Business context and reporting period
The supplied filing is Torchmark Corporation’s Form 10-K for the fiscal year ended December 31, 2016, not a quarterly filing. This conflicts with the request metadata identifying Globe Life Inc.; confirm the intended registrant before relying on this summary. Torchmark was an insurance holding company focused on individual life and supplemental health coverage, chiefly for middle-income customers, sold through exclusive agents, independent agents and direct response.
Effective July 1, 2016, Torchmark sold its Medicare Part D business and reported it as discontinued operations. Continuing results therefore exclude that business.
Financial results and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $3.935 billion | $3.766 billion | +4% |
| Life premium | $2.189 billion | $2.073 billion | +6% |
| Health premium | $948 million | $926 million | +2% |
| Net investment income | $807 million | $774 million | +4% |
| Income from continuing operations, GAAP | $540 million | $516 million | +5% |
| Net income | $550 million | $527 million | +4% |
| Diluted EPS | $4.49 | $4.16 | +8% |
| Cash flow from continuing operations | $1.227 billion | $1.122 billion | +9% |
Life underwriting margin was $574 million, or 26% of life premium, versus 27% in 2015. Health underwriting margin was $210 million, or 22% of health premium, broadly flat as a percentage. Management’s non-GAAP net operating income from continuing operations was $549 million, up 5%; it excludes certain items and is not the GAAP continuing-operations figure.
At year-end, total assets were $21.436 billion and shareholders’ equity was $4.567 billion. Cash and short-term investments totaled approximately $148 million; cash and invested assets were $15.956 billion. Debt carrying value was approximately $1.398 billion: $264 million short-term and $1.133 billion long-term. The company had $310 million of additional capacity under its credit facility. Insurance subsidiaries’ aggregate risk-based capital ratio was approximately 324%, compared with a 325% target.
Fixed maturities were 96% of invested assets; 95% of the fixed-maturity portfolio was investment grade. The portfolio’s weighted-average rating was BBB+, down from A- at year-end 2015. Its net unrealized gain was approximately $1.058 billion, compared with $506 million a year earlier; these market-value changes primarily affected equity through other comprehensive income.
Material changes versus the prior comparable period
- Net income rose 4%, while diluted EPS increased 8%, benefiting in part from ongoing share repurchases and lower average shares outstanding.
- Life premiums and annualized life premium in force grew; life underwriting margin dollars rose modestly, but margin as a percentage of premium declined, principally because Globe Life Direct Response policy obligations were higher than expected.
- Health premiums increased, but health net sales declined 7%, led by a 20% decrease in Medicare Supplement sales. Management attributed the Medicare Supplement decline largely to group sales normalizing after unusually high sales in late 2014.
- Debt increased following issuance of $300 million of 6.125% junior subordinated debentures and a $100 million term loan; proceeds also refinanced $250 million of senior notes due in 2016. Financing costs rose 9%.
- Cash flow from continuing operations increased. Parent-company dividends received from subsidiaries declined to $438 million from $466 million.
Outlook, commentary, risks and unusual items
For 2017, management expected approximately $450 million of subsidiary dividends and transfers to the parent and $325–$335 million of parent excess cash flow. Management anticipated only modest declines in average portfolio yields over the next few years. It estimated the Medicare Part D reimbursement delays would reduce pretax investment income by approximately $2–$3 million in 2017 and have a negligible effect in 2018.
Management cited mortality, morbidity and policy persistency experience; interest rates and reinvestment yields; investment credit downgrades or defaults; timely regulatory approval of health premium increases; Medicare Supplement competition and regulation; sales-force recruitment and retention; cybersecurity and operational disruptions; and litigation as material risks. A putative class-action motion concerning Globe’s handling of premiums on lapsed policies was pending. Unclaimed-property audits involving 47 states had produced no assessment, but the company could not estimate any possible loss or penalty range. Management did not believe pending litigation would have a material adverse effect, while cautioning that punitive-damage outcomes are difficult to predict.
Unusual and accounting items included a $1.8 million pretax estimated gain on the Medicare Part D sale, subject to an enrollment-based purchase-price adjustment; $3.8 million of 2016 administrative settlements related to prior-year death benefits; and adoption of stock-compensation accounting guidance that added $20 million of excess tax benefits to 2016 income and increased EPS by $0.13. The 2016 reported results also included $10.7 million of pretax realized investment losses. The auditor gave an unqualified opinion on the financial statements and internal controls; management reported effective controls and no material weaknesses.
Most important facts for investors to verify
- Confirm whether Torchmark Corporation, rather than Globe Life Inc., is the intended registrant and whether the desired period is the full fiscal year or fourth quarter. Fourth-quarter 2016 diluted EPS was $1.12, versus $1.07 in fourth-quarter 2015.
- Track the final Medicare Part D sale-price adjustment, settlement of retained receivables and payables, and the expected fade in reimbursement-related investment-income drag.
- Monitor claims and mortality trends in the affected Globe Life Direct Response policy blocks and any resulting changes in life margins or reserves.
- Assess the quality and migration of below-investment-grade holdings, unrealized-loss exposure, and insurance-subsidiary capital relative to the 325% RBC target.
- Review Medicare Supplement sales, group-sales volatility, and the timing and adequacy of regulated premium-rate approvals.
- Follow developments in the Globe policyholder class action and multistate unclaimed-property audits; the filing provides no clear estimate of potential exposure.