GLOBE LIFE INC. annual report, FY2012

Business context and reporting period

This is Torchmark Corporation’s consolidated Form 10-K for the fiscal year ended December 31, 2012, not a standalone Globe Life filing. Globe Life and Accident Insurance Company is a Torchmark subsidiary. Torchmark sells individual life and supplemental health insurance, primarily to middle-income customers, through direct-response, exclusive-agent, and independent-agent channels. The filing also includes unaudited fourth-quarter results.

Financial results and key metrics

• Life premium rose 5% to $1.809 billion; life underwriting margin increased 11% to $509.5 million, or 28% of premium versus 27% in 2011.
• Health premium rose to $1.047 billion, largely reflecting Medicare Part D growth and the Family Heritage acquisition. Health underwriting margin increased 4% to $197.3 million; its margin rate was 19%, down from 20%.
• Excess investment income, management’s investment-segment profitability measure, fell 9% to $236.6 million. Net investment income was nearly flat at $693.6 million.
• At year-end, cash and invested assets were $14.156 billion; total assets were $18.777 billion. Short-term debt was $319.0 million and long-term debt $989.7 million. Debt to capitalization was 23.1% on a GAAP basis.
• Cash and short-term investments totaled $156.6 million. The credit facility had $176.8 million of additional capacity. Insurance subsidiaries’ aggregate RBC ratio was approximately 348%, against a 325% management target.
• Common dividends declared were $0.60 per share, up from $0.46. Torchmark repurchased 7.5 million shares for $360 million from excess cash flow and borrowings, in addition to repurchases funded by option exercises.

Material changes versus the prior comparable period

• Revenue increased 6% and net income increased 6%; diluted EPS rose 19%, reflecting the lower share count from repurchases as well as earnings growth.
• Life underwriting margin continued to improve, supported by premium growth and better persistency. Health margin recovered modestly after declining in 2011.
• Medicare Part D premium increased 62% to approximately $318 million, driven by low-income auto-enrollees. Medicare Supplement premium remained the largest component of non-Part D health premium but declined slightly.
• Family Heritage was acquired on November 1, 2012 for approximately $234 million, including $20 million of assumed trust preferred debt. It contributed $33 million of revenue and $3.1 million of net income in the two months after acquisition.
• Low interest rates and an unusual volume of calls on higher-yielding securities pressured investment income. Excess investment income declined even as mean invested assets grew 4%.
• Fixed maturities’ net unrealized gain increased to $1.578 billion from $964 million; shareholders’ equity also reflected higher unrealized gains. This fair-value accounting effect is not equivalent to realized earnings.
• Fourth-quarter 2012 revenue was $928.7 million and net income was $151.0 million, versus $833.6 million and $122.8 million, respectively, in fourth-quarter 2011. Fourth-quarter 2012 diluted EPS was $1.58 versus $1.20.

Outlook, commentary, risks, and unusual items

• Management expected 2013 parent-company dividends and transfers from subsidiaries of approximately $506 million and excess cash flow of approximately $365 million. This is cash-flow outlook, not formal earnings or EPS guidance.
• Management anticipated a slight decline in Medicare Part D premium in 2013 because of intensified competition and fewer expected auto-enrollees.
• The principal cited operating risks include deviations in mortality, morbidity, and persistency; agent recruitment and retention; economic pressure on middle-income customers; Medicare policy or reimbursement changes; and delays in health premium-rate approvals.
• Investment risks include persistently low rates, credit downgrades or defaults, and fair-value volatility in a long-duration fixed-maturity portfolio. Fixed maturities represented about 96% of investments at fair value; 96% of fixed maturities were investment grade, with an average rating of A-.
• Family Heritage acquisition expenses were $2.9 million pretax. The 2012 results also included $5.6 million of pretax investment impairments and a $4.1 million pretax loss on redeeming trust preferred securities. Realized investment gains were $37.8 million pretax; management excludes realized gains and losses from its segment operating measures.
• The American Income agent-classification suit was settled and dismissed with prejudice in December 2012. A United American limited-benefit policy class action remained pending; trial was continued to October 2013. Management said it could not estimate a range for reasonably possible losses and did not consider current litigation contingencies material.
• Management said insurance subsidiaries were more than adequately capitalized under RBC requirements. The independent auditor issued unqualified opinions on the financial statements and internal control; the acquired Family Heritage entity was excluded from management’s internal-control assessment for 2012.

Important facts for investors to verify

1. Confirm the filing entity and scope: the registrant is Torchmark Corporation; Globe is a subsidiary, and the financial results above are consolidated.
2. Assess the sustainability and profitability of Part D enrollment growth, including the expected 2013 premium decline and benefit costs.
3. Review the Family Heritage acquisition’s post-acquisition performance, purchase accounting, goodwill, and integration results.
4. Track investment yields, security calls, credit quality, impairments, unrealized gains, and the sensitivity of reported equity to interest rates.
5. Verify debt maturities, credit-facility availability, subsidiary dividend capacity, and the pending United American litigation developments.