GLOBE LIFE INC. quarterly report, Q3 FY2019

Globe Life Inc. — Q3 2019 Form 10-Q

Business context and reporting period. Globe Life, formerly Torchmark Corporation, is an insurance holding company offering life and supplemental health insurance, with a smaller annuity business. This unaudited report covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. The company changed its name in August 2019 and its NYSE ticker to GL.

Financial performance

Amounts below are in millions except per-share data. Growth rates are year over year unless noted.

MetricQ3 2019Q3 2018Nine months 2019Nine months 2018
Total revenue$1,141.3$1,083.8$3,391.0$3,239.0
Total premiums$900.0$860.8$2,688.5$2,564.8
Net investment income$228.9$221.6$683.0$658.3
Income before tax$247.3$220.3$704.2$660.0
Net income$201.8$178.7$573.7$536.7
Diluted EPS$1.82$1.55$5.14$4.64
  • Q3 revenue rose 5.3% and net income rose 12.9%; diluted EPS increased 17.4%. For the nine months, revenue grew 4.7%, net income 6.9%, and diluted EPS 10.8%.
  • Management’s non-GAAP net operating income was $564.0 million for nine months, up 6%; diluted net operating income per share was $5.05, up 10%. The filing reports nine-month ROE of 12.0% on net income and 14.7% on net operating income excluding unrealized fixed-maturity gains.
  • Nine-month life underwriting margin was $526.3 million, up 9%, with margin at 28% of premium versus 27%. Health underwriting margin was $182.6 million, up 3%, at 23% of premium in both periods. Annuity underwriting margin was $7.1 million, down 8%. Excess investment income rose 6% to $195.0 million; per diluted share it rose 11% to $1.75.
  • Insurance administrative expenses increased 7.6% to $179.2 million, or 6.7% of premium versus 6.5%. Management attributed the increase primarily to information technology spending, including data analytics, systems modernization, and information security.

Financial position, cash flow, and liquidity

  • At September 30, 2019, total assets were $25.8 billion, shareholders’ equity $7.3 billion, and total policy liabilities $14.9 billion. Cash was $66.7 million and short-term investments $77.6 million.
  • Fixed maturities available for sale had a fair value of $18.8 billion, compared with $16.3 billion at December 31, 2018. The portfolio’s net unrealized gain increased to $2.6 billion from $544.5 million, principally as interest rates declined. This boosted GAAP equity; equity excluding the accounting effect of unrealized fixed-maturity gains was $5.3 billion.
  • Nine-month operating cash flow was $1.03 billion, versus $937.3 million. Investing activities used $568.6 million and financing activities used $509.4 million. Cash declined by $54.4 million to $66.7 million.
  • Total debt at book value was approximately $1.585 billion: $233.3 million short-term and $1.351 billion long-term. Commercial paper outstanding was $225 million, with $375 million remaining available under the credit line after letters of credit. The company reported compliance with credit covenants and no difficulty accessing the commercial paper market.
  • Management said operating cash flow, investment maturities, and credit availability should provide sufficient liquidity for 2020 and the foreseeable future. Nine-month interest coverage was 12.0 times, up from 10.9 times.
  • The company repurchased 3.0 million shares for $257.2 million from parent-company excess cash flow during the first nine months; total repurchases including option-related purchases were 3.9 million shares for $334.5 million. Quarterly dividends declared were $0.1725 per share.

Material changes, outlook, and risks

  • Premium growth was broad-based: nine-month life premium increased 4% and health premium 6%; total net sales increased 5% to $451 million. Life net sales rose 3%, while health net sales rose 11%. Health growth included both limited-benefit products and Medicare Supplement.
  • Management targeted a consolidated Company Action Level RBC ratio of 300%–320% for 2019 and 2020; the 2018 year-end ratio was 326%. No specific earnings guidance is provided in the supplied filing text.
  • Management noted that low interest rates can constrain investment-income growth as new funds are invested at yields below the existing portfolio average. The nine-month fixed-maturity portfolio yield was 5.50%, versus 5.57% a year earlier. The company expects fixed-maturity turnover of 4%–6% in 2019, partly from municipal bond calls, and expects average annual turnover of 1%–2% over the following five years.
  • Interest-rate changes can materially affect the fair value of available-for-sale securities and reported equity. Management said an increase of about 120–125 basis points would eliminate the portfolio’s September 2019 net unrealized gains; it stated it had the intent and ability to hold securities to maturity and did not expect forced sales for liquidity.
  • Credit exposure warrants attention: 96% of fixed maturities were investment grade, while 56% were rated BBB-category. The portfolio’s weighted-average composite rating improved to A- from BBB+ at year-end 2018. No other-than-temporary impairments were recorded in the first nine months.
  • Four related California agent-classification cases had a proposed settlement covering the claims; preliminary approval was granted in August 2019, with final approval hearing scheduled for January 9, 2020. Management considered a material adverse judgment remote. The company also described general litigation and the potential for unpredictable punitive-damage awards.
  • The company identified mortality, morbidity, lapses, regulation and Medicare-market changes, pricing competition, investment credit and interest-rate conditions, litigation, premium-rate approvals, technology and cybersecurity, and estimates and assumptions as risks. Management stated there were no material changes to risk factors and that disclosure controls were effective.
  • Adoption of the long-duration insurance accounting standard was expected to have a significant impact; the company was evaluating the effect and had no estimate. The filing discussed a proposed effective-date deferral to January 1, 2022; the corresponding accounting update had not yet been issued.

Investor verification priorities

  • Track whether premium and new-sales growth persist by product and distribution channel, particularly the differing trends in life and health.
  • Assess underwriting margins, claims experience, and administrative spending, including the return on expanded technology investment.
  • Separate recurring operating earnings from realized investment gains and from the large, interest-rate-driven unrealized gains in GAAP equity.
  • Review portfolio credit quality, BBB and below-investment-grade exposures, realized losses, and the impact of rates on investment income and fair value.
  • Verify capital and liquidity against the targeted RBC range, debt maturities, commercial-paper usage, share repurchases, and dividend commitments.
  • Monitor final approval and financial consequences of the California agent settlement, and the implementation impact of the long-duration insurance accounting standard.