Business Context and Reporting Period
This summary covers the Form 10-Q filed by Torchmark Corporation (doing business as Globe Life Inc. in the request metadata, though the filing identifies Torchmark) for the quarter and six months ended June 30, 1999. Torchmark operates in the life insurance, health insurance, and annuity sectors. The reporting period reflects the company's ongoing operations following the 1998 divestitures of its asset management subsidiary, Waddell & Reed, and its preneed funeral insurer, Family Service.
Key Financial Metrics
Revenue and Profitability (Six Months Ended June 30, 1999)
- Total Premium Revenue: $932.8 million (up 7% from $872.4 million in 1998).
- Net Investment Income: $221.9 million (down 7% from $237.7 million in 1998).
- Net Income: $131.7 million (down 15.6% from $156.1 million in 1998).
- Net Operating Income (Continuing Ops): $169.2 million (up 7.0% from $158.1 million in 1998).
- Diluted Earnings Per Share (EPS): $0.97 (down from $1.10 in 1998).
Balance Sheet and Liquidity
- Total Assets: $11.30 billion.
- Total Liabilities: $9.05 billion.
- Shareholders' Equity: $2.06 billion (down from $2.26 billion at year-end 1998).
- Cash and Short-Term Investments: $54.4 million ($13.7 million cash + $40.7 million short-term investments).
- Total Debt: $770 million (Short-term: $398.2 million; Long-term: $371.5 million).
- Debt-to-Capitalization: 25% (treating Monthly Income Preferred Securities as equity).
Cash Flow
- Cash Provided by Operations: $192.4 million.
- Cash Used for Investment Activities: $100.9 million (net).
- Cash Used for Financing Activities: $82.7 million (primarily due to $120.6 million in treasury stock acquisitions).
Material Changes vs. Prior Period
- Realized Investment Losses: The company reported a significant realized investment loss of $85.9 million for the six months ended June 30, 1999, compared to a loss of only $5.0 million in the prior year. This was driven by a change in accounting principle regarding an interest rate swap and market volatility.
- Real Estate Write-down: Torchmark recorded a pretax loss of $64 million ($41 million after-tax) on investment real estate, writing down the portfolio to its estimated realizable value of $133 million.
- Accounting Change: A change in accounting for an interest rate swap agreement resulted in a cumulative effect adjustment of $16.1 million (net of tax) included in 1999 income, while increasing realized losses by $7.4 million for the six-month period.
- Segment Performance:
- Life Insurance: Premiums rose 7% to $506.7 million; underwriting income increased 6% to $133.1 million.
- Health Insurance: Premiums rose 7% to $407.5 million, but underwriting income declined slightly to $70.4 million due to a higher loss ratio on a block of cancer insurance.
- Annuities: Variable annuity collections surged 60% to $187.6 million, driving total annuity underwriting income up 9% to $12.0 million.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Share Repurchases: Torchmark spent $121 million to repurchase 3.7 million shares in the first half of 1999 and intends to continue buying back shares when prices are attractive.
- Capital Resources: The company filed a Form S-3 to register up to $300 million in capital securities, potentially to redeem its Monthly Income Preferred Securities (MIPS) callable in September 1999.
- Rate Increases: Management is seeking premium rate increases, particularly for cancer insurance, to offset rising loss ratios. A major rate increase took effect in May 1999.
Risks and Contingencies
- Legal Proceedings: The company faces approximately 125 active lawsuits, primarily in Alabama, involving claims for punitive damages. While management does not currently consider these liabilities material, the potential for unpredictable large awards in Alabama remains a risk.
- Year 2000 Compliance: The company is on schedule for Y2K compliance, having spent $5.8 million with a total projected cost of $6 million. Contingency plans are in place for business-critical systems.
- Market Sensitivity: Rising interest rates have caused an unrealized loss of $58 million in the fixed maturity portfolio (compared to a gain of $249 million at year-end 1998).
Investor Verification Checklist
- Realized Losses: Verify the impact of the $85.9 million realized investment loss and the specific accounting change regarding the interest rate swap on future earnings.
- Health Insurance Margins: Monitor the loss ratio on the Liberty National cancer insurance block and the effectiveness of the May 1999 rate increase.
- Real Estate Portfolio: Confirm the timeline and proceeds from the planned sale of the investment real estate portfolio written down by $64 million.
- Debt and Liquidity: Review the company's ability to refinance or redeem the $200 million MIPS and the $399 million commercial paper outstanding.
- Legal Exposure: Track the status of the 125 active lawsuits, specifically those seeking punitive damages in Alabama, for potential material adverse judgments.