Business context and reporting period
This is Torchmark Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018, filed August 7, 2018. The filing describes a life and supplemental health insurer; the supplied filing is under the Torchmark name, although the request identifies Globe Life Inc.
Financial performance and position
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2017 period; balance-sheet comparisons are with December 31, 2017.
| Metric | Q2 2018 | Six months 2018 | Comparable 2017 |
|---|---|---|---|
| Total revenue | $1,084.8 | $2,155.2 | $1,029.1 Q2; $2,052.7 six months |
| Income before tax | $226.9 | $439.7 | $201.9 Q2; $393.7 six months |
| Net income | $184.4 | $358.0 | $140.3 Q2; $273.8 six months |
| Diluted earnings per share | $1.59 | $3.08 | $1.18 Q2; $2.29 six months |
| Operating cash flow | Not stated separately | $616.5 | $739.1 six months |
- Six-month premiums increased 4% to $1,704.1 million; life premiums rose 4% to $1,200.8 million and health premiums 3% to $503.2 million. Net investment income increased 4% to $436.7 million.
- Six-month underwriting margins were $316.0 million for life (up 8%; 26% of premium), $117.6 million for health (up 8%; 23% of premium), and $5.2 million for annuities (down 1%). Excess investment income was $121.9 million, up 1%; per diluted share it rose 4% to $1.05.
- Insurance administrative expenses increased 7.2% to $110.7 million and rose to 6.5% of premium from 6.3%. Interest expense increased to $44.0 million from $41.9 million.
- At June 30, total assets were $22,878.7 million, shareholders’ equity $5,571.6 million, and total debt approximately $1,489.1 million. Debt comprised $671.7 million short-term and $817.5 million long-term.
- Cash and short-term investments were approximately $150.8 million, versus $245.6 million at year-end. Cash declined $36.3 million during the six months; investing activities used $409.2 million and financing activities used $251.0 million.
- Shareholders’ equity fell $659.8 million from year-end, primarily reflecting $820.8 million of after-tax other comprehensive losses, including unrealized investment losses, partly offset by $358.0 million net income. The fixed-maturity portfolio’s net unrealized gain declined to $934.5 million from $1,974.2 million.
Material changes versus the prior period
- Six-month net income increased 31% and diluted EPS increased 34%; management attributed the largest contribution to the lower corporate tax rate enacted in 2017, from 35% to 21%. Net operating income, a non-GAAP measure, rose 24% to $347.2 million.
- Six-month operating cash flow declined $122.5 million, primarily due to lower discontinued-operations cash flow and timing fluctuations in settlements included in other liabilities.
- The company repurchased 2.0 million shares using parent-company excess cash flow for $174.4 million at an average $85.41 per share; total treasury-share purchases, including option-exercise proceeds, were $206.6 million.
- Interest-rate increases reduced the fixed-maturity portfolio’s fair value and GAAP equity. Management reported no other-than-temporary impairments in the 2018 period.
Outlook, commentary, risks and contingencies
- No formal earnings guidance is provided. Management expected life direct-response sales declines to moderate during the rest of 2018, and projected approximately $440 million of insurance-subsidiary dividends to the parent and approximately $325 million of parent excess cash flow for the full year.
- Management estimated the 2018 consolidated risk-based capital ratio could be 275%–285% before additional capital contributions; reaching a 300%–325% target could require $100 million–$225 million of additional subsidiary capital. It said this could be funded through debt or parent liquidity and did not expect a significant net-income impact.
- Management cited low reinvestment yields as a constraint on investment-income growth. It expected fixed-maturity turnover of 2%–3% annually over the next five years and stated the portfolio could absorb an approximately 50–55 basis-point rate increase before eliminating its net unrealized gains. It said it had the ability and intent to hold temporarily impaired securities to maturity.
- Risks include changes in policy sales and lapses, mortality and health-care utilization, regulation and Medicare alternatives, interest rates and credit quality, pricing competition, litigation, premium-rate approvals, operating efficiency, customer response, and cybersecurity or data-access events.
- Routine litigation and unclaimed-property audits were not expected by management to have a material adverse effect. A putative sales-agent wage class action against American Income Life was filed in February 2018; the court granted the company’s motion to compel arbitration on July 27, 2018. The company stated that a material adverse judgment in current litigation was considered remote and did not estimate a loss range for reasonably possible unaccrued contingencies.
- The $750 million credit facility (with possible extension to $1 billion) matures in May 2021. Commercial paper outstanding was $375.2 million at a 2.61% annualized rate; $155 million of letters of credit were outstanding and reported remaining facility availability was $219.8 million. The company reported compliance with capitalization covenants.
- The company early adopted a standard permitting reclassification of $252 million of tax effects from accumulated other comprehensive income to retained earnings in 2017. It reported that the 2017 tax-reform accounting estimate remained unchanged at June 30 and expected to complete its analysis in the fourth quarter of 2018.
Important facts for investors to verify
- Confirm the issuer and security identity: this supplied filing is for Torchmark Corporation, despite the request’s Globe Life Inc. label.
- Assess the extent to which earnings growth reflects the tax-rate reduction, rather than underlying operating improvement; review both GAAP income and non-GAAP net operating income.
- Track capital adequacy and whether the potential $100 million–$225 million subsidiary contribution is made, including its funding source and effect on debt.
- Monitor cash generation, commercial-paper levels and available credit, alongside the substantial decline in cash and short-term investments.
- Review investment portfolio credit quality, unrealized losses and interest-rate sensitivity; distinguish market-value changes from realized credit losses.
- Follow sales trends by distribution channel, particularly direct-response life sales, and administrative-cost growth.