GLOBE LIFE INC. quarterly report, Q2 FY2011

Business context and reporting period

The supplied filing is Torchmark Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2011. This does not match the request metadata naming Globe Life Inc.; verify the issuer before relying on this summary. Torchmark primarily marketed life and supplemental health insurance through niche distribution systems and managed the investment portfolio supporting policy liabilities.

Key financial results

Six-month premium revenue was $1.35 billion, up 1%. Life premium increased 4% to $864.2 million; health premium declined 6% to $487.7 million. Six-month pretax income from continuing operations was $374.3 million, versus $354.8 million. Life underwriting income rose 8% to $243.8 million; health underwriting income declined 3% to $81.3 million. Insurance underwriting margin was 28% of life premium and 17% of total health premium.

Net investment income was $344.8 million for the six months, up 2% on a GAAP basis. Management’s segment measure, excess investment income, increased 1% to $148.1 million; excess investment income per diluted share rose 8% to $1.28. The average fixed-maturity yield was 6.55% at June 30, while new investments earned 5.84% during the period.

Financial position, liquidity, and capital

At June 30, total assets were $16.22 billion and shareholders’ equity was $3.78 billion, down from $4.02 billion at year-end 2010. Available-for-sale fixed maturities had a fair value of $11.03 billion and a net unrealized gain of $306 million, compared with $108 million at year-end. Cash and short-term investments totaled $111 million, down from $582 million at year-end.

Short-term debt was $199.9 million and long-term debt was $790.1 million on the balance sheet; management reported total debt of approximately $914 million including junior subordinated debentures. The company had a $600 million revolving credit facility, with approximately $202 million remaining after commercial paper and letters of credit. It reported compliance with its covenants and interest coverage of 10.6 times. Insurance subsidiaries’ year-end 2010 consolidated risk-based capital ratio was 421%, against a stated target of about 325%.

Operating cash flow was more than offset by $640.5 million of financing cash outflows, primarily $664.3 million used to acquire treasury shares. Torchmark repurchased 15.4 million shares during the six months for $664.3 million, including $602.2 million funded from excess cash flow. The board reaffirmed the ongoing repurchase program, which has no stated maximum authorization or expiration date. A three-for-two stock split was paid July 1, 2011; share and per-share figures were adjusted retrospectively.

Material changes versus the prior comparable period

• Six-month continuing-operations income increased 8%, but total net income increased only 3%, partly because prior-year discontinued operations contributed $12.5 million after tax.
• Life results improved, supported by premium growth and lower claims; health premium and health new-business measures weakened.
• Total net sales declined 9% to $203 million, and first-year collected premium fell 10% to $165 million. Health net sales excluding Medicare Part D declined 16%; Medicare Part D net sales declined 46%.
• Cash and short-term investments fell substantially, while share repurchases increased markedly from the prior-year period. Equity also declined, with repurchases a significant factor.
• Fixed-maturity portfolio unrealized gains increased, while the below-investment-grade balance declined to $721 million from $862 million at year-end, mainly reflecting disposals and rating changes.

Outlook, commentary, risks, and unusual items

• Management expected 2011 subsidiary dividends and transfers to the parent of approximately $768 million; it expected the Medicare Part D segment-versus-GAAP interim reporting difference to reverse by year-end.
• Management cited weaker insurance sales from agent losses and the discontinuation of certain health products, including products affected by healthcare reform. Liberty National’s producing agent count fell 20% year over year.
• The filing recorded a $6 million pretax estimated state administrative settlement charge related to historical matters and a $979,000 pretax loss on sale of aviation equipment. Management said the settlement’s final amount could differ from the accrual.
• Six-month results included $8.5 million of pretax realized investment gains. The company reported a small 2011 impairment writedown; it considered the disclosed unrealized loss positions not other-than-temporarily impaired and said it generally intended and was able to hold temporarily impaired securities to maturity.
• Management identified risks including economic conditions affecting sales, lapses, mortality and health claims; Medicare and other regulatory changes; interest-rate and issuer-credit risk; competition; litigation; and delays in health premium-rate increases. It reported no material change in risk factors and no quantitative or qualitative change in market-risk exposure during the quarter.
• The filing stated that disclosure controls were effective and that no material weaknesses in internal control were identified.

Most important facts to verify

• Confirm issuer identity: the provided filing is for Torchmark Corporation, not Globe Life Inc.
• Reconcile GAAP results with management’s segment measures, particularly Medicare Part D adjustments and the non-operating settlement and equipment-sale charges.
• Assess the sustainability of life and health sales declines, agent-force changes, and the discontinued health products’ effect on future premiums.
• Review the scale and funding of share repurchases alongside reduced cash balances, capital needs, and the insurance subsidiaries’ dividend capacity.
• Check investment portfolio credit exposure, including below-investment-grade holdings and unrealized losses, and the sensitivity of investment income to lower reinvestment yields.