Business context and reporting period
Globe Life Inc. is a U.S.-focused life and supplemental health insurer, with annuity and investment operations. This unaudited Form 10-Q covers the three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise stated. Amounts below are in U.S. dollars.
Financial performance and position
- Revenue: Total revenue was $1.133 billion, up 1%. Premium revenue rose 4% to $929.8 million: life premium increased 4% to $649.6 million and health premium increased 5% to $280.2 million. Net investment income was $229.0 million, up 1%.
- Profit: Net income declined 11% to $165.5 million; diluted EPS was $1.52 versus $1.65. Pretax income fell to $202.9 million from $228.1 million. Management’s non-GAAP net operating income increased 2% to $188.7 million, or $1.73 per diluted share versus $1.64.
- Margins and segment results: Life underwriting margin grew 5% to $178.8 million, about 28% of life premium versus 27%. Health underwriting margin grew 3% to $63.5 million and remained about 23% of health premium. Annuity underwriting margin was $2.3 million, down 6%. Excess investment income fell 4% to $62.7 million.
- Cash flow: Operating cash flow was $343.6 million, down from $423.3 million. Investing activities used $311.7 million and financing activities used $31.3 million. Cash ended the quarter at $90.4 million; cash plus short-term investments totaled $363.0 million.
- Balance sheet and capital: Total assets were $25.35 billion and shareholders’ equity was $6.52 billion at March 31, versus $25.98 billion and $7.29 billion at year-end. Equity declined largely as accumulated other comprehensive income fell $778.6 million amid investment-market movements; share repurchases also reduced equity.
- Debt and liquidity: Book-value debt totaled $1.805 billion: $458.1 million short-term and $1.347 billion long-term. Commercial paper outstanding was $450 million, with $150 million of remaining credit-line availability after $150 million of letters of credit. The company reported covenant compliance. It entered a $300 million, 364-day term loan on April 9 and drew it on April 15; management estimated approximately $730–$750 million of liquidity available for the remainder of 2020, including expected excess cash flows.
Material changes versus the prior comparable period
- Net income was reduced by a $31.9 million pretax provision for credit losses on one energy-sector fixed-maturity investment, an offshore driller; the after-tax impact was $25.2 million. This was the principal reason reported earnings fell while operating income grew.
- Available-for-sale fixed maturities had a $17.88 billion fair value at quarter-end, down from $18.91 billion at December 31, 2019. The portfolio’s net unrealized gain declined from $2.49 billion to $1.54 billion. The company recorded $778.6 million of other comprehensive loss for the quarter.
- Total net sales rose 6% to $153 million; first-year collected premium increased to $128 million from $118 million. Insurance administrative expenses rose 7% to $63.6 million, or 6.8% of premium versus 6.6%, primarily reflecting technology investment and pension costs.
- The company repurchased 1.6 million shares for $139 million using parent-company excess cash flow, and purchased additional shares with option-exercise proceeds. It subsequently paused future repurchases pending greater clarity on COVID-19 and available cash flow.
Outlook, commentary, risks, contingencies and unusual items
- COVID-19: Globe Life reported no material claims or significant business disruption in Q1, but said future effects were uncertain. Management expected full-year sales to decline, while still projecting total premium growth of approximately 3%–4%, supported by policies in force. It anticipated potential higher mortality and health claims, lower underwriting margins, and pressure on sales and regulatory capital. Sales trends varied by channel; virtual sales and recruiting were implemented, and direct-to-consumer internet and phone activity had increased.
- Capital and investments: The company targeted a 2020 consolidated Company Action Level RBC ratio of 300%–320%; the year-end 2019 ratio was 318%. Management said COVID-19-related claims, premium growth changes, investment downgrades, or additional credit losses could pressure capital, and stated it had liquidity available to support subsidiaries if needed. Investment income growth could be constrained by low rates; management expected 2020 new-money yields to be about 100 basis points below 2019 acquisitions.
- Credit and market risks: Approximately 95% of fixed maturities were investment grade at quarter-end; the weighted-average composite quality rating was BBB+, versus A- at year-end. Energy represented about 10% of the fixed-maturity portfolio. The company said it did not intend to sell securities and believed insurance cash flows supported holding them through market volatility, but acknowledged potential credit losses, downgrades, spread widening and valuation volatility.
- Accounting change: Globe Life adopted CECL on January 1, 2020. The transition reduced retained earnings by $454,000 after tax; the quarter’s fixed-maturity allowance was $31.9 million, and the company also reported a $335,000 commercial-mortgage allowance from adoption.
- Contingencies: The filing describes agent-class and collective-action litigation, including California claims concerning agent classification and wage practices. A proposed settlement was denied final approval on April 15, 2020; the parties continued evaluating settlement. Management stated it considered the possibility of a material adverse judgment remote. The company also guaranteed letters of credit, with $150 million outstanding at quarter-end against a $250 million maximum.
- Other outlook: The company expected financing costs to rise in 2020 following the new term loan. No quantified estimate of the pandemic’s total future financial impact was provided. Management said the pending long-duration insurance accounting standard, effective in 2022, is expected to have a significant impact, but had not estimated it.
Important facts for investors to verify
- Whether COVID-19 materially changes sales, premium growth, mortality and health claims, underwriting margins, or insurance-subsidiary capital after Q1.
- How the offshore-driller credit exposure and broader energy-sector credit quality evolve, including any further investment allowances or downgrades.
- Whether operating cash flow, subsidiary dividends and parent liquidity remain sufficient under the company’s stated RBC target and debt obligations.
- Whether investment-market movements, lower reinvestment yields or credit losses further affect reported equity, net income and investment income.
- Developments in the agent-classification litigation and the proposed settlement, and the timing or conditions for restarting share repurchases.