptions; and limitations on subsidiary dividends.
- Management did not consider pending litigation material based on information then available, but noted potential for unpredictable punitive awards. State audits of unclaimed-property practices were ongoing, with no assessment or loss range available. A February 2018 putative class action alleged American Income agents were misclassified as independent contractors; management said a material adverse judgment was remote and no reasonably possible loss range could be estimated.
- Estimated Penn Treaty-related guaranty-fund assessments were $9.6 million, with $7.8 million expected to be recoverable through premium-tax credits and $1.8 million estimated unrecoverable. The filing reported a $210 million commitment to purchase commercial mortgage participations.
Important facts for investors to verify
- Confirm the issuer identity: this source is Torchmark Corporation’s 2017 10-K, despite the request metadata naming Globe Life Inc.
- Separate recurring operating performance from the $877 million tax-reform benefit and from realized investment gains or losses; review the company’s non-GAAP reconciliations.
- Assess the credit quality, concentration, duration, and valuation sensitivity of the fixed-maturity portfolio, including below-investment-grade holdings and unrealized gains.
- Review subsidiary dividend restrictions, the 314% RBC ratio and expected regulatory changes, parent debt maturities, and available borrowing capacity.
- Track the direct-response sales outlook, health rate approvals, unclaimed-property audits, agent-classification litigation, and guaranty-fund assessments.