Torchmark Corporation 2013 Form 10-K
Entity and period: This filing is Torchmark Corporation’s consolidated annual report for the fiscal year ended December 31, 2013, not a standalone Globe Life Inc. filing. Globe Life And Accident Insurance Company is one of Torchmark’s principal insurance subsidiaries; the filing does not provide a clear standalone set of Globe results. Unless noted, amounts below are consolidated and in U.S. dollars.
Business context and reporting period
Torchmark sold individual life and supplemental health insurance, primarily to middle-income customers, through exclusive and independent agents and direct response channels. Its products included life, Medicare Supplement, Medicare Part D, and limited-benefit health coverage. Family Heritage, acquired November 1, 2012, contributed to 2013 results for a full year.
Financial results and key metrics
| Metric | 2013 | 2012 | Change or context |
|---|---|---|---|
| Total revenue | $3.772 billion | $3.590 billion | Up 5% |
| Premium revenue | $3.052 billion | $2.856 billion | Up 7%; life premiums rose 4%, health premiums rose 11% |
| Net investment income | $709.7 million | $693.6 million | Up 2% |
| Net income | $528.5 million | $529.3 million | Down slightly; 2013 included lower realized investment gains |
| Diluted EPS | $5.68 | $5.41 | Up 5%, aided by lower average share count |
| Life underwriting margin | $545.1 million; 29% of premium | $509.5 million; 28% | Up 7% |
| Health underwriting margin | $231.8 million; 20% of premium | $197.3 million; 19% | Up 17%; Family Heritage contributed $32 million of the increase |
| Excess investment income | $218.8 million; $2.35 per diluted share | $236.6 million; $2.42 per diluted share | Down 8% in dollars and 3% per share |
| Cash from operations | $1.119 billion | $942.8 million | Up about 19% |
| Total debt at year-end | $1.220 billion | $1.309 billion | Short-term debt $229.1 million; long-term debt $990.9 million |
| Shareholders’ equity | $3.776 billion | $4.362 billion | Down $585 million, principally reflecting fixed-maturity unrealized losses and share repurchases |
At December 31, 2013, total assets were $18.192 billion and cash and invested assets were $13.457 billion. The fixed-maturity portfolio had a fair value of $12.879 billion and net unrealized gains of $390 million, compared with $1.578 billion of net unrealized gains a year earlier. Approximately 95.5% of fixed maturities at amortized cost were investment grade; the weighted-average rating was A-.
For the fourth quarter, net income was $142.8 million and diluted EPS was $1.56, compared with $151.0 million and $1.58, respectively, in fourth-quarter 2012.
Material changes versus the prior comparable period
- Life premiums grew steadily, while the life underwriting margin improved to 29% of premium, supported by better persistency and lower non-deferred acquisition costs.
- Health premium growth included a full year of Family Heritage. Excluding that acquisition, non-Part D health premiums declined 4% in 2013, according to management.
- Medicare Supplement premiums continued to decline as lapses exceeded new sales. Medicare Part D premiums fell 6% in 2013 amid greater competition and fewer new auto-enrollee regions.
- Investment income rose modestly, but excess investment income fell as required interest on policy liabilities increased and reinvestment yields remained lower. Average fixed-maturity yields declined to 5.94% from 6.35%.
- Net unrealized fixed-maturity gains fell sharply as market interest rates rose; this reduced equity through other comprehensive income, rather than representing an equivalent decline in reported net income.
- Torchmark repurchased approximately 7.4 million shares for $482 million, including purchases funded by excess cash flow and option proceeds. Cash dividends declared increased to $0.68 per share from $0.60.
Liquidity, outlook, risks, and unusual items
- Liquidity and capital: Torchmark reported $1.119 billion of operating cash flow. The parent received $488 million in subsidiary dividends and had approximately $364 million of excess operating cash flow before share repurchases. Management expected approximately $475 million of subsidiary dividends and $370–$380 million of excess cash flow in 2014. The parent had $8 million of cash and short-term investments and $173 million of remaining borrowing capacity under its credit facility at year-end. Subsidiary RBC ratios were approximately 341%, versus management’s 325% target.
- Management outlook: The company expected Medicare Part D premiums to rise to approximately $340 million in 2014, citing qualification for new auto-enrollees in more regions. Management also expected excess investment income to improve in the near future as rate declines moderated and most hybrid-security calls were behind it. These are forward-looking expectations, not guarantees.
- Risks: Key exposures include persistency, mortality and morbidity assumptions; agent recruitment and retention; Medicare and other regulatory changes; delays in health premium-rate approvals; competition; interest-rate and credit risk in a long-duration fixed-income portfolio; access to dividends from regulated insurance subsidiaries; litigation; and cyber, privacy, and catastrophic-event risks.
- Contingencies: Subsidiaries were subject to unclaimed-property audits involving 47 states. No state financial assessment or indicated liability had resulted, but the filing said no range could be estimated for possible administrative penalties. West Virginia’s appeal of a dismissal in related litigation reinstated the stay against the Torchmark subsidiaries. Management did not believe pending litigation would have a material adverse effect, while acknowledging uncertainty.
- Unusual items: 2013 included a $1.2 million state guaranty-fund assessment, a $0.5 million non-insurance legal settlement, and an $8.6 million settlement of prior-year litigation. The segment presentation excludes specified non-operating items. Realized investment gains were also lower than in 2012.
- Globe subsidiary rating: The filing reported Globe Life And Accident Insurance Company financial-strength ratings of AA- from S&P and A+ (Superior) from A.M. Best at December 31, 2013.
- Controls and audit: The independent auditor gave unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer and scope: these are Torchmark consolidated results, not standalone Globe Life results.
- Assess how much of health-segment growth and margin improvement came from the Family Heritage acquisition versus underlying performance.
- Track Medicare Supplement lapses and rate approvals, and whether the forecast Part D premium growth was achieved.
- Monitor whether investment spreads and excess investment income recover as management expected, including the impact of reinvestment yields and security calls.
- Review the duration, credit quality, unrealized losses, and concentration of the fixed-maturity portfolio, alongside the effect of market movements on reported equity.
- Follow subsidiary dividend capacity, RBC levels, parent liquidity, and the use of excess cash for repurchases and dividends.
- Check for developments in the unclaimed-property audits and litigation, including any assessments, penalties, or changes in the estimated exposure.