Business context and reporting period
Entity clarification: The supplied filing is Torchmark Corporation’s Form 10-K for the fiscal year ended December 31, 2010, not a standalone Globe Life Inc. filing. Globe Life And Accident Insurance Company was one of Torchmark’s principal insurance subsidiaries. The filing reports full-year results, with selected unaudited quarterly data.
Torchmark marketed individual life and supplemental health insurance, primarily to middle-income households, through direct-response, exclusive-agent, and independent-agent channels. Its principal lines were life, health, annuities, and investment operations.
Financial performance and position
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Total revenue | $3.368 billion | $3.115 billion |
| Premium revenue | $2.652 billion | $2.610 billion |
| Net investment income | $676.4 million | $632.5 million |
| Income from continuing operations | $522.3 million | $386.1 million |
| Net income | $517.1 million | $405.0 million |
| Diluted net income per share | $6.30 | $4.88 |
| Cash provided from operations | $1.029 billion | $976.1 million |
| Total assets | $16.160 billion | $16.024 billion |
| Shareholders’ equity | $4.016 billion | $3.399 billion |
- Life premium rose 5% to $1.664 billion; health premium fell 3% to $987.4 million. Life underwriting margin increased 7% to $455.3 million, with the reported margin holding at 27% of life premium. Health underwriting margin was essentially flat at $170.1 million; its reported margin was 17% of premium.
- Excess investment income, management’s investment-segment profitability measure, rose 8% to $297.1 million, or $3.62 per diluted share.
- Net investment gains after tax were $24.3 million, versus losses of $85.3 million in 2009. Pretax other-than-temporary impairment write-downs were $4.9 million, down from $143 million in 2009.
- At year-end, cash and short-term investments were approximately $582 million. Short-term debt was $198.9 million; funded debt was $913.4 million, including $124.4 million of junior subordinated debentures reported as due to affiliates. The filing reports total debt of approximately $1.112 billion including commercial paper.
- Fixed maturities had a $10.543 billion fair value and $10.435 billion amortized cost, a net unrealized gain of approximately $108 million; the prior year showed a net unrealized loss of approximately $455 million. About 92% of fixed maturities at amortized cost were investment grade, and the weighted-average rating was BBB+.
- Fourth-quarter 2010 net income was $154.8 million and diluted EPS was $1.91; the quarter included $5.9 million of income from discontinued operations.
Material changes versus the prior comparable period
- Net income increased 28%, while diluted EPS rose from $4.88 to $6.30. Improvement reflected the swing from realized investment losses to gains, higher excess investment income, and continued life-premium growth. The comparison is affected by the $35.0 million after-tax loss on the sale of United Investors.
- Life annualized premium in force grew 3% to $1.753 billion. Health annualized premium in force declined to $973.6 million from $1.027 billion, reflecting lower sales and persistency.
- Health net sales excluding Medicare Part D fell 33% to $64.4 million. Management cited agent losses, competitive pressure, and its decision to stop selling certain limited-benefit products after September 2010.
- Shareholders’ equity increased by $617 million, reflecting earnings and improved fixed-maturity valuations, partly offset by share repurchases and dividends. The filing attributes $345 million of the increase to after-tax unrealized gains in the fixed-maturity portfolio.
- Torchmark sold United Investors Life Insurance Company on December 31, 2010 for $343 million in cash plus approximately $21 million receivable after closing. Its results were presented as discontinued operations; the sale produced a $35.0 million after-tax loss. Management said the sale would concentrate the business on core protection life and health products and provide capital.
Outlook, risks, contingencies, and unusual items
- Management expected sufficient liquidity for 2011 and the foreseeable future from operating cash flow, investment maturities, subsidiary distributions, and the credit facility. It estimated approximately $655 million of 2011 excess parent-company cash flow and expected $742 million of subsidiary dividends and transfers, including proceeds related to the United Investors sale. These amounts depend on regulatory dividend restrictions and other conditions.
- The new $600 million credit facility, entered into in December 2010 and expiring in January 2015, backed the commercial-paper program. At year-end, $199 million of commercial paper and $198 million of letters of credit were outstanding, leaving $203 million available under the facility.
- Insurance subsidiaries’ aggregate risk-based capital ratios exceeded 350% at year-end; management’s stated target was at least 325%. Subsidiary dividends are subject to statutory and regulatory limits, making parent liquidity dependent on insurer earnings and permitted distributions.
- Key business risks include mortality, morbidity and policy persistency differing from actuarial assumptions; agent recruitment and retention; health-insurance competition and timely approval of rate increases; Medicare program changes; investment defaults, downgrades and interest-rate changes; and adverse credit-rating actions. Management noted the portfolio’s significant financial-sector exposure and long maturities, while stating its intent and ability to hold investments to maturity.
- Material legal matters included a certified multi-state class action involving United American health policies, with discovery ongoing, and a California class action by American Income sales agents concerning employment classification and compensation, also in discovery. On February 9, 2011, Florida regulators issued Liberty National a final order imposing a $60,000 fine; whether the order would be appealed had not been decided.
- A new accounting standard for insurance acquisition costs was expected to take effect in 2012. Management estimated adoption could reduce shareholders’ equity by approximately 8%, but did not expect a material ongoing effect on operating results.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and no material internal-control weaknesses.
Important facts for investors to verify
- Confirm the filing entity and scope: this is Torchmark Corporation’s consolidated 2010 10-K, with Globe as a subsidiary, not a standalone Globe Life filing.
- Separate recurring insurance and investment-segment performance from volatile realized gains, impairment charges, and the United Investors disposal loss when assessing earnings quality.
- Track life growth against continued health-premium, health-sales, and agent-count declines, particularly at Liberty National and the independent-agent channels.
- Review fixed-maturity credit quality, concentration in financial issuers, remaining impaired securities, and the assumptions supporting management’s recoverability assessments.
- Verify the availability and timing of projected subsidiary dividends and sale-related proceeds, alongside debt maturities, commercial-paper capacity, and outstanding letters of credit.
- Monitor the status and potential financial exposure of the pending class actions and the Florida regulatory order, as well as the expected equity effect of the 2012 acquisition-cost accounting change.