Torchmark Corporation (now Globe Life Inc.) — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The filing registrant is Torchmark Corporation; the request identifies the company as Globe Life Inc. Dollar amounts below are in U.S. dollars.
Business context and financial performance
Torchmark primarily sells life and supplemental health insurance through direct-response, captive-agent, and independent-agent channels. It reports life, health, annuity, and investment operations. Medicare Part D was classified as discontinued operations.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Total revenue | $991.9 million | $950.6 million | $1,969.5 million | $1,885.1 million |
| Income from continuing operations | $139.3 million | $132.5 million | $272.9 million | $263.3 million |
| Net income | $138.4 million | $127.1 million | $262.5 million | $248.8 million |
| Diluted EPS | $1.13 | $1.00 | $2.13 | $1.94 |
| Dividends declared per share | $0.14 | $0.14 | $0.28 | $0.27 |
For the first half, premiums increased 5% to $1.57 billion: life premiums rose 6% to $1.09 billion and health premiums rose 3% to $473 million. Life underwriting margin was $288 million, or 26% of premium, versus $281 million and 27% a year earlier. Health underwriting margin was $104 million, or 22% of premium, broadly unchanged. Excess investment income declined 2% to $109 million, while excess investment income per diluted share rose 2% to $0.89.
Net cash provided by operating activities was $604.9 million for the first half, compared with $454.1 million. Investing activities used $547.5 million and financing activities used $64.0 million; cash ended the period at $49.7 million. Cash plus short-term investments totaled approximately $98 million.
Financial position and material changes
- At June 30, total assets were $21.57 billion, total liabilities $16.70 billion, and shareholders’ equity $4.88 billion, compared with $19.85 billion, $15.80 billion, and $4.06 billion, respectively, at December 31, 2015.
- Total debt at book value was approximately $1.42 billion: $286 million short-term and $1.13 billion long-term. The company issued $300 million of 6.125% junior subordinated debentures due 2056 and used most proceeds to repay $250 million of 6.375% senior notes due June 2016. A $100 million term loan was added and the credit facility maturity extended to May 2021.
- The company reported $286 million of commercial paper outstanding and $287 million remaining under its credit line after letters of credit. It stated that it was in compliance with debt covenants. Interest coverage was 10.3 times for the first half, down from 11.2 times.
- Fixed-maturity investments had a fair value of $15.44 billion. The portfolio’s net unrealized gain rose to $1.66 billion from $506 million at year-end, primarily due to lower Treasury rates; this contributed to the increase in equity. Management cautioned that this fair-value accounting does not similarly revalue insurance liabilities.
- Operating cash flow increased year over year. Share repurchases totaled $203 million across 3.6 million shares during the first half; the Board reaffirmed the repurchase program on August 4, 2016. The quarterly dividend was $0.14 per share.
Outlook, management commentary, and risks
- No specific earnings or revenue guidance is provided in the supplied filing text. Management expects parent-company cash dividends from insurance subsidiaries of approximately $430 million for full-year 2016 and expects readily available liquidity for the foreseeable future.
- Management attributed weaker life margin to higher-than-expected obligations in Globe Life Direct Response business issued since 2011; mortality improvements from underwriting changes have been less than expected. It attributed lower investment income growth to low interest rates, lower reinvestment yields, and timing delays in Medicare Part D reimbursements and drug rebates.
- Effective July 1, 2016, the company agreed to sell its Medicare Part D business to a CVS Health subsidiary. It expected net proceeds, after selling costs, to approximate the business’s $17 million deferred acquisition costs, making the sale’s direct financial-statement impact insignificant. Torchmark retained 2016 plan-year results and administration; the buyer was to assume subsequent plan years.
- Early adoption of stock-compensation accounting guidance increased reported EPS by $0.03 for Q2 and $0.04 for the first half. Management said future net income and EPS may become more volatile as stock prices and option exercises change.
- Investment risks include interest-rate changes, issuer credit deterioration and possible downgrades, particularly in energy and basic materials. The company reported no other-than-temporary impairments in the periods presented and said it intended and was able to hold temporarily impaired securities. It had no commercial mortgage-backed securities, direct residential mortgage investments, or derivatives.
- Other disclosed uncertainties include mortality and morbidity experience, policy lapses, regulatory changes and delays in health premium rate increases, competition, litigation, and the outcome of unclaimed-property audits in 48 states. Management could not estimate a range of potential loss for those audits; no state financial assessment or liability had been indicated. Management did not believe litigation would materially affect financial condition, results, or liquidity, while acknowledging potentially unpredictable punitive awards.
Most important facts for investors to verify
- Confirm the registrant and corporate-name continuity: this filing is in Torchmark Corporation’s name, although the request identifies Globe Life Inc.
- Track life underwriting margins and Direct Response mortality experience, along with life and health net sales and first-year collected premiums.
- Assess investment portfolio credit quality and sensitivity to interest rates; verify the effect of unrealized gains separately from operating earnings and equity.
- Monitor debt costs, commercial paper access, remaining credit-facility capacity, and insurance-subsidiary capital levels.
- Confirm final Medicare Part D sale proceeds and the transition of administration and obligations after the 2016 plan year.
- Review the impact of stock-compensation tax accounting and the unresolved unclaimed-property audits.