Business context and reporting period
Globe Life Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The insurer sells individual life and supplemental health insurance primarily in the United States, through life, health, annuity, and investment segments. Dollar amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $1,195 | $1,141 | $3,509 | $3,391 |
| Net income | $189 | $202 | $528 | $574 |
| Diluted EPS | $1.76 | $1.82 | $4.90 | $5.14 |
| Net investment income | $231 | $229 | $692 | $683 |
- For the quarter, revenue grew about 5%, while net income fell about 6%. For the nine-month period, revenue rose 3% and net income declined 8%; diluted EPS declined 5%.
- Premiums increased 7% in Q3 to $962 million and 6% year to date to $2.845 billion. Life premiums rose 7% in Q3 and 6% year to date; health premiums rose 7% and 6%, respectively.
- Year-to-date segment underwriting margins were $511 million for life, down 3% (26% of premium versus 28%); $201 million for health, up 10% (24% versus 23%); and $6.8 million for annuities, down 5%. Excess investment income, a management-defined non-GAAP measure, fell 6% to $183 million.
- Year-to-date operating cash flow was $1.079 billion versus $1.030 billion. Investing activities used $992 million and financing activities used $87 million; ending cash was $80 million.
- At September 30, total assets were $28.042 billion, shareholders’ equity $8.225 billion, and total debt $1.947 billion, versus $25.977 billion, $7.294 billion, and $1.648 billion, respectively, at December 31, 2019. Debt included $280 million of commercial paper and $1.668 billion of long-term debt.
- Cash and short-term investments were $344 million, compared with $114 million at year-end 2019. The company reported $435 million of parent-company liquid assets and access to a $750 million revolving credit facility, expandable to $1 billion; the revolver was undrawn. Commercial paper outstanding was $280 million.
- Fixed maturities had a $20.277 billion fair value and $3.389 billion net unrealized gain at September 30. The portfolio was 95% investment grade by amortized cost; its weighted-average composite rating was BBB+, down from A- at year-end 2019.
Material changes and unusual items
- COVID-19 life claims totaled about $40 million through September 30. These claims contributed to lower life underwriting margins. Management estimated $56 million in COVID-related life claims for full-year 2020.
- Realized investment losses and a debt-redemption loss weighed on earnings. Nine-month realized losses were $29 million pretax ($22 million after tax), including the sale of an energy-sector holding after its issuer filed for bankruptcy. The sale produced a $38.8 million realized loss; an additional $1 million of accrued investment income was written off.
- Net unrealized investment gains increased equity by about $710 million after tax during the first nine months, mainly reflecting lower market interest rates. Book value per share was $77.60, including $25.21 per share of net unrealized fixed-maturity gains; management’s adjusted book value measure was $52.39.
- The company issued $400 million of 2.15% senior notes due 2030 and used proceeds to repay a $300 million term loan and for general corporate purposes. It also repaid the remaining $82.5 million balance on a prior term loan.
- Share repurchases were temporarily paused in Q2 and resumed in August. The company repurchased 3.1 million shares using parent-company excess cash flow for $257 million year to date, at an average $83.74 per share; total treasury-stock purchases, including option-related purchases, were $297 million.
- The company adopted the current expected credit losses (CECL) standard in January 2020. A commercial mortgage loan was over 90 days delinquent and in non-accrual status; its reported balance was $3.5 million. The commercial mortgage portfolio had a $3.7 million credit-loss allowance, and one loan was considered probable of foreclosure.
Outlook, commentary, and risks
- Management expected full-year life and health premiums to grow about 6% each. It projected net life sales to increase 12% and health sales to decline 5%. These estimates were subject to pandemic-related uncertainty.
- Management said the business continued to operate after moving much of its workforce, sales, recruiting, and training to virtual channels. It reported higher direct-to-consumer demand and growth in agent counts at American Income and Family Heritage.
- Management expected lower investment yields to constrain investment-income growth: the yield on 2020 fixed-maturity acquisitions was expected to be about 80 basis points below 2019 acquisitions. It anticipated full-year financing costs to rise because of the new senior notes.
- The company targeted a consolidated insurance-subsidiary risk-based capital ratio of 300%–320% for 2020; the 2019 ratio was 318%. Management stated that liquidity was available to support subsidiary capital needs.
- Principal risks include COVID-related changes in mortality, morbidity, policy lapses, premium collections, sales and operations; investment defaults, downgrades and interest-rate changes; regulatory or premium-rate delays; litigation; and cyber, data-security, and remote-work risks.
- Management said a material adverse outcome from the disclosed litigation was remote. A proposed settlement in related California agent-class actions had preliminary approval, with final approval scheduled for January 2021. The filing also describes other agent classification and wage-related actions.
Important facts for investors to verify
- Whether COVID-related mortality and the estimated $56 million of full-year life claims, along with sales and agent-recruiting trends, developed as management expected.
- Whether the lower fixed-maturity acquisition yields and any further credit downgrades or losses affect investment income, capital, or liquidity.
- How commercial mortgage loan delinquency, foreclosure risk, and credit-loss allowances evolve.
- Whether the company maintained its targeted 300%–320% risk-based capital ratio and its capacity for dividends, debt service, and share repurchases.
- The final outcome and financial effect, if any, of the California settlement and other agent-related litigation.