Globe Life Inc. (formerly Torchmark Corporation) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless noted. Globe Life sells individual life and supplemental health insurance, with a smaller annuity business, across the United States. Dollar figures below are in millions unless stated otherwise.
Financial performance
- Q2 revenue: $1,130.5, up 4.2%; premiums were $897.5, up 5.1%, and net investment income was $227.4, up 4.1%.
- Q2 earnings: Income from continuing operations was $186.6, up 1.2%; net income was $186.6. Diluted EPS was $1.67 versus $1.59, up 5.0%.
- First-half revenue and earnings: Revenue was $2,249.7, up 4.4%; net income was $371.9, up 3.9%. Diluted EPS was $3.32 versus $3.08, up 7.8%. Management’s non-GAAP net operating income was $371.6, up 7.0%, with diluted EPS of $3.32, up 11%.
- First-half premiums and sales: Total premiums increased 5% to $1,788.5. Life premiums rose 5% to $1,255.5 and health premiums rose 6% to $533.0. Net sales rose 4% to $300; first-year collected premium increased to $241 from $232.
- Underwriting: First-half life underwriting margin increased 9% to $344.9, or 27% of premium versus 26%. Health margin rose 3% to $121.7, remaining 23% of premium. Annuity margin declined 7% to $4.8.
- Investment results: First-half net investment income increased 4% to $454.1; excess investment income rose 7% to $130.2, or 10% per diluted share. The fixed-maturity portfolio’s effective annual yield was 5.50% at June 30, versus 5.55% at year-end.
- Cash flow: First-half operating cash flow was $686.6 versus $616.5. Investing used $356.4 and financing used $356.1. Cash ended the period at $89.3; cash plus short-term investments totaled $163.4.
Financial position and capital
- Total assets were $24.9 billion at June 30, 2019, up from $23.1 billion at December 31, 2018. Shareholders’ equity was $6.7 billion, up from $5.4 billion, primarily reflecting after-tax unrealized fixed-maturity gains of about $1.1 billion and net income, partly offset by share repurchases.
- Available-for-sale fixed maturities had a fair value of $17.9 billion and a net unrealized gain of approximately $2.0 billion, versus $16.3 billion and $544 million at year-end. Management says these marks primarily reflect falling interest rates and emphasizes its intent and ability to hold securities to maturity.
- Total debt was $1.61 billion at book value: $257.5 million short-term and $1.35 billion long-term. Commercial paper outstanding was $250 million; $350 million remained available under the credit line after letters of credit. The company reported compliance with credit covenants. First-half interest coverage was 11.7 times, versus 11.0 times.
- Management targeted a consolidated Company Action Level RBC ratio of 300%–320% for 2019; the year-end 2018 ratio was 326%. The filing does not provide a June 2019 RBC ratio.
- During the first half, the company repurchased 2.1 million shares for $174.0 million using parent-company excess cash flow; additional purchases funded with option proceeds brought total repurchases to 2.7 million shares and $230.1 million. The quarterly dividend declared was $0.1725 per share.
Changes, outlook, and risks
- First-half net income growth was attributed primarily to favorable underwriting. EPS growth also benefited from a lower share count. Administrative expenses increased 7.1%, mainly due to investments in information technology, including data analytics, systems modernization, and information security.
- Management expects funds to be readily available for 2020 and the foreseeable future through operating cash flow and the credit facility. It expects fixed-maturity portfolio turnover generally to average 1%–3% annually over the next five years, while noting possible higher turnover of 4%–5% in 2019 from municipal bond calls. A prolonged low-rate environment could constrain investment-income growth; higher rates could reduce portfolio fair values. Management estimated rates would need to rise about 95–100 basis points to eliminate June’s net unrealized gains.
- The filing reports four California putative class actions alleging, among other matters, that American Income sales agents were misclassified and not properly paid. Management considered a material adverse judgment remote, while cautioning that litigation outcomes are uncertain. A $5.5 million legal-proceedings expense was recorded in Q2; first-half results also included a $0.4 million administrative settlement related to state regulatory examinations.
- Other stated risks include changes in policy lapses, mortality and health-care utilization; regulation and Medicare Supplement market competition; interest rates and issuer credit quality; pricing competition; premium-rate approvals; litigation; operational efficiency; customer response to products and marketing; and cybersecurity events. The company reported no material change to risk factors and no material change in market-risk exposure.
- Torchmark changed its corporate name to Globe Life Inc. effective August 8, 2019, with the NYSE ticker changing to GL on August 9. Management described this as a brand-alignment strategy. The board reaffirmed the share-repurchase program, which has no specified maximum or expiration date.
Important facts for investors to verify
- Review the quality, concentration, and downgrade trends in the investment portfolio: 96% was investment grade, while below-investment-grade holdings were $645.6 million at amortized cost; the weighted-average rating of securities in unrealized-loss positions declined to BBB- from BBB+ at year-end.
- Assess the sensitivity of reported equity and book value to interest-rate-driven unrealized gains. Management reported diluted book value per share of $60.22, or $46.43 excluding net unrealized fixed-maturity gains.
- Track whether premium and net-sales growth convert into continuing underwriting-margin improvement, particularly in health, where margin remained 23% and United American’s margin rate declined.
- Monitor the California agent-classification litigation, the recorded legal expense, and any subsequent developments or changes in management’s assessment.
- Confirm the subsequent-period RBC ratio, cash needs and commercial-paper balances, as well as the effects of continued share repurchases and the scheduled adoption of long-duration insurance accounting changes. The company was evaluating the latter standard; a proposed effective-date deferral to 2022 was awaiting final approval.