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GLOBE LIFE INC. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ________
Commission File Number 1-8052
GLOBE LIFE INC.
(Exact name of registrant as specified in its charter)
Delaware
 
63-0780404
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
3700 South Stonebridge Drive, McKinney, Texas 75070
(Address of principal executive offices) (Zip Code)

(972) 569-4000
(Registrant’s telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1.00 par value per share
GL
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                 Yes    ☒   No   ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).                                             Yes   ☒   No   ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
☒
  
Accelerated filer
 
☐
Non-accelerated filer
 
☐
  
Smaller reporting company
 
☐
 
 
 
 
Emerging growth company
 
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   ☐   No   ☒

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the last practicable date.
Class
 
Outstanding at November 4, 2019
Common Stock, $1.00 Par Value
 
108,288,348



GLOBE LIFE INC.
Table of Contents
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
 
 
 
 











As used in this Form 10‑Q, “Globe Life,” the “Company,” “we,” “our” and “us” refer to Globe Life Inc., a Delaware corporation incorporated in 1979, its subsidiaries and affiliates.

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

GLOBE LIFE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollar amounts in thousands, except per share data)
 
September 30,
2019
 
December 31,
2018
Assets:
 
 
 
Investments:
 
 
 
Fixed maturities—available for sale, at fair value (amortized cost: 2019—$16,209,723; 2018—$15,753,471)
$
18,797,674

 
$
16,297,932

Policy loans
568,892

 
550,066

Other long-term investments (includes: 2019—$184,466; 2018—$108,241 under the fair value option)
315,535

 
207,258

Short-term investments
77,556

 
63,288

Total investments
19,759,657

 
17,118,544

Cash
66,675

 
121,026

Accrued investment income
253,125

 
243,003

Other receivables
432,236

 
415,157

Deferred acquisition costs
4,281,018

 
4,137,925

Goodwill
441,591

 
441,591

Other assets
557,604

 
549,899

Assets related to discontinued operations
—

 
68,577

Total assets
$
25,791,906

 
$
23,095,722

Liabilities:
 
 
 
Future policy benefits
$
14,358,592

 
$
13,953,826

Unearned and advance premium
62,586

 
61,208

Policy claims and other benefits payable
351,729

 
350,826

Other policyholders' funds
95,875

 
97,459

Total policy liabilities
14,868,782

 
14,463,319

Current and deferred income taxes
1,498,025

 
1,047,737

Short-term debt
233,314

 
307,848

Long-term debt (estimated fair value: 2019—$1,466,868; 2018—$1,384,455)
1,351,190

 
1,357,185

Other liabilities
528,064

 
453,270

Liabilities related to discontinued operations
—

 
51,186

Total liabilities
18,479,375

 
17,680,545

Commitments and Contingencies (Note 5)

 

Shareholders' equity:
 
 
 
Preferred stock, par value $1 per share—5,000,000 shares authorized; outstanding: 0 in 2019 and 2018
—

 
—

Common stock, par value $1 per share—320,000,000 shares authorized; outstanding: (2019—121,218,183 issued; 2018— 121,218,183 issued)
121,218

 
121,218

Additional paid-in-capital
538,051

 
524,414

Accumulated other comprehensive income (loss)
1,943,124

 
319,475

Retained earnings
5,686,636

 
5,213,468

Treasury stock, at cost: (2019—12,773,862 shares; 2018—10,525,147 shares)
(976,498
)
 
(763,398
)
Total shareholders' equity
7,312,531

 
5,415,177

Total liabilities and shareholders' equity
$
25,791,906

 
$
23,095,722

See accompanying Notes to Condensed Consolidated Financial Statements.

1
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollar amounts in thousands, except per share data)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Life premium
$
630,824

 
$
605,547

 
$
1,886,314

 
$
1,806,384

Health premium
269,166

 
255,201

 
802,132

 
758,439

Other premium
3

 
2

 
4

 
12

Total premium
899,993

 
860,750

 
2,688,450

 
2,564,835

Net investment income
228,905

 
221,627

 
683,003

 
658,279

Realized gains (losses)
11,943

 
1,032

 
18,426

 
14,796

Other income
438

 
393

 
1,077

 
1,104

Total revenue
1,141,279

 
1,083,802

 
3,390,956

 
3,239,014

 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
Life policyholder benefits
406,963

 
396,701

 
1,227,616

 
1,196,616

Health policyholder benefits
170,875

 
162,574

 
511,403

 
483,654

Other policyholder benefits
7,854

 
8,581

 
23,792

 
25,852

Total policyholder benefits
585,692

 
567,856

 
1,762,811

 
1,706,122

 
 
 
 
 
 
 
 
Amortization of deferred acquisition costs
138,449

 
129,492

 
412,436

 
388,189

Commissions, premium taxes, and non-deferred acquisition costs
74,139

 
69,632

 
221,302

 
208,698

Other operating expense
74,575

 
74,059

 
226,412

 
209,503

Interest expense
21,094

 
22,433

 
63,804

 
66,466

Total benefits and expenses
893,949

 
863,472

 
2,686,765

 
2,578,978

 
 
 
 
 
 
 
 
Income before income taxes
247,330

 
220,330

 
704,191

 
660,036

Income tax benefit (expense)
(45,512
)
 
(41,630
)
 
(130,370
)
 
(123,232
)
Income from continuing operations
201,818

 
178,700

 
573,821

 
536,804

 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of tax
—

 
24

 
(92
)
 
(55
)
Net income
$
201,818

 
$
178,724

 
$
573,729

 
$
536,749

 
 
 
 
 
 
 
 
Basic net income (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
1.85

 
$
1.59

 
$
5.24

 
$
4.74

Discontinued operations
—

 
—

 
—

 
(0.01
)
Total basic net income per common share
$
1.85

 
$
1.59

 
$
5.24

 
$
4.73

 
 
 
 
 
 
 
 
Diluted net income (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
1.82

 
$
1.55

 
$
5.14

 
$
4.64

Discontinued operations
—

 
—

 
—

 
—

Total diluted net income per common share
$
1.82

 
$
1.55

 
$
5.14

 
$
4.64





See accompanying Notes to Condensed Consolidated Financial Statements.

2
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Dollar amounts in thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
201,818

 
$
178,724

 
$
573,729

 
$
536,749

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
Unrealized gains (losses) on fixed maturities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during period
649,270

 
(173,598
)
 
2,057,614

 
(1,202,762
)
Reclassifications adjustments included in net income
(11,020
)
 
(458
)
 
(14,307
)
 
(9,715
)
Foreign exchange adjustment on securities recorded at fair value
(301
)
 
8,624

 
183

 
7,360

Unrealized gains (losses) on fixed maturities
637,949

 
(165,432
)
 
2,043,490

 
(1,205,117
)
 
 
 
 
 
 
 
 
Unrealized gains (losses) on other investments
1,429

 
1,310

 
9,063

 
(492
)
Total unrealized investment gains (losses)
639,378

 
(164,122
)
 
2,052,553

 
(1,205,609
)
Less applicable tax (expense) benefit
(134,272
)
 
34,464

 
(431,037
)
 
253,176

Unrealized gains (losses) on investments, net of tax
505,106

 
(129,658
)
 
1,621,516

 
(952,433
)
 
 
 
 
 
 
 
 
Deferred acquisition costs:
 
 
 
 
 
 
 
Unrealized gains (losses) attributable to deferred acquisition costs
402

 
1,178

 
(2,627
)
 
3,669

Less applicable tax (expense) benefit
(84
)
 
(248
)
 
552

 
(771
)
Unrealized gains (losses) attributable to deferred acquisition costs, net of tax
318

 
930

 
(2,075
)
 
2,898

 
 
 
 
 
 
 
 
Foreign exchange translation:
 
 
 
 
 
 
 
Foreign exchange translation adjustments, other than securities
(4,082
)
 
(168
)
 
(1,031
)
 
(7,684
)
Less applicable tax (expense) benefit
858

 
36

 
218

 
1,615

Foreign exchange translation adjustments, other than securities, net of tax
(3,224
)
 
(132
)
 
(813
)
 
(6,069
)
 
 
 
 
 
 
 
 
Pension:
 
 
 
 
 
 
 
Amortization of pension costs
2,117

 
3,778

 
6,355

 
11,334

Less applicable tax (expense) benefit
(443
)
 
(793
)
 
(1,334
)
 
(2,380
)
Pension adjustments, net of tax
1,674

 
2,985

 
5,021

 
8,954

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
503,874

 
(125,875
)
 
1,623,649

 
(946,650
)
Comprehensive income (loss)
$
705,692

 
$
52,849

 
$
2,197,378

 
$
(409,901
)








See accompanying Notes to Condensed Consolidated Financial Statements.

3
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(Dollar amounts in thousands, except per share data)

 
Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Treasury Stock
 
Total Shareholders' Equity
Balance at January 1, 2019
$
—

 
$
121,218

 
$
524,414

 
$
319,475

 
$
5,213,468

 
$
(763,398
)
 
$
5,415,177

Adoption of ASU 2016-02(1)
—

 
—

 
—

 
—

 
(497
)
 
—

 
(497
)
Comprehensive income (loss)
—

 
—

 
—

 
550,592

 
185,345

 
—

 
735,937

Common dividends declared ($0.1725 per share)
—

 
—

 
—

 
—

 
(18,943
)
 
—

 
(18,943
)
Acquisition of treasury stock
—

 
—

 
—

 
—

 
—

 
(110,896
)
 
(110,896
)
Stock-based compensation
—

 
—

 
(5,885
)
 
—

 
(6,817
)
 
23,261

 
10,559

Exercise of stock options
—

 
—

 
—

 
—

 
(7,736
)
 
19,825

 
12,089

Balance at March 31, 2019
—

 
121,218

 
518,529

 
870,067

 
5,364,820

 
(831,208
)
 
6,043,426

Other
—

 
—

 
—

 
—

 
105

 
—

 
105

Comprehensive income (loss)
—

 
—

 
—

 
569,183

 
186,566

 
—

 
755,749

Common dividends declared ($0.1725 per share)
—

 
—

 
—

 
—

 
(18,838
)
 
—

 
(18,838
)
Acquisition of treasury stock
—

 
—

 
—

 
—

 
—

 
(119,201
)
 
(119,201
)
Stock-based compensation
—

 
—

 
7,989

 
—

 
—

 
3,267

 
11,256

Exercise of stock options
—

 
—

 
—

 
—

 
(18,136
)
 
46,037

 
27,901

Balance at June 30, 2019
—

 
121,218

 
526,518

 
1,439,250

 
5,514,517

 
(901,105
)
 
6,700,398

Comprehensive income (loss)
—

 
—

 
—

 
503,874

 
201,818

 
—

 
705,692

Common dividends declared ($0.1725 per share)
—

 
—

 
—

 
—

 
(18,695
)
 
—

 
(18,695
)
Acquisition of treasury stock
—

 
—

 
—

 
—

 
—

 
(104,372
)
 
(104,372
)
Stock-based compensation
—

 
—

 
11,533

 
—

 
—

 
—

 
11,533

Exercise of stock options
—

 
—

 
—

 
—

 
(11,004
)
 
28,979

 
17,975

Balance at September 30, 2019
$
—

 
$
121,218

 
$
538,051

 
$
1,943,124

 
$
5,686,636

 
$
(976,498
)
 
$
7,312,531

(1)
See further discussion in Note 2—New Accounting Standards.


















See accompanying Notes to Condensed Consolidated Financial Statements.

4
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
(Unaudited)
(Dollar amounts in thousands, except per share data)

 
Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Treasury Stock
 
Total Shareholders' Equity
Balance at January 1, 2018
$
—

 
$
124,218

 
$
508,476

 
$
1,424,274

 
$
4,806,208

 
$
(631,755
)
 
$
6,231,421

Adoption of ASU 2016-01
—

 
—

 
—

 
—

 
4,896

 
—

 
4,896

Comprehensive income (loss)
—

 
—

 
—

 
(484,075
)
 
173,600

 
—

 
(310,475
)
Common dividends declared ($0.16 per share)
—

 
—

 
—

 
—

 
(18,216
)
 
—

 
(18,216
)
Acquisition of treasury stock
—

 
—

 
—

 
—

 
—

 
(109,954
)
 
(109,954
)
Stock-based compensation
—

 
—

 
465

 
—

 
(1,803
)
 
10,398

 
9,060

Exercise of stock options
—

 
—

 
—

 
—

 
(9,077
)
 
22,646

 
13,569

Balance at March 31, 2018
—

 
124,218

 
508,941

 
940,199

 
4,955,608

 
(708,665
)
 
5,820,301

Comprehensive income (loss)
—

 
—

 
—

 
(336,700
)
 
184,425

 
—

 
(152,275
)
Common dividends declared ($0.16 per share)
—

 
—

 
—

 
—

 
(18,062
)
 
—

 
(18,062
)
Acquisition of treasury stock
—

 
—

 
—

 
—

 
—

 
(96,635
)
 
(96,635
)
Stock-based compensation
—

 
—

 
8,136

 
—

 
—

 
2,361

 
10,497

Exercise of stock options
—

 
—

 
—

 
—

 
(6,900
)
 
14,683

 
7,783

Balance at June 30, 2018
—

 
124,218

 
517,077

 
603,499

 
5,115,071

 
(788,256
)
 
5,571,609

Comprehensive income (loss)
—

 
—

 
—

 
(125,875
)
 
178,724

 
—

 
52,849

Common dividends declared ($0.16 per share)
—

 
—

 
—

 
—

 
(17,953
)
 
—

 
(17,953
)
Acquisition of treasury stock
—

 
—

 
—

 
—

 
—

 
(91,725
)
 
(91,725
)
Stock-based compensation
—

 
—

 
10,412

 
—

 
—

 
—

 
10,412

Exercise of stock options
—

 
—

 
—

 
—

 
(7,878
)
 
21,591

 
13,713

Balance at September 30, 2018
$
—

 
$
124,218

 
$
527,489

 
$
477,624

 
$
5,267,964

 
$
(858,390
)
 
$
5,538,905























See accompanying Notes to Condensed Consolidated Financial Statements.

5
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollar amounts in thousands)
 
Nine Months Ended
September 30,
 
2019
 
2018
Cash provided from (used for) operating activities
$
1,030,175

 
$
937,289

 
 
 
 
Cash provided from (used for) investing activities:
 
 
 
Investments sold or matured:
 
 
 
Fixed maturities available for sale—sold
62,151

 
12,162

Fixed maturities available for sale—matured or other redemptions
604,701

 
266,736

Other long-term investments
—

 
47

Total investments sold or matured
666,852

 
278,945

Acquisition of investments:
 
 
 
Fixed maturities—available for sale
(1,056,822
)
 
(727,296
)
Other long-term investments
(107,660
)
 
(74,396
)
Total investments acquired
(1,164,482
)
 
(801,692
)
Net increase (decrease) in policy loans
(18,826
)
 
(14,307
)
Net increase (decrease) in short-term investments
(5,270
)
 
(506,419
)
Additions to properties
(30,049
)
 
(27,316
)
Dispositions of properties
32

 
17

Investment in low-income housing interests
(16,824
)
 
(19,075
)
Cash provided from (used for) investing activities
(568,567
)
 
(1,089,847
)
 
 
 
 
Cash provided from (used for) financing activities:
 
 
 
Issuance of common stock
57,573

 
35,065

Cash dividends paid to shareholders
(55,493
)
 
(53,481
)
Repayment of debt
(5,000
)
 
(23,125
)
Proceeds from issuance of debt
—

 
550,000

Payment for debt issuance costs
—

 
(6,797
)
Net borrowing (repayment) of commercial paper
(76,409
)
 
(7,196
)
Acquisition of treasury stock
(334,469
)
 
(298,314
)
Net receipts (payments) from deposit product
(95,626
)
 
(87,561
)
Cash provided from (used for) financing activities
(509,424
)
 
108,591

 
 
 
 
Effect of foreign exchange rate changes on cash
(6,535
)
 
2,843

Net increase (decrease) in cash
(54,351
)
 
(41,124
)
Cash at beginning of year
121,026

 
118,563

Cash at end of period
$
66,675

 
$
77,439











See accompanying Notes to Condensed Consolidated Financial Statements.

6
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)




Note 1—Significant Accounting Policies

Business: Effective August 8, 2019, Torchmark Corporation changed its corporate name to Globe Life Inc. The New York Stock Exchange (NYSE) ticker was changed to "GL" on August 9, 2019. The name change is part of a brand alignment strategy which will enhance the Company's ability to build name recognition with potential customers and agent recruits through the use of a single brand. The underwriting companies owned by Globe Life Inc. (the Parent Company) will continue to exist as legal entities, but over a period of time will go to market under the Globe Life name to leverage branding initiatives implemented at Globe Life And Accident Insurance Company in recent years.

"Globe Life" and the "Company" refer to Globe Life Inc., an insurance holding company incorporated in Delaware in 1979, and its subsidiaries and affiliates. Its primary subsidiaries are Globe Life And Accident Insurance Company, American Income Life Insurance Company (American Income), Liberty National Life Insurance Company (Liberty National), Family Heritage Life Insurance Company of America (Family Heritage), and United American Insurance Company (United American).

Globe Life provides a variety of life and supplemental health insurance products and annuities to a broad base of customers. The Company is organized into four reportable segments: life insurance, supplemental health insurance, annuities, and investments.

Basis of Presentation: The accompanying condensed consolidated financial statements of Globe Life Inc. have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America (GAAP) for annual financial statements. However, in the opinion of management, these statements include all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the condensed consolidated financial position at September 30, 2019, and the condensed consolidated results of operations, comprehensive income, and cash flows for the periods ended September 30, 2019 and 2018. The interim period condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements that are included in the Form 10-K filed with the Securities Exchange Commission (SEC) on March 1, 2019.

Note 2—New Accounting Standards

Accounting Pronouncements Adopted in the Current Year
Standard
 
Description
 
Effective date
 
Effect on the consolidated financial statements
ASU No. 2016-02/2018-11, Leases (Topic 842), with clarification guidance issued in July 2018.
 
The standard requires lessees to record a right-of-use asset and corresponding lease liability on the balance sheet for all operating leases that do not qualify for the practical expedients allowed for in this standard. Additional qualitative and quantitative disclosures are required.
 
This standard became effective for the Company beginning January 1, 2019.
 
The Company adopted the optional transition method allowed for under ASU 2018-11 by not restating comparative periods and recognizing an immaterial cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019. The Company does not have any significant lessor contracts. The adoption did not have a material impact on the consolidated financial statements.
ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities
 
This standard was issued to shorten the amortization period for certain callable debt securities held at a premium. The standard requires the premium to be amortized to the earliest call date.
 
This standard became effective for the Company beginning January 1, 2019.
 
This adoption did not have a material impact on the condensed consolidated financial statements.



7
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



Accounting Pronouncements Yet to be Adopted
Standard
 
Description
 
Effective date
 
Effect on the consolidated financial statements
ASU No. 2016-13/2018-19/2019-04/2019-05, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, with clarification guidance issued in November 2018, along with April and May 2019.
 
This standard ("CECL") provides financial statement users with more decision-useful information about the expected credit losses on financial instruments, such as assets recorded at amortized cost, as well as to change the loss impairment methodology for available-for-sale fixed maturities by use of an allowance rather than a direct write-down.
 
This standard will become effective on January 1, 2020 with a modified retrospective transition and an opening balance sheet adjustment to retained earnings on January 1, 2020. The applicable section of the standard related to debt securities requires a prospective transition.
 
The Company's available-for-sale fixed maturities and other financing receivables will be the relevant financial assets within the scope of the standard. Based on current analysis, the adoption of the guidance is not expected to have a material impact on the consolidated financial statements.
ASU No. 2018-12, 
Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts
 
ASU 2018-12 is a significant change to our current accounting and disclosure of long-duration contracts, which is our primary business. The guidance was primarily issued to 1) improve the timeliness of recognizing changes in the liability for future policy benefits and modify the rate used to discount future cash flows, 2) simplify and improve the accounting for certain market-based options or guarantees associated with deposit (or account balance) contracts, 3) simplify the amortization of deferred acquisition costs, and 4) improve the effectiveness of the required disclosures.
 
This standard is effective beginning January 1, 2021. In July 2019, the FASB tentatively approved a proposal to defer the adoption date by one year to January 1, 2022. While final approval was received in the third quarter, the corresponding ASU has not yet been issued. Early adoption of the amendments is permitted.

An entity may select to either adopt a modified retrospective transition or a full retrospective transition. Each adoption allows for an opening balance sheet adjustment through AOCI.

 
The Company is currently in the process of evaluating the impact this standard will have on the consolidated financial statements and disclosures, specifically assessing key accounting policies, assumption and data inputs, controls, as well as enhanced system solutions.

Due to the overall nature of the standard, the impact on the consolidated financial statements is expected to be significant. At this time, the Company does not have an estimate of the impact. The Company does not anticipate to early adopt this ASU.
ASU No. 2018-13, 
Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement
 
The amendment modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures.
 
The revised standard is effective beginning January 1, 2020. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. Early adoption is permitted.
 
The Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 


8
                                              GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



Accounting Pronouncements Yet to be Adopted (continued)
Standard
 
Description
 
Effective date
 
Effect on the consolidated financial statements
ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20), Changes to the Disclosure Requirements for Defined Benefit Plans
 
The standard removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant to defined benefit plans.
 
This standard is effective beginning January 1, 2021, and will be applied retrospectively. Early adoption is permitted.
 
The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.
ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
 
The standard was issued to now allow the capitalization of implementation costs incurred in a hosting arrangement that is a service contract with similar treatment of developed or obtained internal-use software.
 
The standard is effective beginning January 1, 2020, and the Company plans to apply the standards on a prospective basis. Early adoption of the amendments is also permitted.
 
The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.



9
                                              GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



Note 3—Supplemental Information about Changes to Accumulated Other Comprehensive Income

Components of Accumulated Other Comprehensive Income: An analysis of the change in balance by component of Accumulated Other Comprehensive Income is as follows for the three and nine month periods ended September 30, 2019 and 2018:
 
Three Months Ended September 30, 2018
 
Available
for Sale
Assets
 
Deferred
Acquisition
Costs
 
Foreign
Exchange
 
Pension
Adjustments
 
Total
Balance at July 1, 2018
$
746,514

 
$
(6,579
)
 
$
10,365

 
$
(146,801
)
 
$
603,499

Other comprehensive income (loss) before reclassifications, net of tax
(129,296
)
 
930

 
(132
)
 
—

 
(128,498
)
Reclassifications, net of tax
(362
)
 
—

 
—

 
2,985

 
2,623

Other comprehensive income (loss)
(129,658
)
 
930

 
(132
)
 
2,985

 
(125,875
)
Balance at September 30, 2018
$
616,856

 
$
(5,649
)
 
$
10,233

 
$
(143,816
)
 
$
477,624


 
Three Months Ended September 30, 2019
 
Available
for Sale
Assets
 
Deferred
Acquisition
Costs
 
Foreign
Exchange
 
Pension
Adjustments
 
Total
Balance at July 1, 2019
$
1,552,108

 
$
(6,556
)
 
$
8,906

 
$
(115,208
)
 
$
1,439,250

Other comprehensive income (loss) before reclassifications, net of tax
513,812

 
318

 
(3,224
)
 
—

 
510,906

Reclassifications, net of tax
(8,706
)
 
—

 
—

 
1,674

 
(7,032
)
Other comprehensive income (loss)
505,106

 
318

 
(3,224
)
 
1,674

 
503,874

Balance at September 30, 2019
$
2,057,214

 
$
(6,238
)
 
$
5,682

 
$
(113,534
)
 
$
1,943,124


 
Nine Months Ended September 30, 2018
 
Available
for Sale
Assets
 
Deferred
Acquisition
Costs
 
Foreign
Exchange
 
Pension
Adjustments
 
Total
Balance at January 1, 2018
$
1,569,289

 
$
(8,547
)
 
$
16,302

 
$
(152,770
)
 
$
1,424,274

Other comprehensive income (loss) before reclassifications, net of tax
(944,758
)
 
2,898

 
(6,069
)
 
—

 
(947,929
)
Reclassifications, net of tax
(7,675
)
 
—

 
—

 
8,954

 
1,279

Other comprehensive income (loss)
(952,433
)
 
2,898

 
(6,069
)
 
8,954

 
(946,650
)
Balance at September 30, 2018
$
616,856

 
$
(5,649
)
 
$
10,233

 
$
(143,816
)
 
$
477,624


 
Nine Months Ended September 30, 2019
 
Available
for Sale
Assets
 
Deferred
Acquisition
Costs
 
Foreign
Exchange
 
Pension
Adjustments
 
Total
Balance at January 1, 2019
$
435,698

 
$
(4,163
)
 
$
6,495

 
$
(118,555
)
 
$
319,475

Other comprehensive income (loss) before reclassifications, net of tax
1,632,819

 
(2,075
)
 
(813
)
 
—

 
1,629,931

Reclassifications, net of tax
(11,303
)
 
—

 
—

 
5,021

 
(6,282
)
Other comprehensive income (loss)
1,621,516

 
(2,075
)
 
(813
)
 
5,021

 
1,623,649

Balance at September 30, 2019
$
2,057,214

 
$
(6,238
)
 
$
5,682

 
$
(113,534
)
 
$
1,943,124



10
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



Reclassification adjustments: Reclassification adjustments out of Accumulated Other Comprehensive Income are presented below for the three and nine month periods ended September 30, 2019 and 2018.
  
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
Affected line items in the Statement of Operations
Component Line Item
 
2019
 
2018
 
2019
 
2018
 
Unrealized investment gains (losses) on available for sale assets:
 
 
 
 
 
 
 
 
 

Realized (gains) losses
 
$
(12,430
)
 
$
(1,510
)
 
$
(18,337
)
 
$
(12,327
)
 
Realized investment gains (losses)
Amortization of (discount) premium
 
1,410

 
1,052

 
4,030

 
2,612

 
Net investment income
Total before tax
 
(11,020
)
 
(458
)
 
(14,307
)
 
(9,715
)
 

Tax
 
2,314

 
96

 
3,004

 
2,040

 
Income taxes
Total after-tax
 
(8,706
)
 
(362
)
 
(11,303
)
 
(7,675
)
 

Pension adjustments:
 
 
 
 
 
 
 
 
 

Amortization of prior service cost
 
158

 
119

 
474

 
357

 
Other operating expense
Amortization of actuarial (gain) loss
 
1,959

 
3,659

 
5,881

 
10,977

 
Other operating expense
Total before tax
 
2,117

 
3,778

 
6,355

 
11,334

 

Tax
 
(443
)
 
(793
)
 
(1,334
)
 
(2,380
)
 
Income taxes
Total after-tax
 
1,674

 
2,985

 
5,021

 
8,954

 

Total reclassification (after-tax)
 
$
(7,032
)
 
$
2,623

 
$
(6,282
)
 
$
1,279

 


 

11
                                              GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



Note 4—Investments

Portfolio Composition: Summaries of fixed maturities available for sale by cost or amortized cost and estimated fair value at September 30, 2019 and December 31, 2018 are as follows. Redeemable preferred stock is included within the corporates by sector.
 
At September 30, 2019
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
 Value(1)
 
% of Total
Fixed
Maturities(2)
Fixed maturities available for sale:
 
 
 
 
 
 
 
 
 
U.S. Government direct, guaranteed, and government-sponsored enterprises
$
393,186

 
$
55,730

 
$
(291
)
 
$
448,625

 
2
States, municipalities, and political subdivisions
1,459,986

 
174,070

 
(242
)
 
1,633,814

 
9
Foreign governments
24,428

 
2,442

 
(98
)
 
26,772

 
—
Corporates, by sector:
 
 
 
 
 
 


 
 
Financial
4,031,919

 
721,475

 
(27,772
)
 
4,725,622

 
25
Utilities
1,939,618

 
454,518

 
(1,640
)
 
2,392,496

 
13
Energy
1,658,861

 
269,339

 
(35,836
)
 
1,892,364

 
10
Other corporate sectors
6,500,351

 
970,984

 
(21,765
)
 
7,449,570

 
40
Total corporates
14,130,749

 
2,416,316

 
(87,013
)
 
16,460,052

 
88
Collateralized debt obligations
56,815

 
28,275

 
(6,929
)
 
78,161

 
—
Other asset-backed securities
144,559

 
5,967

 
(276
)
 
150,250

 
1
Total fixed maturities
$
16,209,723

 
$
2,682,800

 
$
(94,849
)
 
$
18,797,674

 
100
(1)
Amount reported in the balance sheet.
(2)
At fair value.
 
At December 31, 2018
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
 Value(1)
 
% of Total
Fixed
Maturities(2)
Fixed maturities available for sale:
 
 
 
 
 
 
 
 
 
U.S. Government direct, guaranteed, and government-sponsored enterprises
$
390,351

 
$
5,104

 
$
(2,787
)
 
$
392,668

 
2
States, municipalities, and political subdivisions
1,354,810

 
83,600

 
(1,750
)
 
1,436,660

 
9
Foreign governments
19,006

 
1,810

 
—

 
20,816

 
—
Corporates, by sector:
 
 
 
 
 
 
 
 
 
Financial
3,759,768

 
262,875

 
(87,515
)
 
3,935,128

 
24
Utilities
1,989,506

 
217,846

 
(24,399
)
 
2,182,953

 
13
Energy
1,652,700

 
93,880

 
(62,371
)
 
1,684,209

 
10
Other corporate sectors
6,382,707

 
283,524

 
(242,509
)
 
6,423,722

 
40
Total corporates
13,784,681

 
858,125

 
(416,794
)
 
14,226,012

 
87
Collateralized debt obligations
57,769

 
22,014

 
(6,414
)
 
73,369

 
1
Other asset-backed securities
146,854

 
2,187

 
(634
)
 
148,407

 
1
Total fixed maturities
$
15,753,471

 
$
972,840

 
$
(428,379
)
 
$
16,297,932

 
100
(1)
Amount reported in the balance sheet.
(2)
At fair value.


12
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



A schedule of fixed maturities available for sale by contractual maturity date at September 30, 2019 is shown below on an amortized cost basis and on a fair value basis. Actual disposition dates could differ from contractual maturities due to call or prepayment provisions.
 
At September 30, 2019
 
Amortized
Cost
 
Fair
Value
Fixed maturities available for sale:
 
 
 
Due in one year or less
$
100,626

 
$
102,237

Due after one year through five years
643,842

 
691,898

Due after five years through ten years
1,670,278

 
1,924,341

Due after ten years through twenty years
5,246,650

 
6,314,401

Due after twenty years
8,346,465

 
9,535,865

Mortgage-backed and asset-backed securities
201,862

 
228,932


$
16,209,723

 
$
18,797,674



Analysis of investment operations: Net investment income for the three and nine month periods ended September 30, 2019 and 2018 is summarized as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Fixed maturities available for sale
$
216,154

 
$
210,929

 
$
647,784

 
$
629,242

Policy loans
10,959

 
10,490

 
32,416

 
30,889

Other long-term investments
5,105

 
3,682

 
12,484

 
8,656

Short-term investments
514

 
489

 
2,096

 
1,313

 
232,732

 
225,590

 
694,780

 
670,100

Less investment expense
(3,827
)
 
(3,963
)
 
(11,777
)
 
(11,821
)
Net investment income
$
228,905

 
$
221,627

 
$
683,003

 
$
658,279



Selected information about sales of fixed maturities available for sale is as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Fixed maturities available for sale:
 
 
 
 
 
 
 
Proceeds from sales(1)
$
27,154

 
$
12,162

 
$
62,151

 
$
12,162

Gross realized gains
1,031

 
66

 
1,077

 
66

Gross realized losses
(604
)
 
—

 
(3,631
)
 
—

(1)
There were no unsettled sales in the periods ended September 30, 2019 and 2018.


13
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



An analysis of realized gains (losses) is as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Realized investment gains (losses):
 
 
 
 
 
 
 
Fixed maturities available for sale:
 
 
 
 
 
 
 
Sales and other(1)
$
12,430

 
$
1,510

 
$
18,337

 
$
12,327

Fair value option—change in fair value
(487
)
 
(456
)
 
197

 
2,405

Other investments
—

 
(22
)
 
(108
)
 
64

Realized gains (losses) from investments
11,943

 
1,032

 
18,426

 
14,796

Applicable tax
(2,508
)
 
(217
)
 
(3,869
)
 
(3,107
)
Realized gains (losses), net of tax
$
9,435

 
$
815

 
$
14,557

 
$
11,689

(1)
During the three months ended September 30, 2019, the Company recorded $43.7 million of exchanges of fixed maturities (noncash transactions) that resulted in $11.8 million in realized gains (losses). During the same period of 2018, there were no exchanges. During the nine months ended September 30, 2019 and 2018, the Company recorded $161.0 million and $128.9 million of exchanges of fixed maturities (noncash transactions) that resulted in $20.1 million and $10.4 million, respectively in realized gains.

Fair value measurements: The following tables represent the fair value of fixed maturities measured on a recurring basis at September 30, 2019 and December 31, 2018:
 
Fair Value Measurement at September 30, 2019 Using:
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total Fair
Value
Fixed maturities available for sale
 
 
 
 
 
 
 
U.S. Government direct, guaranteed, and government-sponsored enterprises
$
—

 
$
448,625

 
$
—

 
$
448,625

States, municipalities, and political subdivisions
—

 
1,633,814

 
—

 
1,633,814

Foreign governments
—

 
26,772

 
—

 
26,772

Corporates, by sector:
 
 
 
 
 
 

Financial
—

 
4,680,315

 
45,307

 
4,725,622

Utilities
—

 
2,234,140

 
158,356

 
2,392,496

Energy
—

 
1,850,580

 
41,784

 
1,892,364

Other corporate sectors
25

 
7,117,250

 
332,295

 
7,449,570

Total corporates
25

 
15,882,285

 
577,742

 
16,460,052

Collateralized debt obligations
—

 
—

 
78,161

 
78,161

Other asset-backed securities
—

 
136,568

 
13,682

 
150,250

Total fixed maturities
$
25

 
$
18,128,064

 
$
669,585

 
$
18,797,674

Percentage of total
—
%
 
96
%
 
4
%
 
100
%


14
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



 
Fair Value Measurement at December 31, 2018 Using:
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total Fair
Value
Fixed maturities available for sale
 
 
 
 
 
 
 
U.S. Government direct, guaranteed, and government-sponsored enterprises
$
—

 
$
392,668

 
$
—

 
$
392,668

States, municipalities, and political subdivisions
—

 
1,436,660

 
—

 
1,436,660

Foreign governments
—

 
20,816

 
—

 
20,816

Corporates, by sector:
 
 
 
 
 
 

Financial
—

 
3,891,728

 
43,400

 
3,935,128

Utilities
—

 
2,032,127

 
150,826

 
2,182,953

Energy
—

 
1,645,077

 
39,132

 
1,684,209

Other corporate sectors
—

 
6,103,609

 
320,113

 
6,423,722

Total corporates
—

 
13,672,541

 
553,471

 
14,226,012

Collateralized debt obligations
—

 
—

 
73,369

 
73,369

Other asset-backed securities
—

 
135,425

 
12,982

 
148,407

Total fixed maturities
$
—

 
$
15,658,110

 
$
639,822

 
$
16,297,932

Percentage of total
—
%
 
96
%
 
4
%
 
100
%


The following tables represent changes in fixed maturities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
Analysis of Changes in Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Asset-
backed Securities
 
Collateralized
Debt
Obligations
 
Corporates(1)
 
Total
Balance at January 1, 2019
$
12,982

 
$
73,369

 
$
553,471

 
$
639,822

Total gains or losses:
 
 
 
 
 
 
 
Included in realized gains / losses
—

 
—

 
—

 
—

Included in other comprehensive income
1,043

 
5,745

 
34,971

 
41,759

Acquisitions
—

 
—

 
—

 
—

Sales
—

 
—

 
—

 
—

Amortization
—

 
3,459

 
10

 
3,469

Other(2)
(343
)
 
(4,412
)
 
(10,710
)
 
(15,465
)
Transfers into (out of) Level 3(3)
—

 
—

 
—

 
—

Balance at September 30, 2019
$
13,682

 
$
78,161

 
$
577,742

 
$
669,585

Percent of total fixed maturities
—
%
 
1
%
 
3
%
 
4
%
(1)
Includes redeemable preferred stocks.
(2)
Includes capitalized interest, foreign exchange adjustments, and principal repayments. 
(3)
Considered to be transferred at the end of the period. Transfers into Level 3 occur when observable inputs are no longer available. Transfers out of Level 3 occur when observable inputs become available.


15
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



 
Analysis of Changes in Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Asset-
backed Securities
 
Collateralized
Debt
Obligations
 
Corporates(1)
 
Total
Balance at January 1, 2018
$
14,049

 
$
71,581

 
$
582,810

 
$
668,440

Total gains or losses:
 
 
 
 
 
 
 
Included in realized gains / losses
—

 
—

 
698

 
698

Included in other comprehensive income
(950
)
 
8,691

 
(21,854
)
 
(14,113
)
Acquisitions
—

 
—

 
27,453

 
27,453

Sales
—

 
—

 
—

 
—

Amortization
—

 
3,572

 
13

 
3,585

Other(2)
(315
)
 
(4,928
)
 
(37,619
)
 
(42,862
)
Transfers into (out of) Level 3(3)
—

 
—

 
4,533

 
4,533

Balance at September 30, 2018
$
12,784

 
$
78,916

 
$
556,034

 
$
647,734

Percent of total fixed maturities
—
%
 
1
%
 
3
%
 
4
%
(1)
Includes redeemable preferred stocks.
(2)
Includes capitalized interest, foreign exchange adjustments, and principal repayments. 
(3)
Considered to be transferred at the end of the period. Transfers into Level 3 occur when observable inputs are no longer available. Transfers out of Level 3 occur when observable inputs become available.

The following table presents transfers in and out of each of the valuation levels of fair values:
 
Nine Months Ended September 30,
 
2019
 
2018
 
In
 
Out
 
Net
 
In
 
Out
 
Net
Level 1
$
14,597

 
$
—

 
$
14,597

 
$
—

 
$
—

 
$
—

Level 2
—

 
(14,597
)
 
(14,597
)
 
—

 
(4,533
)
 
(4,533
)
Level 3
—

 
—

 
—

 
4,533

 
—

 
4,533


 
Other investment information: Other long-term investments consist of the following:
 
September 30, 2019
 
December 31, 2018
Investment in limited partnerships(1)
$
184,466

 
$
108,241

Commercial mortgage loan participations(2)
127,953

 
96,266

Other
3,116

 
2,751

Total
$
315,535

 
$
207,258

(1)
See the following section for more information regarding the fair value method used to account for these investments.
(2)
Globe Life invests in a portfolio of commercial mortgage loan participations. As of September 30, 2019 and December 31, 2018, the Company evaluated the portfolio on a loan-by-loan basis to determine any allowance for loan loss. Factors considered include, but are not limited to, collateral value, loan-to-value ratio, debt service coverage ratio, local market conditions, credit quality of the borrower and tenants, and loan performance. There were no material changes to these factors during the period. As of September 30, 2019 and December 31, 2018, there were no allowances for loan loss.


16
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



Fair Value Option: The following table represents the fair value of certain limited partnership investments elected for the fair value option method measured on a recurring basis at September 30, 2019, and the changes in fair value for the nine months ended September 30, 2019. All changes in fair value are recognized in "Realized Investment Gains (Losses)" in the Condensed Consolidated Statements of Operations. Distributions received on a periodic basis are recorded in Net Investment Income.
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total Fair Value
Fair Value Measurements at:
 
 
 
 
 
 
 
September 30, 2019
$
—

 
$
184,466

 
$
—

 
$
184,466

December 31, 2018
—

 
108,241

 
—

 
108,241

 
Changes in Fair Values for the Period for Items Measured at Fair Value Pursuant to Election of the Fair Value Option
 
Net Gains and Losses Recognized During the Period
 
Less Net Gains and Losses Recognized due to Sales
 
Total Changes in Fair Values Included in Current-Period Earnings
Nine Months Ended September 30,
 
 
 
 
 
2019
$
197

 
$
—

 
$
197

2018
2,405

 
—

 
2,405



Other-than-temporary impairments (OTTI): In accordance with the other-than-temporary impairment (OTTI) policy, the Company evaluated its fixed maturities available for sale in an unrealized loss position to determine if there was any impairment for the quarter. Gross unrealized losses may fluctuate quarter over quarter due to adverse factors in the market that affect our holdings, such as changes in the interest rates or credit spreads. While the Company holds securities that may be in an unrealized loss position from time to time, Globe Life has the ability and intent to hold these investments to recovery. Additionally, the Company does not expect to be required to sell any of its securities due to the strong cash flows generated by its insurance operations.

For the nine months ended September 30, 2019 and 2018, the Company concluded that there were no other-than-temporary impairments.

Unrealized Loss Analysis: The following table discloses information about fixed maturities available for sale in an unrealized loss position.
 
Less than Twelve Months
 
Twelve Months or Longer
 
Total
Number of issues (CUSIP numbers) held:
 
 
 
 
 
As of September 30, 2019
46

 
59

 
105

As of December 31, 2018
495

 
234

 
729

 
Globe Life's entire fixed maturity portfolio consisted of 1,585 issues at September 30, 2019 and 1,548 issues at December 31, 2018. The weighted-average quality rating of all unrealized loss positions at amortized cost as of September 30, 2019 was BB+ compared with BBB+ as of December 31, 2018. The drop in quality rating is attributed to the overall decreasing interest rate that has caused certain securities to move from an unrealized loss position to an unrealized gain position.

17
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



The following tables disclose unrealized investment losses by class and major sector of fixed maturities available for sale at September 30, 2019 and December 31, 2018, respectively. Globe Life considers these investments to be only temporarily impaired.

Analysis of Gross Unrealized Investment Losses
 
At September 30, 2019
 
Less than Twelve Months
 
Twelve Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Fixed maturities available for sale:
 
 
 
 
 
 
 
 
 
 
 
Investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government direct, guaranteed, and government-sponsored enterprises
$
1,158

 
$
(1
)
 
$
21,089

 
$
(290
)
 
$
22,247

 
$
(291
)
States, municipalities and political subdivisions
19,654

 
(242
)
 
—

 
—

 
19,654

 
(242
)
Foreign governments
6,400

 
(98
)
 
—

 
—

 
6,400

 
(98
)
Corporates, by sector:
 
 
 
 
 
 
 
 
 
 
 
Financial
157,535

 
(2,335
)
 
6,763

 
(1,737
)
 
164,298

 
(4,072
)
Utilities
3,706

 
(8
)
 
—

 
—

 
3,706

 
(8
)
Energy
71,563

 
(2,439
)
 
29,469

 
(5,975
)
 
101,032

 
(8,414
)
Other corporate sectors
125,509

 
(1,711
)
 
99,645

 
(4,376
)
 
225,154

 
(6,087
)
Total corporates
358,313

 
(6,493
)
 
135,877

 
(12,088
)
 
494,190

 
(18,581
)
Other asset-backed securities
—

 
—

 
—

 
—

 
—

 
—

Total investment grade securities
385,525

 
(6,834
)
 
156,966

 
(12,378
)
 
542,491

 
(19,212
)
 
 
 
 
 
 
 
 
 
 
 
 
Below investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
States, municipalities and political subdivisions
—

 
—

 
—

 
—

 
—

 
—

Corporates, by sector:
 
 
 
 
 
 
 
 
 
 
 
Financial
—

 
—

 
109,052

 
(23,700
)
 
109,052

 
(23,700
)
Utilities
7,651

 
(14
)
 
14,631

 
(1,618
)
 
22,282

 
(1,632
)
Energy
6,328

 
(582
)
 
38,839

 
(26,840
)
 
45,167

 
(27,422
)
Other corporate sectors
—

 
—

 
63,797

 
(15,678
)
 
63,797

 
(15,678
)
Total corporates
13,979

 
(596
)
 
226,319

 
(67,836
)
 
240,298

 
(68,432
)
Collateralized debt obligations
—

 
—

 
13,070

 
(6,929
)
 
13,070

 
(6,929
)
Other asset-backed securities
—

 
—

 
14,049

 
(276
)
 
14,049

 
(276
)
Total below investment grade securities
13,979

 
(596
)
 
253,438

 
(75,041
)
 
267,417

 
(75,637
)
Total fixed maturities
$
399,504

 
$
(7,430
)
 
$
410,404

 
$
(87,419
)
 
$
809,908

 
$
(94,849
)
 

18
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



Analysis of Gross Unrealized Investment Losses
 
At December 31, 2018
 
Less than Twelve Months
 
Twelve Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Fixed maturities available for sale:
 
 
 
 
 
 
 
 
 
 
 
Investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government direct, guaranteed, and government-sponsored enterprises
$
37,182

 
$
(212
)
 
$
89,664

 
$
(2,575
)
 
$
126,846

 
$
(2,787
)
States, municipalities and political subdivisions
124,907

 
(1,648
)
 
7,981

 
(102
)
 
132,888

 
(1,750
)
Corporates, by sector:
 
 
 
 
 
 
 
 
 
 
 
Financial
931,161

 
(36,337
)
 
241,442

 
(21,572
)
 
1,172,603

 
(57,909
)
Utilities
329,753

 
(11,680
)
 
121,308

 
(9,442
)
 
451,061

 
(21,122
)
Energy
475,736

 
(29,426
)
 
54,937

 
(9,382
)
 
530,673

 
(38,808
)
Other corporate sectors
2,515,541

 
(149,168
)
 
575,796

 
(62,994
)
 
3,091,337

 
(212,162
)
Total corporates
4,252,191

 
(226,611
)
 
993,483

 
(103,390
)
 
5,245,674

 
(330,001
)
Other asset-backed securities
44,603

 
(634
)
 
—

 
—

 
44,603

 
(634
)
Total investment grade securities
4,458,883

 
(229,105
)
 
1,091,128

 
(106,067
)
 
5,550,011

 
(335,172
)
 
 
 
 
 
 
 
 
 
 
 
 
Below investment grade securities:
 
 
 
 
 
 
 
 

 

Corporates, by sector:
 
 
 
 
 
 
 
 

 

Financial
22,087

 
(8,674
)
 
81,101

 
(20,932
)
 
103,188

 
(29,606
)
Utilities
28,613

 
(3,277
)
 
—

 
—

 
28,613

 
(3,277
)
Energy
42,874

 
(3,901
)
 
36,122

 
(19,662
)
 
78,996

 
(23,563
)
Other corporate sectors
146,373

 
(7,235
)
 
69,053

 
(23,112
)
 
215,426

 
(30,347
)
Total corporates
239,947

 
(23,087
)
 
186,276

 
(63,706
)
 
426,223

 
(86,793
)
Collateralized debt obligations
—

 
—

 
13,586

 
(6,414
)
 
13,586

 
(6,414
)
Total below investment grade securities
239,947

 
(23,087
)
 
199,862

 
(70,120
)
 
439,809

 
(93,207
)
Total fixed maturities
$
4,698,830

 
$
(252,192
)
 
$
1,290,990

 
$
(176,187
)
 
$
5,989,820

 
$
(428,379
)



19
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



Note 5—Commitments and Contingencies

Guarantees: The Parent Company has guaranteed letters of credit in connection with its credit facility with a group of banks. The letters of credit were issued by TMK Re, Ltd., a wholly-owned subsidiary, to secure TMK Re, Ltd.’s obligation for claims on certain policies reinsured by TMK Re, Ltd. that were sold by other Globe Life Inc. insurance subsidiaries. These letters of credit facilitate TMK Re, Ltd.’s ability to reinsure the business of Globe Life's insurance carriers. The agreement expires in 2021. The maximum amount of letters of credit available is $250 million. The Parent Company would be liable to the extent that TMK Re, Ltd. does not pay the reinsured party. On April 2, 2019, the letters of credit were amended to reduce the current amount outstanding from $155 million to $150 million. As of September 30, 2019, the outstanding balance remained unchanged.

Litigation: Globe Life Inc. (formerly Torchmark Corporation) and its subsidiaries, in common with the insurance industry in general, are subject to litigation, including putative class action litigation, alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of the Parent Company's insurance subsidiaries, employment discrimination, and miscellaneous other causes of action. Based upon information presently available, and in light of legal and other factual defenses available to the Parent Company and its subsidiaries, management does not believe that it is reasonably possible that such litigation will have a material adverse effect on Globe Life's financial condition, future operating results or liquidity; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future. This bespeaks caution, particularly in states with reputations for high punitive damage verdicts. Globe Life's management recognizes that large punitive damage awards bearing little or no relation to actual damages continue to be awarded by juries in jurisdictions in which the Company has substantial business, creating the potential for unpredictable material adverse judgments in any given punitive damage suit.

On September 12, 2018, putative class action litigation was filed against American Income in California’s Contra Costa County Superior Court (Joh v. American Income Life Insurance Company, Case No. C18-01863) (Joh Action). An amended complaint was filed on October 18, 2018. American Income removed the case to the United States District Court for the Northern District of California (Case No. 3:18-cv-06364-TSH). A second amended complaint was filed on May 20, 2019. The plaintiffs, former insurance sales agents of American Income, are suing on behalf of all current and former trainees and sales agents who sold insurance for American Income in the State of California for the four years prior to the filing of the complaint. The second amended complaint alleges that such individuals are employees and asserts claims under the California Labor Code, California Business and Professions Code, and California Private Attorney General Act. The complaint seeks compensatory damages, penalties and attorney fees on claims for failure to pay wages/commissions, failure to appropriately pay agents at termination, failure to provide itemized wage statements, failure to reimburse expenses, misclassification and unfair business practices.

On October 18, 2018, putative class action litigation was filed against Torchmark Corporation and American Income in California’s Los Angeles County Superior Court (Golz v. American Income Life Insurance Company, et al., Case No. 18STCV01354) (Golz Action). American Income removed the case to the United States District Court for the Central District of California (Case No. 2:18-cv-09879 R (SSx)). An amended complaint was filed on February 5, 2019. On February 6, 2019, Torchmark Corporation was dismissed without prejudice and the case proceeded with respect to American Income. On April 2, 2019, the District Court granted American Income’s motion to dismiss four of the five causes of action asserted. The amended complaint’s remaining claim alleges that plaintiff, as an American Income insurance agent trainee in California, was an employee who should have been compensated accordingly. The plaintiff seeks to represent a class of individuals in California who trained to contract as American Income agents and who subsequently worked as contracted agents. The class period is alleged to begin four years prior to the complaint’s filing. The complaint seeks restitution under the California Business and Professions Code for alleged unfair business practices such as failure to pay minimum wage and overtime, failure to provide meal and rest breaks, and failure to reimburse business expenses.


20
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



On December 14, 2018, putative class action litigation was filed against American Income in United States District Court for the Northern District of California (Hamilton v. American Income Life Insurance Company, Case No. 4:18-cv-7535-KAW) (Hamilton Action). An amended complaint was filed on January 23, 2019. The plaintiffs, former insurance sales agents of American Income, are suing on behalf of all current and former sales agents who sold insurance for American Income in the State of California for the last four years prior to the filing of the complaint. The lawsuit alleges that putative class members are employees and asserts claims under the California Labor Code, California Business and Professions Code, and California Private Attorney General Act. The complaint seeks compensatory damages, penalties and attorney fees on claims for failure to pay minimum wage and overtime, failure to provide meal and rest breaks, failure to appropriately pay agents at termination, failure to provide itemized wage statements, failure to reimburse expenses, misclassification and unfair business practices.

On January 16, 2019, putative class action litigation was filed against American Income in Orange County, California Superior Court (Putros v. American Income Life Insurance Company, Case No. 30-2019-01044772-CU-OE-CXC) (Putros Action). An amended complaint was filed on January 22, 2019. The plaintiff, a former insurance sales agent of American Income, is suing on behalf of all current and former sales agents who sold insurance for American Income in the State of California for the year prior to the filing of the complaint. The lawsuit alleges that putative class members are employees and asserts claims under the California Private Attorney General Act. The complaint seeks penalties for failure to pay minimum wage, failure to provide meal and rest breaks, failure to appropriately pay agents at termination, failure to provide itemized wage statements, failure to reimburse expenses, and misclassification.

With respect to the four related cases above, on August 1, 2019, Plaintiffs in the Joh/Hamilton Actions jointly moved for preliminary approval of a settlement of all class and representative claims—which broadly covers “all individuals who trained to become and/or worked as sales agents in California for Defendant during the last four years prior to the filing of the original Complaint in Joh and whose training and/or work began before the date of preliminary approval of this Settlement”—and explained that “The proposed settlement reached here will resolve all claims in Joh and Hamilton, and, in doing so, encompasses all claims asserted in the Putros and Golz actions as well.” On August 16, 2019, the Northern District of California granted the Motion for Preliminary Approval of Class Action Settlement and scheduled a hearing for final approval of the settlement for January 9, 2020.

With respect to the aforementioned litigation, at this time, management believes that the possibility of a material judgment adverse to the Company is remote.


21
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Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



Note 6—Liability for Unpaid Claims

Activity in the liability for unpaid health claims is summarized as follows:
 
Nine Months Ended
September 30,
 
2019
 
2018
Balance at beginning of period
$
154,528

 
$
146,865

Incurred related to:
 
 
 
Current year
454,186

 
411,662

Prior year
(851
)
 
(3,795
)
Total incurred
453,335

 
407,867

Paid related to:
 
 
 
Current year
326,553

 
293,800

Prior year
123,803

 
113,109

Total paid
450,356

 
406,909

Balance at end of period
$
157,507

 
$
147,823



Below is the reconciliation of the liability of "Policy claims and other benefits payable" in the Condensed Consolidated Balance Sheets.
 

 
September 30,
2019
 
December 31, 2018
Policy claims and other benefits payable:
 
 
 
Life insurance
$
194,222

 
$
196,298

Health insurance
157,507

 
154,528

Total
$
351,729

 
$
350,826




22
                                              GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



Note 7—Postretirement Benefits

Globe Life has qualified noncontributory defined benefit pension plans and contributory savings plans that cover substantially all employees. There is also a nonqualified noncontributory supplemental executive retirement plan (SERP) that covers a limited number of employees. The tables included herein will focus on the defined benefit plans and SERP.

Pension Assets: The following table presents the assets of the Company's defined benefit pension plans at September 30, 2019 and December 31, 2018.
Pension Assets by Component at September 30, 2019
 
Fair Value Determined by:
 
 
 
 
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total
Amount
 
% to
Total
Corporate bonds:
 
 
 
 
 
 
 
 
 
Financial
$
—

 
$
51,045

 
$
—

 
$
51,045

 
11
Utilities
—

 
43,401

 
—

 
43,401

 
10
Energy
—

 
21,919

 
—

 
21,919

 
5
Other corporates
—

 
92,421

 
—

 
92,421

 
20
Total corporate bonds
—

 
208,786

 
—

 
208,786

 
46
Exchange traded fund(1)
189,103

 
—

 
—

 
189,103

 
41
Other bonds
—

 
258

 
—

 
258

 
—
Other long-term investments
—

 
11,959

 
—

 
11,959

 
3
Guaranteed annuity contract(2)
—

 
28,360

 
—

 
28,360

 
6
Short-term investments
10,107

 
—

 
—

 
10,107

 
2
Other
7,162

 
—

 
—

 
7,162

 
2
Total pension assets
$
206,372

 
$
249,363

 
$
—

 
$
455,735

 
100
(1)
A fund including marketable securities that mirror the S&P 500 index.
(2)
Representing a guaranteed annuity contract issued by Globe Life Inc.'s subsidiary, American Income, to fund the obligations of the American Income Life Insurance Company Non-Exempt Employees Defined Benefit Pension Plan ("American Income Pension Plan").

23
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



Pension Assets by Component at December 31, 2018
 
Fair Value Determined by:
 
 
 
 
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total
Amount
 
% to
Total
Corporate bonds:
 
 
 
 
 
 
 
 
 
Financial
$
—

 
$
44,236

 
$
—

 
$
44,236

 
11
Utilities
—

 
39,443

 
—

 
39,443

 
10
Energy
—

 
19,744

 
—

 
19,744

 
5
Other corporates
—

 
83,202

 
—

 
83,202

 
22
Total corporate bonds
—

 
186,625

 
—

 
186,625

 
48
Exchange traded fund(1)
157,717

 
—

 
—

 
157,717

 
40
Other bonds
—

 
245

 
—

 
245

 
—
Other long-term investments
—

 
8,475

 
—

 
8,475

 
2
Guaranteed annuity contract(2)
—

 
26,505

 
—

 
26,505

 
7
Short-term investments
9,289

 
—

 
—

 
9,289

 
2
Other
3,816

 
—

 
—

 
3,816

 
1
Total pension assets
$
170,822

 
$
221,850

 
$
—

 
$
392,672

 
100
(1)
A fund including marketable securities that mirror the S&P 500 index.
(2)
Representing a guaranteed annuity contract issued by Globe Life Inc.'s subsidiary, American Income, to fund the obligations of the American Income Pension Plan.

SERP: The following table includes information regarding the SERP at September 30, 2019 and December 31, 2018.
 
September 30,
2019
 
December 31,
2018
Premiums paid for insurance coverage
$
2,394

 
$
2,997

 
 
 
 
Total investments:
 
 
 
Company owned life insurance
$
47,406

 
$
44,285

Exchange traded funds
62,944

 
52,659

 
$
110,350

 
$
96,944




Pension and SERP Liabilities: The following table presents liabilities for the defined benefit pension plans and SERP at September 30, 2019 and December 31, 2018.
 
September 30,
2019
 
December 31,
2018
Funded defined benefit pension
$
534,798

 
$
481,792

SERP
75,531

 
74,407

Pension benefit obligation
$
610,329

 
$
556,199




24
                                              GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



Net Periodic Benefit Cost: The following table presents the net periodic benefit costs for the defined benefit pension plans and SERP by expense components for the three and nine months ended September 30, 2019 and 2018.

Components of Net Periodic Benefit Cost
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Service cost
$
4,982

 
$
5,277

 
$
14,947

 
$
15,831

Interest cost
5,964

 
5,496

 
17,892

 
16,482

Expected return on assets
(6,966
)
 
(6,363
)
 
(20,898
)
 
(19,089
)
Amortization:
 
 
 
 
 
 
 
Prior service cost
158

 
119

 
474

 
357

Actuarial (gain) loss
1,894

 
3,636

 
5,684

 
10,908

Net periodic benefit cost
$
6,032

 
$
8,165

 
$
18,099

 
$
24,489



Note 8—Earnings Per Share

Earnings per Share: A reconciliation of basic and diluted weighted-average shares outstanding used in the computation of basic and diluted earnings per share is as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Basic weighted average shares outstanding
108,813,355

 
112,587,623

 
109,582,748

 
113,366,465

Weighted average dilutive options outstanding
2,100,378

 
2,386,831

 
2,009,262

 
2,418,281

Diluted weighted average shares outstanding
110,913,733

 
114,974,454

 
111,592,010

 
115,784,746

 
 
 
 
 
 
 
 
Antidilutive shares
—

 
1,375,186

 
1,359,186

 
1,097,439



Antidilutive shares are excluded from the calculation of diluted earnings per share. 

Note 9—Business Segments

Globe Life is organized into four segments: life insurance, supplemental health insurance, annuities, and investments. In addition, other expenses not included in these segments are reported in "Corporate & Other."

Globe Life's reportable segments are based on the insurance product lines it markets and administers: life insurance, supplemental health insurance, and annuities. These major product lines are set out as reportable segments because of the common characteristics of products within these categories, comparability of margins, and the similarity in regulatory environment and management techniques. There is also an investment segment which manages the investment portfolio, debt, and cash flow for the insurance segments and the corporate function. The Company's chief operating decision makers evaluate the overall performance of the operations of the Company in accordance with these segments.

Management’s measure of profitability for each insurance segment is insurance underwriting margin, which is underwriting income before other income and insurance administrative expenses. It represents the profit margin on insurance products before administrative expenses, and is calculated by deducting net policy obligations (claims incurred and change in reserves), commissions and other acquisition expenses from premium revenue. Globe Life further views the profitability of each insurance product segment by the marketing groups that distribute the products of that segment: direct response, independent agencies, or captive agencies.

25
                                              GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



Globe Life's management prefers to evaluate the performance of its underwriting and investment activities separately, rather than allocating investment income to the underwriting results. As such, the investment function is presented as a stand-alone segment. The investment segment includes management of the investment portfolio, debt, and cash flow. Management’s measure of profitability for this segment is excess investment income, which is the income earned on the investment portfolio less the required interest on net policy liabilities and financing costs. Financing costs include the interest on the Parent Company's debt. Other income and insurance administrative expense are classified in a separate Corporate and Other segment.

The majority of the Company’s required interest on net policy liabilities (benefit reserves less the deferred acquisition cost asset) is not credited to policyholder accounts. Instead, it is an actuarial assumption for discounting cash flows in the computation of benefit reserves and the amortization of the deferred acquisition cost asset. Investment income required to fund the required interest on net policy liabilities is removed from the investment segment and applied to the insurance segments to eliminate the effect of the required interest from the insurance segments. As a result, the investment segment measures net investment income against the required interest on net policy liabilities and financing costs, while the insurance segments simply measure premiums against net policy benefits and expenses. Management believes this presentation facilitates a more meaningful analysis of the Company’s underwriting and investment performance as the underwriting results are based on premiums, claims, and expenses and are not affected by unanticipated fluctuations in investment yields.
 
As noted, Globe Life's core operations are insurance and investment management. The insurance segments issue policies for which premiums are collected for the eventual payment of policy benefits. In addition to policy benefits, operating expenses are incurred including acquisition costs, administrative expenses, and taxes. Because life and health contracts can be long term, premium receipts in excess of current expenses are invested. Investment activities, conducted by the investment segment, focus on seeking quality investments with a yield and term appropriate to support the insurance product obligations. These investments generally consist of fixed maturities and, over the long term, the expected yields are taken into account when setting insurance premium rates and product profitability expectations. As a result, fixed maturities are generally held for long periods to support the liabilities, and the Company generally expects to hold investments until maturity. However, dispositions of investments occur from time to time, generally for reasons such as credit concerns, calls by issuers, or other factors.

Since Globe Life does not actively trade investments, realized gains and losses from the disposition and write down of investments are generally incidental to operations and are not considered a material factor in insurance pricing or product profitability. While from time to time these realized gains and losses could be significant to net income in the period in which they occur, they generally have a limited effect on the yield of the total investment portfolio. Further, the disposals have little effect on the size of the portfolio as the proceeds of the disposals are reinvested in the portfolio and the income from the reinvestments is included in net investment income. Therefore, management removes realized investment gains and losses from results of core operations when evaluating the performance of the Company. For this reason, these gains and losses are excluded from the Company's operating segments.

Globe Life accounts for its stock options and restricted stock under current accounting guidance requiring stock options and stock grants to be expensed based on fair value at the time of grant. Management considers stock compensation expense to be an expense of the Parent Company. Therefore, stock compensation expense is treated as a corporate expense in Globe Life's segment analysis. The following tables set forth a reconciliation of the Company's revenues and operations by segment to its pre-tax income and each significant line item in its Condensed Consolidated Statements of Operations.


26
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



The following tables set forth a reconciliation of Globe Life's revenues and operations by segment to its major income statement line items:
 
Three Months Ended September 30, 2019
 
Life
 
Health
 
Annuity
 
Investment
 
Corporate & Other
 
Adjustments
 
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premium
$
630,824

 
$
269,166

 
$
3

 
$
—

 
$
—

 
$
—

 

$
899,993

Net investment income
—

 
—

 
—

 
228,905

 
—

 
—

 

228,905

Other income
—

 
—

 
—

 
—

 
438

 
—

 

438

Total revenue
630,824

 
269,166

 
3

 
228,905

 
438

 
—

 

1,129,336

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 

 
Policy benefits
406,963

 
170,875

 
7,854

 
—

 
—

 
—

 

585,692

Required interest on reserves
(167,719
)
 
(21,955
)
 
(10,832
)
 
200,506

 
—

 
—

 

—

Required interest on DAC
50,948

 
6,395

 
125

 
(57,468
)
 
—

 
—

 

—

Amortization of acquisition costs
108,798

 
29,151

 
500

 
—

 
—

 
—

 

138,449

Commissions, premium taxes, and non-deferred acquisition costs
50,375

 
23,759

 
5

 
—

 
—

 
—

 

74,139

Insurance administrative expense(1)
—

 
—

 
—

 
—

 
60,570

 
—

 
 
60,570

Parent expense
—

 
—

 
—

 
—

 
2,472

 
—

 

2,472

Stock-based compensation expense
—

 
—

 
—

 
—

 
11,533

 
—

 

11,533

Interest expense
—

 
—

 
—

 
21,094

 
—

 
—

 

21,094

Total expenses
449,365

 
208,225

 
(2,348
)
 
164,132

 
74,575

 
—

 

893,949

Subtotal
181,459

 
60,941

 
2,351

 
64,773

 
(74,137
)
 
—

 

235,387

Non-operating items
—

 
—

 
—

 
—

 
—

 
—

 
 
—

Measure of segment profitability (pretax)
$
181,459

 
$
60,941

 
$
2,351

 
$
64,773

 
$
(74,137
)
 
$
—

 
 
235,387

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized gain (loss)—investments
 
 
11,943

Income before income taxes per Condensed Consolidated Statements of Operations
 
 
$
247,330

(1)
Administrative expense is not allocated to insurance segments.



27
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Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



 
Three Months Ended September 30, 2018
 
Life
 
Health
 
Annuity
 
Investment
 
Corporate & Other
 
Adjustments
 
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premium
$
605,547

 
$
255,201

 
$
2

 
$
—

 
$
—

 
$
—

 

$
860,750

Net investment income
—

 
—

 
—

 
221,627

 
—

 
—

 

221,627

Other income
—

 
—

 
—

 
—

 
416

 
(23
)
 
(2)
393

Total revenue
605,547

 
255,201

 
2

 
221,627

 
416

 
(23
)
 

1,082,770

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 

 
Policy benefits
396,701

 
162,574

 
8,581

 
—

 
—

 
—

 

567,856

Required interest on reserves
(160,058
)
 
(20,965
)
 
(11,831
)
 
192,854

 
—

 
—

 

—

Required interest on DAC
48,907

 
6,136

 
145

 
(55,188
)
 
—

 
—

 

—

Amortization of acquisition costs
103,792

 
25,162

 
538

 
—

 
—

 
—

 

129,492

Commissions, premium taxes, and non-deferred acquisition costs
47,609

 
22,041

 
5

 
—

 
—

 
(23
)
 
(2)
69,632

Insurance administrative expense(1)
—

 
—

 
—

 
—

 
55,812

 
3,590

 
(3)
59,402

Parent expense
—

 
—

 
—

 
—

 
2,667

 
1,578

 
(4)
4,245

Stock-based compensation expense
—

 
—

 
—

 
—

 
10,412

 
—

 

10,412

Interest expense
—

 
—

 
—

 
22,433

 
—

 
—

 

22,433

Total expenses
436,951

 
194,948

 
(2,562
)
 
160,099

 
68,891

 
5,145

 

863,472

Subtotal
168,596

 
60,253

 
2,564

 
61,528

 
(68,475
)
 
(5,168
)
 

219,298

Non-operating items
—

 
—

 
—

 
—

 
—

 
5,168

 
(3,4)
5,168

Measure of segment profitability (pretax)
$
168,596

 
$
60,253

 
$
2,564

 
$
61,528

 
$
(68,475
)
 
$
—

 
 
224,466

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized gain (loss)—investments
 
 
1,032

Administrative settlements
 
 
(3,590
)
Non-operating fees
 
 
(1,578
)
Income before income taxes per Condensed Consolidated Statements of Operations
 
 
$
220,330

(1)
Administrative expense is not allocated to insurance segments.
(2)
Elimination of intersegment commission.
(3)
In 2018, the Company recorded $3.6 million in administrative settlements related to state regulatory examinations. These administrative settlements were included in "Policyholder benefits" in the Consolidated Statements of Operations.
(4)
Non-operating fees.





28
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



 
Nine Months Ended September 30, 2019
 
Life
 
Health
 
Annuity
 
Investment
 
Corporate & Other
 
Adjustments
 
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premium
$
1,886,314

 
$
802,132

 
$
4

 
$
—

 
$
—

 
$
—

 

$
2,688,450

Net investment income
—

 
—

 
—

 
683,003

 
—

 
—

 

683,003

Other income
—

 
—

 
—

 
—

 
1,077

 
—

 

1,077

Total revenue
1,886,314

 
802,132

 
4

 
683,003

 
1,077

 
—

 

3,372,530

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Policy benefits
1,227,616

 
511,403

 
23,792

 
—

 
—

 
—

 

1,762,811

Required interest on reserves
(496,894
)
 
(65,131
)
 
(32,840
)
 
594,865

 
—

 
—

 

—

Required interest on DAC
151,270

 
19,019

 
383

 
(170,672
)
 
—

 
—

 

—

Amortization of acquisition costs
327,407

 
83,508

 
1,521

 
—

 
—

 
—

 

412,436

Commissions, premium taxes, and non-deferred acquisition costs
150,567

 
70,719

 
16

 
—

 
—

 
—

 

221,302

Insurance administrative expense(1)
—

 
—

 
—

 
—

 
179,177

 
5,900

 
(2,3)
185,077

Parent expense
—

 
—

 
—

 
—

 
7,987

 
—

 

7,987

Stock-based compensation expense
—

 
—

 
—

 
—

 
33,348

 
—

 

33,348

Interest expense
—

 
—

 
—

 
63,804

 
—

 
—

 

63,804

Total expenses
1,359,966

 
619,518

 
(7,128
)
 
487,997

 
220,512

 
5,900

 

2,686,765

Subtotal
526,348

 
182,614

 
7,132

 
195,006

 
(219,435
)
 
(5,900
)
 

685,765

Non-operating items
—

 
—

 
—

 
—

 
—

 
5,900

 
(2,3)
5,900

Measure of segment profitability (pretax)
$
526,348

 
$
182,614

 
$
7,132

 
$
195,006

 
$
(219,435
)
 
$
—

 
 
691,665

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized gain (loss)—investments
 
 
18,426

Administrative settlements
 
 
(400
)
Legal proceedings
 
 
(5,500
)
Income before income taxes per Condensed Consolidated Statements of Operations
 
 
$
704,191

(1)
Administrative expense is not allocated to insurance segments.
(2)
During the first quarter of 2019, Globe Life recorded $400 thousand in administrative settlements related to state regulatory examinations.
(3)
Legal proceedings—See Note 5 for further discussion.



29
        GL Q3 2019 FORM 10-Q
Table of Contents

GLOBE LIFE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)



 
Nine Months Ended September 30, 2018
 
Life
 
Health
 
Annuity
 
Investment
 
Corporate & Other
 
Adjustments
 
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premium
$
1,806,384

 
$
758,439

 
$
12

 
$
—

 
$
—

 
$
—

 

$
2,564,835

Net investment income
—

 
—

 
—

 
658,279

 
—

 
—

 

658,279

Other income
—

 
—

 
—

 
—

 
1,180

 
(76
)
 
(2)
1,104

Total revenue
1,806,384

 
758,439

 
12

 
658,279

 
1,180

 
(76
)
 

3,224,218

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 

 
Policy benefits
1,196,616

 
483,654

 
25,852

 
—

 
—

 
—

 

1,706,122

Required interest on reserves
(474,373
)
 
(62,095
)
 
(35,733
)
 
572,201

 
—

 
—

 

—

Required interest on DAC
145,126

 
18,228

 
448

 
(163,802
)
 
—

 
—

 

—

Amortization of acquisition costs
312,168

 
74,311

 
1,710

 
—

 
—

 
—

 

388,189

Commissions, premium taxes, and non-deferred acquisition costs
142,253

 
66,502

 
19

 
—

 
—

 
(76
)
 
(2)
208,698

Insurance administrative expense(1)
—

 
—

 
—

 
—

 
166,560

 
3,590

 
(3)
170,150

Parent expense
—

 
—

 
—

 
—

 
7,806

 
1,578

 
(4)
9,384

Stock-based compensation expense
—

 
—

 
—

 
—

 
29,969

 
—

 

29,969

Interest expense
—

 
—

 
—

 
66,466

 
—

 
—

 

66,466

Total expenses
1,321,790

 
580,600

 
(7,704
)
 
474,865

 
204,335

 
5,092

 

2,578,978

Subtotal
484,594

 
177,839

 
7,716

 
183,414

 
(203,155
)
 
(5,168
)
 

645,240

Non-operating items
—

 
—

 
—

 
—

 
—

 
5,168

 
(3,4)
5,168

Measure of segment profitability (pretax)
$
484,594

 
$
177,839

 
$
7,716

 
$
183,414

 
$
(203,155
)
 
$
—

 
 
650,408

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized gain (loss)—investments
 
 
14,796

Administrative settlements
 
 
(3,590
)
Non-operating fees
 
 
(1,578
)
Income before income taxes per Condensed Consolidated Statements of Operations
 
 
$
660,036

(1)
Administrative expense is not allocated to insurance segments.
(2)
Elimination of intersegment commission.
(3)
In 2018, the Company recorded $3.6 million in administrative settlements related to state regulatory examinations. These administrative settlements were included in "Policyholder benefits" in the Consolidated Statements of Operations.
(4)
Non-operating fees.


30
        GL Q3 2019 FORM 10-Q
Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with Globe Life Inc.'s Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.
 

Effective August 8, 2019, Torchmark Corporation changed its corporate name to Globe Life Inc. The NYSE ticker was changed to "GL" on August 9, 2019. The name change is part of a brand alignment strategy which will enhance the Company's ability to build name recognition with potential customers and agent recruits through the use of a single brand. The underwriting companies owned by Globe Life Inc. (the Parent Company) will continue to exist as legal entities, but over a period of time will go to market under the Globe Life name to leverage branding initiatives implemented at Globe Life And Accident Insurance Company in recent years.

"Globe Life" and the "Company" refer to Globe Life Inc. and its subsidiaries and affiliates.


Results of Operations
icons2002a05.jpg
 
How Globe Life Views Its Operations. Globe Life Inc. is the holding company for a group of insurance companies that market primarily individual life and supplemental health insurance to lower middle to middle income households throughout the United States. We view our operations by segments, which are the insurance product lines of life, supplemental health, and annuities, and the investment segment that supports the product lines. Segments are aligned based on their common characteristics, comparability of the profit margins, and management techniques used to operate each segment. 
 
 
 
icons003a09.jpg
 
Insurance Product Line Segments. The insurance product line segments involve the marketing, underwriting, and administration of policies. Each product line is further segmented by the various distribution units that market the insurance policies. Each distribution unit operates in a niche market offering insurance products designed for that particular market. Whether analyzing profitability of a segment as a whole, or the individual distribution units within the segment, the measure of profitability used by management is the underwriting margin, which is:

 
 
Premium revenue
Less:
Policy obligations
Policy acquisition costs and commissions

icons3002a05.jpg
 
Investment Segment. The investment segment involves the management of our capital resources, including investments and the management of corporate debt and liquidity. Our measure of profitability for the investment segment is excess investment income, which is:

 
 
Net investment income
Less:
Required interest on net policy liabilities
Financing costs





31
        GL Q3 2019 FORM 10-Q
Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


Current Highlights, comparing first nine months of 2019 with first nine months of 2018.
•
Net income as a return on equity (ROE) was 12.0% and net operating income as an ROE, excluding net unrealized gains on the fixed maturity portfolio(1) was 14.7%.
•
Total premium increased 5% over the same period in the prior year. Life premium increased 4% for the period from $1.81 billion in 2018 to $1.89 billion in 2019. Life underwriting margin increased 9% from $485 million in 2018 to $526 million in 2019.
•
Net investment income increased 4% over the same period in the prior year. In addition, excess investment income increased 6% over the prior year.
•
Total net sales increased 5% over the same period in the prior year from $428 million to $451 million.
•
Book value per share increased 36% over the same period in the prior year from $48.35 to $65.96. Book value per share, excluding net unrealized gains on the fixed maturity portfolio(1), increased 10% over the prior year from $43.10 to $47.58.
•
Through September 30, 2019, the Company repurchased 3.0 million shares at a total cost of $257 million for an average share price of $85.70.

The following represents net income and net operating income for the nine months ended September 30, 2019 and 2018.
a10qchart4q31019a01.jpga10qchart5q31019.jpg
(1)
Net operating income is considered a non-GAAP measure and it has been used consistently by Globe Life's management for many years to evaluate the operating performance of the Company. It differs from net income primarily because it excludes certain non-operating items such as realized gains and losses and certain significant and unusual items included in net income. Net income is the most directly comparable GAAP measure.
Net operating income as an ROE, excluding net unrealized gains on the fixed maturity portfolio, is considered a non-GAAP measure. Management utilizes this measure to view the business without the effect of the unrealized gains or losses, which are primarily attributable to fluctuation in interest rates on the available for sale portfolio. The impact of the adjustment to exclude net unrealized gains on fixed maturities is $2.0 billion and $602 million for 2019 and 2018, respectively.
Book value per share, excluding net unrealized gains on the fixed maturity portfolio, is also considered a non-GAAP measure. Management utilizes this measure to view the book value of the business without the effect of unrealized gains or losses, which are primarily attributable to fluctuation in interest rates on the available for sale portfolio. The impact of the adjustment to exclude net unrealized gains on fixed maturities is $18.38 and $5.25 for 2019 and 2018, respectively.


32
        GL Q3 2019 FORM 10-Q
Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


Summary of Operations. Net income increased 7% to $574 million during the nine months ended September 30, 2019, compared with $537 million in the same period in 2018. This increase was primarily related to favorable underwriting income. Included in net income were after-tax realized gains of $15 million in 2019, compared with realized after-tax gains of $12 million for the same period in 2018. On a diluted per common share basis, net income per common share for the nine months ended September 30, 2019 increased 11% from $4.64 to $5.14. The percentage growth in net income per share continues to exceed the growth in dollar amounts due to our share repurchase program. Realized gains and losses are presented more fully under the caption Realized Gains and Losses in this report.

Net operating income is the consolidated total of segment profits after-tax and as such is considered a non-GAAP measure. Net operating income increased 6% to $564 million for the nine months ended September 30, 2019, compared with $530 million for the same period in 2018. On a diluted per common share basis, net operating income per common share for the nine months ended September 30, 2019 increased 10% from $4.58 to $5.05.

Globe Life's operations on a segment-by-segment basis are discussed in depth below. Net operating income has been used consistently by management for many years to evaluate the operating performance of the Company, and is a measure commonly used in the life insurance industry. It differs from net income primarily because it excludes certain non-operating items such as realized investment gains and losses and certain significant and unusual items included in net income. Management believes an analysis of net operating income is important in understanding the profitability and operating trends of the Company’s business. Net income is the most directly comparable GAAP measure.

Analysis of Profitability by Segment
(Dollar amounts in thousands)
 
Nine Months Ended September 30,
 
2019
 
2018
 
Change
 
%
Life insurance underwriting margin
$
526,348

 
$
484,594

 
$
41,754

 
9

Health insurance underwriting margin
182,614

 
177,839

 
4,775

 
3

Annuity underwriting margin
7,132

 
7,716

 
(584
)
 
(8
)
Excess investment income
195,006

 
183,414

 
11,592

 
6

Other insurance:
 
 
 
 

 

Other income
1,077

 
1,180

 
(103
)
 
(9
)
Administrative expense
(179,177
)
 
(166,560
)
 
(12,617
)
 
8

Corporate and other
(41,335
)
 
(37,775
)
 
(3,560
)
 
9

Pre-tax total
691,665

 
650,408

 
41,257

 
6

Applicable taxes
(127,656
)
 
(120,456
)
 
(7,200
)
 
6

Net operating income
564,009

 
529,952

 
34,057

 
6

Reconciling items, net of tax:
 
 
 
 
 
 
 
Realized gain (loss)—investments
14,557

 
11,689

 
2,868

 
 
Part D adjustments—discontinued operations
(92
)
 
(55
)
 
(37
)
 
 
Administrative settlements
(400
)
 
(3,590
)
 
3,190

 
 
Non-operating fees
—

 
(1,247
)
 
1,247

 
 
Legal proceedings
(4,345
)
 
—

 
(4,345
)
 
 
Net income
$
573,729

 
$
536,749

 
$
36,980

 
7



33
        GL Q3 2019 FORM 10-Q
Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


In 2019, the largest contributor of total underwriting margin was the life insurance segment and the primary distribution channel was American Income Exclusive Agency. The following tables represent the breakdown of total underwriting margin by operating segment and distribution channel for the nine months ended September 30, 2019.

a10qchart3q31019.jpga10qchart2q31019002.jpg

Total premium income rose 5% for the nine months ended September 30, 2019 to $2.7 billion. Total net sales increased 5% to $451 million, when compared with the same period in 2018. Total first-year collected premium was $365 million for the 2019 period, compared with $350 million for the 2018 period.

Life insurance premium income increased 4% to $1.9 billion over the prior year total of $1.8 billion. Life net sales rose 3% to $323 million for the first nine months of 2019. First-year collected life premium rose 2% to $247 million. Life underwriting margins, as a percent of premium, increased to 28% in 2019 from 27% in the prior year period, primarily due to lower policy obligations. Underwriting income increased to $526 million for the nine months ended September 30, 2019, 9% over the same period in 2018.

Health insurance premium income increased 6% to $802 million over the prior year total of $758 million. Health net sales rose 11% to $127 million for the first nine months of 2019. First-year collected health premium rose 9% to $118 million. Health underwriting margins, as a percent of premium, were 23% in both periods. Underwriting income increased to $183 million for the first nine months of 2019, 3% over the same period in 2018.

Excess investment income, the measure of profitability of our investment segment, increased 6% during the first nine months of 2019 to $195 million from $183 million in the same period in 2018. Excess investment income per common share, reflecting the impact of our share repurchase program, increased 11% to $1.75 from $1.58 in the same period last year.

Insurance administrative expenses increased 7.6% in 2019 when compared with the prior year period. These expenses were 6.7% as a percentage of premium during the first nine months of 2019 compared with 6.5% a year earlier. The increase in administrative expenses was primarily due to an increase in investments in information technology.


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        GL Q3 2019 FORM 10-Q
Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


A discussion of each of Globe Life's segments follows. The following discussions are presented in the manner we view our operations, as described in Note 9—Business Segments.
 
We use three statistical measures as indicators of premium growth and sales over the near term: “annualized premium in force,” “net sales,” and “first-year collected premium.”

•
Annualized premium in force is defined as the premium income that would be received over the following twelve months at any given date on all active policies if those policies remain in force throughout the twelve-month period. Annualized premium in force is an indicator of potential growth in premium revenue.
•
Net sales is annualized premium issued (gross premium that would be received during the policies' first year in force and assuming that none of the policies lapsed or terminated), net of cancellations in the first thirty days after issue, except in the case of our Direct Response channel, where net sales is annualized premium issued at the time the first full premium is paid after any introductory offer period has expired. We believe that net sales is a better indicator of the rate of premium growth as compared with annualized premium issued.
•
First-year collected premium is defined as the premium collected during the reporting period for all policies in their first policy year. First-year collected premium takes lapses into account in the first year when lapses are more likely to occur, and thus is a useful indicator of how much new premium is expected to be added to premium income in the future.

LIFE INSURANCE

Life insurance is the Company's predominant segment, with 2019 life premium representing 70% of total premium and life underwriting margin representing 74% of the total. Additionally, investments supporting the reserves for life products produce the majority of excess investment income attributable to the investment segment.
 
The following table presents the summary of results of life insurance. Further discussion of the results by distribution channel is included below.

Life Insurance
Summary of Results
(Dollar amounts in thousands)
 
Nine Months Ended September 30,
 
Increase
 
2019
 
2018
 
(Decrease)
 
Amount
 
% of Premium
 
Amount
 
% of Premium
 
Amount
 
%
Premium and policy charges
$
1,886,314

 
100

 
$
1,806,384

 
100

 
$
79,930

 
4
 
 
 
 
 
 
 
 
 
 
 
 
Policy obligations
1,227,616

 
65

 
1,196,616

 
66

 
31,000

 
3
Required interest on reserves
(496,894
)
 
(26
)
 
(474,373
)
 
(26
)
 
(22,521
)
 
5
Net policy obligations
730,722

 
39

 
722,243

 
40

 
8,479

 
1
Commissions, premium taxes, and non-deferred acquisition expenses
150,567

 
8

 
142,253

 
8

 
8,314

 
6
Amortization of acquisition costs
478,677

 
25

 
457,294

 
25

 
21,383

 
5
Total expense
1,359,966

 
72

 
1,321,790

 
73

 
38,176

 
3
Insurance underwriting margin
$
526,348

 
28

 
$
484,594

 
27

 
$
41,754

 
9


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                                              GL Q3 2019 FORM 10-Q
Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


The following table presents Globe Life's life insurance premium by distribution channel.

Life Insurance
Premium by Distribution Channel
(Dollar amounts in thousands)
 
Nine Months Ended September 30,
 
Increase
 
2019
 
2018
 
(Decrease)
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
%
American Income Exclusive Agency
$
863,250

 
46
 
$
805,372

 
45
 
$
57,878

 
7

Direct Response
646,530

 
34
 
628,525

 
35
 
18,005

 
3

Liberty National Exclusive Agency
214,007

 
11
 
209,224

 
11
 
4,783

 
2

Other Agencies
162,527

 
9
 
163,263

 
9
 
(736
)
 
—

Total
$
1,886,314

 
100
 
$
1,806,384

 
100
 
$
79,930

 
4


Annualized life premium in force was $2.6 billion at September 30, 2019, an increase of 4% over $2.5 billion a year earlier.

An analysis of life net sales, an indicator of new business production, by distribution channel is presented below. 

Life Insurance
Net Sales by Distribution Channel
(Dollar amounts in thousands)
 
Nine Months Ended September 30,
 
Increase
 
2019
 
2018
 
(Decrease)
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
%
American Income Exclusive Agency
$
178,291

 
55
 
$
169,442

 
54
 
$
8,849

 
5

Direct Response
96,420

 
30
 
96,978

 
31
 
(558
)
 
(1
)
Liberty National Exclusive Agency
39,100

 
12
 
36,189

 
12
 
2,911

 
8

Other Agencies
9,265

 
3
 
9,901

 
3
 
(636
)
 
(6
)
Total
$
323,076

 
100
 
$
312,510

 
100
 
$
10,566

 
3


First-year collected life premium by distribution channel is presented in the table below. 

Life Insurance
First-Year Collected Premium by Distribution Channel
(Dollar amounts in thousands)
 
Nine Months Ended September 30,
 
Increase
 
2019
 
2018
 
(Decrease)
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
%
American Income Exclusive Agency
$
145,445

 
59
 
$
143,498

 
60
 
$
1,947

 
1

Direct Response
62,667

 
25
 
62,889

 
26
 
(222
)
 
—

Liberty National Exclusive Agency
29,663

 
12
 
27,369

 
11
 
2,294

 
8

Other Agencies
8,818

 
4
 
7,424

 
3
 
1,394

 
19

Total
$
246,593

 
100
 
$
241,180

 
100
 
$
5,413

 
2



36
        GL Q3 2019 FORM 10-Q
Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


A discussion of life operations by distribution channel follows.

While American Income Exclusive Agency has historically marketed primarily to members of labor unions, this agency has diversified over the years by focusing heavily on other affinity groups, third-party internet vendor leads, and referrals which have driven growth despite declines in North American union membership. This agency is Globe Life's largest contributor to life premium at 46% of the Company's 2019 year-to-date total. This agency produced premium income during the nine months ended September 30, 2019 of $863 million, an increase of 7% over the comparable prior year period of $805 million. First-year collected premium was $145 million, an increase of 1%. The underwriting margin, as a percent of premium, was 34%, up from 33% in the nine months ended September 30, 2018. The increase was primarily attributable to favorable policy obligations compared with the prior year period. Net sales increased 5% to $178 million in 2019 over the 2018 total of $169 million. Over the long term, sales growth in our exclusive agencies is generally dependent on growth in the size of the agency force. The American Income Exclusive Agency's average producing agent count increased 4% to 7,269 for the nine months ended September 30, 2019, compared with 6,983 for the same period in 2018. As is the case with all Globe Life's exclusive agencies, the average producing agent count is based on the actual count at the end of each week during the period.

The American Income Exclusive Agency continues to focus on growing and strengthening the agency force. In addition to offering financial incentives and training opportunities, the agency has made considerable investments in information technology, including launching a lead mapping and customer relationship management tool for the agency force. We anticipate this tool will help enhance agent productivity and agent retention.

The Direct Response unit offers adult and juvenile life insurance through a variety of direct-to-consumer marketing approaches, which include direct mailings, insert media, and electronic media. These different approaches support and complement one another in the unit’s efforts to reach the consumer. The Direct Response channel’s growth has been fueled over the years by constant innovation. In recent years, electronic media production has grown rapidly as management has aggressively increased marketing activities related to internet and mobile technology, and has focused on driving traffic to an inbound call center. We continually introduce new initiatives in this unit in an attempt to increase response and issue rates.

While the juvenile market is an important source of sales, it also is a vehicle to reach the parents and grandparents of juvenile policyholders, who are more likely to respond favorably to a Direct Response solicitation for life coverage on themselves than is the general adult population. Also, both juvenile policyholders and their parents are low acquisition-cost targets for sales of additional coverage over time.

Direct Response’s life premium income rose 3% to $647 million, representing 34% of Globe Life's total life premium for the nine months ended September 30, 2019. Net sales for this group declined 1% to $96 million, while first-year collected premium remained unchanged at $63 million. The underwriting margin, as a percent of premium, was 18%, up from 17% in the nine months ended September 30, 2018. This increase was attributable to favorable claims and amortization of deferred acquisition costs in the nine months ended September 30, 2019 compared with the same period in 2018.

The Liberty National Exclusive Agency markets individual life insurance to middle-income household and worksite customers. Life premium income for this agency was $214 million in the nine months ended September 30, 2019 compared with $209 million for the same period in 2018. Net sales for the Liberty National Exclusive Agency increased 8% to $39 million during the nine months ended September 30, 2019 compared with $36 million in the prior year. Recent investments in information technology as well as recent growth in middle management within the agency will help continue this growth. First-year collected premium increased 8% to $30 million from $27 million in the same period in 2018.

The underwriting margin as a percent of premium was 26%, up from 24% for the nine months ended September 30, 2018. The increase is primarily attributable to higher than normal policy obligations during the nine months ended September 30, 2018 compared with lower policy obligations during the same period in 2019.

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Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis




The Liberty National Exclusive Agency's average producing agent count increased 6% to 2,289 for the nine months ended September 30, 2019 compared with 2,151 for the same period in 2018. We continue to execute our long-term plan to grow this agency through expansion from small-town markets in the southeast to more densely populated areas with larger pools of potential agent recruits and customers. Continued expansion of this agency’s presence into more heavily populated, less-penetrated areas will help create long-term agency growth. Additionally, the agency continues to help improve the ability of agents to develop new worksite marketing business. Systems that were put in place several years ago and the addition of a CRM platform has helped the agents develop additional worksite marketing opportunities as well improve the productivity of the individual market.

The Other Agencies distribution channels primarily include non-exclusive independent agencies selling predominantly life insurance. The Other Agencies contributed $163 million of life premium income, or 9% of Globe Life's total premium income in the nine months ended September 30, 2019, and contributed 3% of net sales for the period.

HEALTH INSURANCE
Health insurance sold by the Company includes primarily Medicare Supplement insurance, accident coverage, and other limited-benefit supplemental health products including cancer, critical illness, heart, and intensive care coverage.
Health premium accounted for 30% of our total premium in 2019, while the health underwriting margin accounted for 25% of total underwriting margin, reflective of the lower underwriting margin as a percent of premium for health compared with life insurance. As noted under the caption Life Insurance, the Company has emphasized life insurance sales relative to health due to life’s superior profitability and its greater contribution to excess investment income.

The following table presents underwriting margin data for health insurance.

Health Insurance
Summary of Results
(Dollar amounts in thousands)
 
Nine Months Ended September 30,
 
Increase
 
2019
 
2018
 
(Decrease)
 
Amount
 
% of
Premium
 
Amount
 
% of
Premium
 
Amount
 
%
Premium and policy charges
$
802,132

 
100

 
$
758,439

 
100

 
$
43,693

 
6
 
 
 
 
 
 
 
 
 
 
 
 
Policy obligations
511,403

 
63

 
483,654

 
64

 
27,749

 
6
Required interest on reserves
(65,131
)
 
(8
)
 
(62,095
)
 
(8
)
 
(3,036
)
 
5
Net policy obligations
446,272

 
55

 
421,559

 
56

 
24,713

 
6
Commissions, premium taxes, and non-deferred acquisition expenses
70,719

 
9

 
66,502

 
9

 
4,217

 
6
Amortization of acquisition costs
102,527

 
13

 
92,539

 
12

 
9,988

 
11
Total expense
619,518

 
77

 
580,600

 
77

 
38,918

 
7
Insurance underwriting margin
$
182,614

 
23

 
$
177,839

 
23

 
$
4,775

 
3


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        GL Q3 2019 FORM 10-Q
Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


We market supplemental health insurance products through a number of distribution channels. The following table is an analysis of our health premium by distribution channel.

Health Insurance
Premium by Distribution Channel
(Dollar amounts in thousands) 
 
Nine Months Ended September 30,
 
Increase
 
2019
 
2018
 
(Decrease)
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
%
United American Independent Agency
$
308,271

 
39
 
$
283,735

 
37
 
$
24,536

 
9

Family Heritage Exclusive Agency
218,469

 
27
 
202,915

 
27
 
15,554

 
8

Liberty National Exclusive Agency
142,887

 
18
 
144,598

 
19
 
(1,711
)
 
(1
)
American Income Exclusive Agency
73,861

 
9
 
69,751

 
9
 
4,110

 
6

Direct Response
58,644

 
7
 
57,440

 
8
 
1,204

 
2

Total
$
802,132

 
100
 
$
758,439

 
100
 
$
43,693

 
6


Of total health premium ($802 million), premium from limited-benefit plans comprise $414 million, or 52%, for 2019 compared with $392 million in the same period in the prior year. Premium from Medicare Supplement products comprises the remaining 48% or $388 million for 2019 compared with $367 million in the same period in the prior year.

Annualized health premium in force increased 6% to $1.1 billion at September 30, 2019 over the prior year total.

Presented below is a table of health net sales by distribution channel.
 
Health Insurance
Net Sales by Distribution Channel
(Dollar amounts in thousands) 
 
Nine Months Ended September 30,
 
Increase
 
2019
 
2018
 
(Decrease)
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
%
United American Independent Agency
$
47,276

 
37
 
$
40,215

 
35
 
$
7,061

 
18

Family Heritage Exclusive Agency
47,453

 
37
 
45,047

 
39
 
2,406

 
5

Liberty National Exclusive Agency
17,332

 
14
 
15,706

 
14
 
1,626

 
10

American Income Exclusive Agency
13,108

 
10
 
10,697

 
9
 
2,411

 
23

Direct Response
2,273

 
2
 
3,439

 
3
 
(1,166
)
 
(34
)
Total
$
127,442

 
100
 
$
115,104

 
100
 
$
12,338

 
11


Of total net sales ($127 million), sales of limited-benefit plans comprise $78 million, or 61% of the total for 2019, compared with $72 million in the same period in the prior year. Medicare Supplement sales make up the remaining 39% or $49 million for 2019, compared with $43 million in the same period in the prior year.


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        GL Q3 2019 FORM 10-Q
Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


The following table presents health insurance first-year collected premium by distribution channel.

 Health Insurance
First-Year Collected Premium by Distribution Channel
(Dollar amounts in thousands) 
 
Nine Months Ended September 30,
 
Increase
 
2019
 
2018
 
(Decrease)
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
%
United American Independent Agency
$
51,142

 
43
 
$
45,017

 
41
 
$
6,125

 
14

Family Heritage Exclusive Agency
37,123

 
31
 
35,196

 
32
 
1,927

 
5

Liberty National Exclusive Agency
14,692

 
13
 
13,330

 
12
 
1,362

 
10

American Income Exclusive Agency
12,467

 
11
 
11,352

 
11
 
1,115

 
10

Direct Response
2,839

 
2
 
3,862

 
4
 
(1,023
)
 
(26
)
Total
$
118,263

 
100
 
$
108,757

 
100
 
$
9,506

 
9

 
First-year collected premium related to limited-benefit plans comprises $65 million, or 55% of total first-year collected premium, for 2019 compared with $60 million in the same period in the prior year. First-year collected premium from Medicare Supplement policies makes up the remaining 45% or $54 million for 2019 compared with $49 million in the same period in the prior year.

A discussion of health operations by distribution channel follows.
The United American Independent Agency consists of non-exclusive independent agencies who may also sell for other companies. The United American Independent Agency was Globe Life's largest health agency in terms of health premium income. For the period ended September 30, 2019, premium income was $308 million, representing 39% of the Company's total health premium. Net sales were $47 million, 37% of total health sales.
This agency is also Globe Life's largest producer of Medicare Supplement insurance. The United American Independent Agency represents 77% of all Medicare Supplement premium and 95% of Medicare Supplement net sales. For the period ended September 30, 2019, Medicare Supplement premium in this agency rose 9% to $300 million in 2019 over the prior period balance of $275 million. Medicare Supplement net sales increased 18% to $47 million in 2019 from the prior year period, primarily as a result of an increase in individual sales. First-year collected health premium rose 14% to $51 million. Underwriting margin as a percent of premium was 14%, down from 17% for the period ended September 30, 2018. This decrease was primarily due to higher policy obligations and amortization of deferred acquisition costs as a percentage of premium in the current period versus the year ago period.
The Family Heritage Exclusive Agency primarily markets limited-benefit supplemental health insurance in non-urban areas. Most of their policies include a cash-back feature, such as a return of premium, where any excess of premiums over claims paid is returned to the policyholder at the end of a specified period stated within the insurance policy. The Family Heritage Exclusive Agency contributed $47 million in net sales as of September 30, 2019, compared with $45 million for the same period in 2018. Health premium income was $218 million in 2019, representing 27% of Globe Life's health premium, compared to $203 million, or 27%, of health premium in 2018. Underwriting margin as a percent of premium was 25%, up from 24% for the period ended September 30, 2018. The increase was primarily attributable to favorable policy obligations in the current period compared with the prior year. The average producing agent count was 1,073 for the period ended September 30, 2019 compared with 1,042 for the same period in 2018, an increase of 3%.

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        GL Q3 2019 FORM 10-Q
Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


The Liberty National Exclusive Agency represented 18% of all Globe Life health premium income as of September 30, 2019. The Liberty National Exclusive Agency markets limited-benefit supplemental health products consisting primarily of critical illness insurance. Much of this health business is now generated through worksite marketing. In 2019, health premium at Liberty National Exclusive Agency declined $2 million to $143 million from the prior year period. Liberty National Exclusive Agency's health premium decline is primarily attributable to the runoff of a block of discontinued Medicare Supplement policies previously sold by the agency. First-year collected premium increased 10% to $15 million in 2019 compared with $13 million in 2018, reflecting the steady increase in net sales of limited-benefit plans in the agency.
Other distribution. While some of the Company's other distribution channels market health products, their main emphasis is on life insurance. On a combined basis, they accounted for 16% of health premium in 2019 and 17% in 2018. The American Income Exclusive Agency primarily markets accident plans. The Direct Response group markets primarily Medicare Supplements to employer or union-sponsored groups. Direct Response added $2 million of Medicare Supplement net sales as of September 30, 2019 and $3 million as of September 30, 2018 

ANNUITIES

Annuities represent an insignificant part of our business and are not expected to be an important part of our marketing strategy going forward.


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        GL Q3 2019 FORM 10-Q
Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


OPERATING EXPENSES

Operating expenses are included in the Corporate and Other segment and are classified into two categories: insurance administrative expenses and expenses of the Parent Company. Insurance administrative expenses generally include expenses incurred after a policy has been issued. As these expenses relate to premium for a given period, management measures the expenses as a percentage of premium income. Also included is stock compensation expense, which is viewed by the Company as a Parent Company expense. Expenses associated with the issuance of our insurance policies are reflected as acquisition expenses and included in the determination of underwriting margin.

An analysis of operating expenses is shown below.

Operating Expenses Selected Information
(Dollar amounts in thousands)

 
Nine Months Ended September 30,
 
Increase
 
2019
 
2018
 
(Decrease)
 
Amount
 
% of
Premium
 
Amount
 
% of
Premium
 
Amount
 
%
Insurance administrative expenses:
 
 
 
 
 
 
 
 
 
 
 
Salaries
$
76,084

 
2.8
 
$
74,844

 
2.9
 
$
1,240

 
1.7

Other employee costs
26,164

 
1.0
 
27,169

 
1.1
 
(1,005
)
 
(3.7
)
Information technology costs
32,501

 
1.2
 
20,878

 
0.8
 
11,623

 
55.7

Legal costs
7,546

 
0.3
 
6,371

 
0.2
 
1,175

 
18.4

Other administrative costs
36,882

 
1.4
 
37,298

 
1.5
 
(416
)
 
(1.1
)
Total insurance administrative expenses
179,177

 
6.7
 
166,560

 
6.5
 
12,617

 
7.6

 
 
 
 
 
 
 
 
 
 
 
 
Parent company expense
7,987

 
 
 
7,806

 
 
 
181

 
 
Stock compensation expense
33,348

 
 
 
29,969

 
 
 
3,379

 
 
Administrative settlements
400

 
 
 
3,590

 
 
 
(3,190
)
 
 
Legal proceedings
5,500

 
 
 
—

 
 
 
5,500

 
 
Non-operating fees
—

 
 
 
1,578

 
 
 
(1,578
)
 
 
Total operating expenses, per Condensed Consolidated Statements of Operations
$
226,412

 
 
 
$
209,503

 
 
 
$
16,909

 
8.1



The 7.6% increase in insurance administrative expenses was primarily due to an increase in information technology expenses. The increase in information technology costs reflects investments related to data analytics capabilities, administrative systems modernization, and information security programs. The increase in stock-based compensation expense was primarily due to higher expense associated with equity awards, reflecting the Parent Company's increasing share price over the past several years.

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GLOBE LIFE INC.
Management's Discussion & Analysis


INVESTMENTS

We manage our capital resources including investments, debt, and cash flow through the investment segment. Excess investment income represents the profit margin attributable to investment operations and is the measure that we use to evaluate the performance of the investment segment as described in Note 9—Business Segments. It is defined as net investment income less both the required interest on net policy liabilities and the interest cost associated with capital funding or “financing costs.”

Management also views excess investment income per diluted common share as an important and useful measure to evaluate the performance of the investment segment. It is defined as excess investment income divided by the total diluted weighted average shares outstanding, representing the contribution by the investment segment to the consolidated earnings per share of the Company. Since implementing our share repurchase program in 1986, we have used $7.7 billion of excess cash flow at the Parent Company to repurchase Globe Life Inc. (formerly Torchmark Corporation) shares after determining that the repurchases provided a greater risk adjusted after-tax return than other investment alternatives. If we had not used this excess cash to repurchase shares, but had instead invested it in interest-bearing assets, we would have earned more investment income and had more shares outstanding. As excess investment income per diluted common share incorporates all capital resources, we believe that excess investment income per diluted share is a useful measure to evaluate the investment segment. In order to put all capital resource uses on a comparable basis, we believe that excess investment income per diluted share is an appropriate measure of the investment segment.

Excess Investment Income. The following table summarizes Globe Life's investment income, excess investment income, and excess investment income per diluted common share.

Analysis of Excess Investment Income
(Dollar amounts in thousands, except for per share data) 
 
Nine Months Ended
September 30,
 
Increase
(Decrease)
 
2019
 
2018
 
Amount
 
%
Net investment income
$
683,003

 
$
658,279

 
$
24,724

 
4

Interest on net insurance policy liabilities:
 
 
 
 

 

Interest on reserves
(594,865
)
 
(572,201
)
 
(22,664
)
 
4

Interest on deferred acquisition costs
170,672

 
163,802

 
6,870

 
4

Net required interest
(424,193
)
 
(408,399
)
 
(15,794
)
 
4

Financing costs
(63,804
)
 
(66,466
)
 
2,662

 
(4
)
Excess investment income
$
195,006

 
$
183,414

 
$
11,592

 
6

 
 
 
 
 
 
 
 
Excess investment income per diluted share
$
1.75

 
$
1.58

 
$
0.17

 
11

 
 
 
 
 
 
 
 
Mean invested assets (at amortized cost)
$
16,947,539

 
$
16,101,519

 
$
846,020

 
5

Average net insurance policy liabilities(1)
10,024,627

 
9,702,313

 
322,314

 
3

Average debt and preferred securities (at amortized cost)
1,659,108

 
1,648,035

 
11,073

 
1

(1)
Net of deferred acquisition costs, excluding the associated unrealized gains and losses thereon.

Excess investment income increased 6% compared with the year-ago period, while on a per diluted common share basis it increased 11% from the prior year-ago period. Excess investment income per diluted common share generally increases at a faster pace than excess investment income because the number of diluted common shares outstanding generally decreases from year to year as result of our share repurchase program.


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GLOBE LIFE INC.
Management's Discussion & Analysis


Net investment income in 2019 was $683 million or 4% greater than the year ago period. Mean invested assets increased 5% during the first nine months of 2019 over the same period last year. The effective annual yield rate earned on the fixed maturity portfolio was 5.50% in the first nine months of 2019, compared with 5.57% a year earlier. Growth in net investment income has been negatively impacted in recent years by the low interest rate environment during which time we have invested new money at rates less than the average portfolio yield rate and reinvested the proceeds from dispositions at yield rates less than what we earned on these bonds prior to disposition. As a result, growth in net investment income has been slower than the growth in mean invested assets. While the Company may see a higher turnover rate of fixed maturity assets of 4% to 6% in 2019 due to calls of highly-rated municipal securities, we expect that the average annual turnover of fixed maturity assets during the next five years will be between 1% and 2% of the portfolio and will not have a material negative impact on net investment income.

Should the current low interest rate environment continue, the Company's net investment income will be negatively impacted primarily due to the investment of new money at rates less than the average portfolio yield rate. While net investment income would grow, it would continue to grow at rates less than the growth in mean invested assets.

Should interest rates, especially long-term rates, rise, Globe Life's net investment income would benefit due to higher interest rates on new purchases. While such a rise in interest rates could adversely affect the fair value of the fixed maturities portfolio, we could withstand an increase in interest rates of approximately 120 to 125 basis points before the net unrealized gains on our fixed maturity portfolio as of September 30, 2019 would be eliminated. Should interest rates increase further, we would not be concerned with potential interest rate driven unrealized losses in our fixed maturity portfolio because we have the intent and, more importantly, the ability to hold our fixed maturities to maturity.

Required interest on net insurance policy liabilities reduces net investment income as it is the amount of net investment income considered by management necessary to “fund” required interest on net insurance policy liabilities, which is the net of the benefit reserve liability and the deferred acquisition cost asset. As such, it is removed from the investment segment and applied to the insurance segments to offset the effect of the required interest from the insurance segments. As discussed in Note 9—Business Segments, management believes this provides a more meaningful analysis of the investment and insurance segments. Required interest is based on the actuarial interest assumptions used in discounting the benefit reserve liability and the amortization of deferred acquisition costs for our insurance policies in force.

The great majority of our life and health insurance policies are fixed interest rate protection policies, not investment products, and are accounted for under current accounting guidance for long-duration insurance products which mandates that interest rate assumptions for a particular block of business be “locked in” for the life of that block of business. Each calendar year, we set the discount rate to be used to calculate the benefit reserve liability and the amortization of the deferred acquisition cost asset for all insurance policies issued that year. That rate is based on the new money yields that we expect to earn on cash flow received in the future from policies of that issue year, and cannot be changed. The discount rate used for policies issued in the current year has no impact on the in force policies issued in prior years as the rates of all prior issue years are also locked in. As such, the overall discount rate for the entire in force block of 5.6% is a weighted average of the discount rates being used from all issue years. Changes in the overall weighted-average discount rate over time are caused by changes in the mix of the reserves and the deferred acquisition cost asset by issue year on the entire block of in-force business. Business issued in the current year has very little impact on the overall weighted average discount rate due to the size of our in force business.

Since actuarial discount rates are locked in for life on essentially all of our business, benefit reserves and deferred acquisition costs are not affected by interest rate fluctuations unless a loss recognition event occurs. Due to the strength of our underwriting margins, we do not expect an extended low interest rate environment to cause a loss recognition event.

Required interest on net insurance policy liabilities increased $16 million, or 4%, to $424 million, slightly greater than the 3% growth in average net interest-bearing insurance policy liabilities.


44
        GL Q3 2019 FORM 10-Q
Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


Financing costs for the investment segment primarily consist of interest on our various debt instruments and are deducted from excess investment income. The table below presents the components of financing costs and reconciles interest expense per the Condensed Consolidated Statements of Operations.

Analysis of Financing Costs
(Dollar amounts in thousands)
 
Nine Months Ended
September 30,
 
Increase
(Decrease)
 
2019
 
2018
 
Amount
 
%
Interest on funded debt
$
52,363

 
$
54,631

 
$
(2,268
)
 
(4
)
Interest on term loan
2,561

 
2,298

 
263

 
11

Interest on short-term debt
8,858

 
9,533

 
(675
)
 
(7
)
Other
22

 
4

 
18

 
450

Financing costs
$
63,804

 
$
66,466

 
$
(2,662
)
 
(4
)
 
In 2019, financing costs decreased 4% primarily due to refinancing long-term debt with lower rates in late 2018. More information on our debt transactions is disclosed in the Financial Condition section of this report.

Realized Gains and Losses. Our core business of providing insurance coverage requires us to maintain a large and diverse investment portfolio to support our insurance liabilities. From time to time, investments are disposed of or written down prior to maturity, resulting in realized gains or losses. Since these dispositions and write-downs are outside the course of our normal operations, management removes the effects of such gains and losses when evaluating its overall core operating results.

The Company elects to measure its investment in certain limited partnerships at fair value in accordance with the fair value option for financial instruments with changes recognized in "Realized Investment Gains (Losses)" in the Condensed Consolidated Statements of Operations. The following table summarizes our tax-effected realized gains (losses) by component.

Analysis of Realized Gains (Losses), Net of Tax
(Dollar amounts in thousands, except for per share data)
 
Nine Months Ended September 30,
 
2019
 
2018
 
Amount
 
Per Share
 
Amount
 
Per Share
Fixed maturities:
 
 
 
 
 
 
 
Sales
$
(2,017
)
 
$
(0.02
)
 
$
52

 
$
—

Matured or other redemptions(1)
16,503

 
0.15

 
9,686

 
0.08

Fair value option—change in fair value
156

 
—

 
1,900

 
0.02

Other
(85
)
 
—

 
51

 
—

Total realized gains (losses)
$
14,557

 
$
0.13

 
$
11,689

 
$
0.10

(1)
During the nine months ended September 30, 2019 and 2018, the Company recorded $161.0 million and $128.9 million of exchanges of fixed maturity securities (noncash transactions) that resulted in $15.9 million and $8.3 million, respectively in realized gains, net of tax.


45
        GL Q3 2019 FORM 10-Q
Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


Investment Acquisitions. Globe Life's investment policy calls for investing primarily in investment grade fixed maturities that meet our quality and yield objectives. We generally prefer to invest in securities with longer maturities because they more closely match the long-term nature of our policy liabilities. We believe this strategy is appropriate since our expected future cash flows are generally stable and predictable and the likelihood that we will need to sell invested assets to raise cash is low. If longer-term securities that meet our quality and yield objectives are not available, we do not relax our quality objectives; instead, we consider investing in shorter-term or lower-yielding securities taking into consideration the slope of the yield curve and other factors.

The following table summarizes selected information for fixed maturity purchases. The effective annual yield shown is based on the acquisition price and call features, if any, of the securities. For non-callable bonds, the yield is calculated to maturity date. For callable bonds acquired at a premium, the yield is calculated to the earliest known call date and call price after acquisition ("first call date"). For all other callable bonds, the yield is calculated to maturity date.


Fixed Maturity Acquisitions Selected Information
(Dollar amounts in thousands)
 
Nine Months Ended September 30,
 
2019
 
2018
Cost of acquisitions:
 
 
 
Investment-grade corporate securities
$
749,681

 
$
566,250

Investment-grade municipal securities
352,221

 
171,572

Other investment-grade securities
10,373

 
8,708

Total fixed maturity acquisitions(1)
$
1,112,275

 
$
746,530

 
 
 
 
Effective annual yield (one year compounded)(2)
4.62
%
 
4.82
%
Average life (in years, to next call)
20.1

 
16.6

Average life (in years, to maturity)
28.6

 
22.9

Average rating
A
 
A-
(1)
Fixed maturity acquisitions included unsettled trades of $55 million in 2019 and $19 million in 2018.
(2)
Tax-equivalent basis, where the yield on tax-exempt securities is adjusted to produce a yield equivalent to the pretax yield on taxable securities.

Acquisitions in both periods consisted primarily of corporate bonds with securities spanning a diversified range of issuers, industry sectors, and geographical regions. During 2019 and 2020, we anticipate calls of higher-rated municipal bonds and we plan to reinvest the proceeds from these calls in bonds with similar ratings.

We are not a party to any derivative contracts. We also do not participate in securities lending nor have any exposure to European sovereign debt at September 30, 2019.

In 2017, it was announced by the head of the United Kingdom's Financial Conduct Authority that they plan to phase out the floating rate, London Interbank Offered Rate (LIBOR), by the end of 2021. Uncertainty remains as to what will be the final replacement floating rate; however, the Federal Reserve Bank of New York has begun publishing a Secured Overnight Funding Rate (“SOFR”) which could potentially replace the U.S. dollar LIBOR. As of September 30, 2019, the Company had limited assets and liabilities that utilize LIBOR as a benchmark rate. We will continue to monitor the progress towards the establishment of a new floating rate.


46
        GL Q3 2019 FORM 10-Q
Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


Selected information concerning the fixed-maturity portfolio is as follows:

Fixed Maturity Portfolio Selected Information
 
At
 
September 30,
2019
 
December 31, 2018
 
September 30, 2018
Average annual effective yield(1)
5.45%
 
5.55%
 
5.56%
Average life, in years, to:
 
 
 
 
 
Next call(2)
16.9
 
16.9
 
17.0
Maturity(2)
19.0
 
18.7
 
18.8
Effective duration to:
 
 
 
 
 
Next call(2,3)
10.8
 
10.0
 
10.2
Maturity(2,3)
11.7
 
10.8
 
10.9
(1)
Tax-equivalent basis. The yield on tax-exempt securities is adjusted to produce a yield equivalent to the pretax yield on taxable securities.
(2)
Globe Life calculates the average life and duration of the fixed maturity portfolio two ways:
(a) based on the next call date which is the next call date for callable bonds and the maturity date for noncallable bonds, and
(b) based on the maturity date of all bonds, whether callable or not.
(3)
Effective duration is a measure of the price sensitivity of a fixed-income security to a particular change in interest rates.


47
        GL Q3 2019 FORM 10-Q
Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


Credit Risk Sensitivity. The following tables summarize certain information about the major corporate sectors and security types held in our fixed maturity portfolio at September 30, 2019 and December 31, 2018.

Fixed Maturities by Sector
September 30, 2019
(Dollar amounts in thousands)
 
 
Below Investment Grade
 
Total Fixed Maturities
 
% of Total Fixed Maturities
 
 
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 
At Amortized Cost
At Fair Value
 
 
Corporates:
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance - life, health, P&C
$
57,875

$
3,506

$
(9,788
)
$
51,593

 
$
2,054,024

$
422,976

$
(12,331
)
$
2,464,669

 
13
13
 
Banks
27,053

—

(1,204
)
25,849

 
894,755

168,365

(1,236
)
1,061,884

 
5
6
 
Other financial
97,571

531

(12,708
)
85,394

 
1,083,140

130,134

(14,205
)
1,199,069

 
7
6
 
Total financial
182,499

4,037

(23,700
)
162,836

 
4,031,919

721,475

(27,772
)
4,725,622

 
25
25
 
Utilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Electric
47,298

977

(1,632
)
46,643

 
1,420,268

368,943

(1,640
)
1,787,571

 
9
10
 
Gas and water
—

—

—

—

 
519,350

85,575

—

604,925

 
3
3
 
Total utilities
47,298

977

(1,632
)
46,643

 
1,939,618

454,518

(1,640
)
2,392,496

 
12
13
 
Industrial - Energy
 
 
 
 
 
 
 
 
 
 
 
 
 
Pipelines
40,525

300

(2,225
)
38,600

 
920,741

144,769

(9,066
)
1,056,444

 
6
6
 
Exploration and production
28,083

1,920

(569
)
29,434

 
553,761

96,077

(2,126
)
647,712

 
3
3
 
Oil field services
—

—

—

—

 
49,823

10,304

—

60,127

 
—
—
 
Refiner
—

—

—

—

 
89,769

18,189

(16
)
107,942

 
1
1
 
Driller
44,767

—

(24,628
)
20,139

 
44,767

—

(24,628
)
20,139

 
—
—
 
Total energy
113,375

2,220

(27,422
)
88,173

 
1,658,861

269,339

(35,836
)
1,892,364

 
10
10
 
Industrial - Basic materials
 
 
 
 
 
 
 
 
 
 
 
 
 
Chemicals
—

—

—

—

 
616,153

54,997

(814
)
670,336

 
4
3
 
Metals and mining
10,571

1,394

—

11,965

 
398,552

85,837

(278
)
484,111

 
2
3
 
Forestry products and paper
—

—

—

—

 
111,166

14,996

—

126,162

 
1
1
 
Total basic materials
10,571

1,394

—

11,965

 
1,125,871

155,830

(1,092
)
1,280,609

 
7
7
 
Industrial - Consumer, non-cyclical
33,569

494

(7,615
)
26,448

 
2,117,848

315,285

(9,653
)
2,423,480

 
13
13
 
Other industrials
25,773

1,239

—

27,012

 
1,317,871

211,402

(345
)
1,528,928

 
8
8
 
Industrial - Transportation
25,987

483

(138
)
26,332

 
570,694

112,443

(238
)
682,899

 
4
4
 
Other corporate sectors
113,075

5,851

(7,925
)
111,001

 
1,368,067

176,024

(10,437
)
1,533,654

 
8
8
 
Total corporates
552,147

16,695

(68,432
)
500,410

 
14,130,749

2,416,316

(87,013
)
16,460,052

 
87
88
 
Other fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Government (U.S., municipal, and foreign)
—

—

—

—

 
1,877,112

232,208

(631
)
2,108,689

 
12
11
 
Collateralized debt obligations
56,815

28,275

(6,929
)
78,161

 
56,815

28,275

(6,929
)
78,161

 
—
—
 
Other asset-backed securities
14,325

—

(276
)
14,049

 
144,379

5,937

(276
)
150,040

 
1
1
 
Mortgage-backed securities(1)
—

—

—

—

 
668

64

—

732

 
—
—
 
Total fixed maturities
$
623,287

$
44,970

$
(75,637
)
$
592,620

 
$
16,209,723

$
2,682,800

$
(94,849
)
$
18,797,674

 
100
100
(1)
Includes Government National Mortgage Association (GNMA).

Corporate securities, which consist of bonds and redeemable preferred stocks, were the largest component of the fixed maturity portfolio, representing 87% of amortized cost and 88% of fair value. The remainder of the portfolio is invested primarily in securities issued by the U.S. government and U.S. municipalities. The Company holds insignificant amounts in foreign government bonds, collateralized debt obligations, asset-backed securities, and agency mortgage-

48
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Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


backed securities. Corporate securities are diversified over a variety of industry sectors and issuers. At September 30, 2019, the total fixed maturity portfolio consisted of 629 issuers.

Fixed Maturities by Sector
December 31, 2018
(Dollar amounts in thousands)
 
 
Below Investment Grade
 
Total Fixed Maturities
 
% of Total Fixed Maturities
 
 
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 
At Amortized Cost
At Fair Value
 
 
Corporates:
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance - life, health, P&C
$
66,310

$
3,836

$
(8,674
)
$
61,472

 
$
1,941,967

$
181,552

$
(28,158
)
$
2,095,361

 
12
13
 
Banks
27,075

—

(1,348
)
25,727

 
871,485

50,205

(16,730
)
904,960

 
6
5
 
Other financial
74,958

—

(19,584
)
55,374

 
946,316

31,118

(42,627
)
934,807

 
6
6
 
Total financial
168,343

3,836

(29,606
)
142,573

 
3,759,768

262,875

(87,515
)
3,935,128

 
24
24
 
Utilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Electric
36,889

176

(3,277
)
33,788

 
1,458,193

188,136

(14,943
)
1,631,386

 
10
10
 
Gas and water
—

—

—

—

 
531,313

29,710

(9,456
)
551,567

 
3
3
 
Total utilities
36,889

176

(3,277
)
33,788

 
1,989,506

217,846

(24,399
)
2,182,953

 
13
13
 
Industrial - Energy
 
 
 
 
 
 
 
 
 
 
 
 
 
Pipelines
40,553

—

(4,762
)
35,791

 
925,689

50,835

(25,395
)
951,129

 
6
6
 
Exploration and production
17,187

—

(1,554
)
15,633

 
548,099

30,969

(17,518
)
561,550

 
3
3
 
Oil field services
—

—

(1
)
(1
)
 
49,837

3,893

(715
)
53,015

 
—
—
 
Refiner
—

—

—

—

 
84,255

8,183

(1,496
)
90,942

 
1
1
 
Driller
44,820

—

(17,247
)
27,573

 
44,820

—

(17,247
)
27,573

 
—
—
 
Total energy
102,560

—

(23,564
)
78,996

 
1,652,700

93,880

(62,371
)
1,684,209

 
10
10
 
Industrial - Basic materials
 
 
 
 
 
 
 
 
 
 
 
 
 
Chemicals
—

—

—

—

 
554,481

8,818

(25,302
)
537,997

 
4
3
 
Metals and mining
57,409

92

(1,492
)
56,009

 
386,782

33,868

(2,500
)
418,150

 
2
3
 
Forestry products and paper
—

—

—

—

 
111,612

7,329

(2,711
)
116,230

 
—
1
 
Total basic materials
57,409

92

(1,492
)
56,009

 
1,052,875

50,015

(30,513
)
1,072,377

 
6
7
 
Industrial - Consumer, non-cyclical
33,847

587

(6,710
)
27,724

 
2,024,230

76,669

(89,536
)
2,011,363

 
13
12
 
Other industrials
46,852

—

(3,311
)
43,541

 
1,364,192

62,338

(42,222
)
1,384,308

 
9
8
 
Industrial - Transportation
26,213

—

(2,592
)
23,621

 
569,786

47,496

(10,325
)
606,957

 
4
4
 
Other corporate sectors
135,873

982

(16,241
)
120,614

 
1,371,624

47,006

(69,913
)
1,348,717

 
9
9
 
Total corporates
607,986

5,673

(86,793
)
526,866

 
13,784,681

858,125

(416,794
)
14,226,012

 
88
87
 
Other fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Government (U.S., municipal, and foreign)
306

93

—

399

 
1,763,496

90,475

(4,537
)
1,849,434

 
11
11
 
Collateralized debt obligations
57,769

22,014

(6,414
)
73,369

 
57,769

22,014

(6,414
)
73,369

 
—
1
 
Other asset-backed securities
—

—

—

—

 
146,546

2,159

(633
)
148,072

 
1
1
 
Mortgage-backed securities(1)
—

—

—

—

 
979

67

(1
)
1,045

 
—
—
 
Total fixed maturities
$
666,061

$
27,780

$
(93,207
)
$
600,634

 
$
15,753,471

$
972,840

$
(428,379
)
$
16,297,932

 
100
100
(1)
Includes Government National Mortgage Association (GNMA).

At September 30, 2019, fixed maturities had a fair value of $18.8 billion, compared with $16.3 billion at December 31, 2018. The net unrealized gain position in the fixed-maturity portfolio increased from $544.5 million at December 31, 2018 to $2.6 billion at September 30, 2019 due to decreases in interest rates during the period.


49
        GL Q3 2019 FORM 10-Q
Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


For more information about our fixed maturity portfolio by component at September 30, 2019 and December 31, 2018, including a discussion of other-than-temporary impairments, an analysis of unrealized investment losses and a schedule of maturities, see Note 4—Investments.

An analysis of the fixed maturity portfolio by a composite quality rating at September 30, 2019 and December 31, 2018 is shown in the following tables. The composite rating for each security, other than private-placement securities managed by third parties, is the average of the security’s ratings as assigned by Moody’s Investor Service, Standard & Poor’s, Fitch Ratings, and Dominion Bond Rating Service, LTD. The ratings assigned by these four nationally recognized statistical rating organizations are evenly weighted when calculating the average. The composite quality rating is created using a methodology developed by the Company using ratings from the various rating agencies noted above. The composite quality rating is not a Standard & Poor's credit rating. Standard & Poor's does not sponsor, endorse or promote the composite quality rating and shall not be liable for any use of the composite quality rating. Included in the chart below are private placement fixed maturity holdings of $589 million at amortized cost ($623 million at fair value) for which the ratings were assigned by the third party managers.

Fixed Maturities by Rating
At September 30, 2019
(Dollar amounts in thousands)
 
Amortized
Cost
 
% of Total
 
Fair
Value
 
% of Total
 
Average Composite Quality Rating on Amortized Cost
Investment grade:
 
 
 
 
 
 
 
 
 
AAA
$
764,904

 
5
 
$
853,996

 
5
 
 
AA
1,210,036

 
7
 
1,367,402

 
7
 
 
A
4,550,168

 
28
 
5,594,351

 
30
 
 
BBB+
3,614,064

 
22
 
4,281,358

 
23
 
 
BBB
3,744,073

 
23
 
4,227,296

 
22
 
 
BBB-
1,703,191

 
11
 
1,880,651

 
10
 
 
Total investment grade
15,586,436

 
96
 
18,205,054

 
97
 
A-
 
 
 
 
 
 
 
 
 
 
Below investment grade:
 
 
 
 
 
 
 
 
 
BB
397,725

 
2
 
384,031

 
2
 
 
B
124,513

 
1
 
106,080

 
1
 
 
Below B
101,049

 
1
 
102,509

 
—
 
 
Total below investment grade
623,287

 
4
 
592,620

 
3
 
B+
 
$
16,209,723

 
100
 
$
18,797,674

 
100
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average composite quality rating
A-



50
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Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


Fixed Maturities by Rating
At December 31, 2018
(Dollar amounts in thousands)
 
Amortized
Cost
 
% of Total
 
Fair
Value
 
% of Total
 
Average Composite Quality Rating on Amortized Cost
Investment grade:
 
 
 
 
 
 
 
 
 
AAA
$
750,101

 
5
 
$
766,341

 
5
 
 
AA
1,222,158

 
8
 
1,282,834

 
8
 
 
A
3,983,869

 
25
 
4,378,152

 
26
 
 
BBB+
3,606,143

 
23
 
3,707,078

 
23
 
 
BBB
3,695,585

 
23
 
3,746,661

 
23
 
 
BBB-
1,829,554

 
12
 
1,816,232

 
11
 
 
Total investment grade
15,087,410

 
96
 
15,697,298

 
96
 
A-
 
 
 
 
 
 
 
 
 
 
Below investment grade:
 
 
 
 
 
 
 
 
 
BB
403,649

 
3
 
362,090

 
2
 
 
B
164,052

 
1
 
123,904

 
1
 
 
Below B
98,360

 
—
 
114,640

 
1
 
 
Total below investment grade
666,061

 
4
 
600,634

 
4
 
B+
 
$
15,753,471

 
100
 
$
16,297,932

 
100
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average composite quality rating
BBB+

The overall quality rating of the portfolio has increased to A- from BBB+ since the prior year, the first time since 2016. The increase was aided by reduced exposure to below investment grade securities as well as acquisitions of fixed maturities rated A and above, primarily in municipal sector.

Fixed maturities rated BBB are 56% of the total portfolio as compared to 58% at the end of 2018. While this ratio is high relative to our peers, the Company has no exposure to higher risk assets such as derivatives or equities, and little exposure to commercial mortgages and asset backed securities. We consider that BBB securities provide the best risk adjusted capital adjusted returns, largely due to our unique ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets.


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Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


An analysis of changes in our portfolio of below-investment grade fixed maturities at amortized cost is as follows:

Below-Investment Grade Fixed Maturities
(Dollar amounts in thousands)
 
Nine Months Ended
September 30,
 
2019
 
2018
Balance at beginning of period
$
666,061

 
$
702,256

Downgrades by rating agencies
86,519

 
—

Upgrades by rating agencies
(65,700
)
 
—

Dispositions
(67,014
)
 
(23,154
)
Amortization and other
3,421

 
2,847

Balance at end of period
$
623,287

 
$
681,949


Our investment policy calls for investing primarily in fixed maturities that are investment grade and meet our quality and yield objectives. Thus, any increases in below-investment grade issues are typically a result of ratings downgrades of existing holdings. Below-investment grade bonds at amortized cost were 12% of our shareholders’ equity, excluding the effect of unrealized gains and losses on fixed maturities as of September 30, 2019.

SHARE PURCHASES

Globe Life Inc. has an ongoing share repurchase program that began in 1986, and is reviewed quarterly by management and annually reaffirmed by the Board of Directors. The program was reaffirmed on August 8, 2019. With no specified authorization amount, we determine the amount of repurchases based on the amount of the excess cash flow at the Parent Company, general market conditions, and other alternative uses. The majority of these purchases are made from excess cash flow. Excess cash flow at the Parent Company is primarily comprised of dividends received from the insurance subsidiaries less interest expense paid on its debt, dividends paid to Parent Company shareholders, and other limited operating activities. Additionally, when stock options are exercised, proceeds from these exercises and the resulting tax benefit are used to repurchase additional shares on the open market to minimize dilution as a result of the option exercises. The Board of Directors has authorized the Parent Company’s share repurchase program in amounts and with timing that management, in consultation with the Board, determines to be in the best interest of the Company and its shareholders.

The following chart summarizes share purchases for the nine month periods ended September 30, 2019 and 2018.

Analysis of Share Purchases
(Amounts in thousands, except per share data) 
 
Nine Months Ended September 30,
 
2019
 
2018
 
Shares
 
Amount
 
Average
Price
 
Shares
 
Amount
 
Average
Price
Purchases with:
 
 
 
 
 
 
 
 
 
 
 
Excess cash flow at the Parent Company
3,002

 
$
257,246

 
$
85.70

 
2,919

 
$
249,670

 
$
85.54

Option exercise proceeds
889

 
77,223

 
86.82

 
555

 
48,644

 
87.57

Total
3,891

 
$
334,469

 
$
85.95

 
3,474

 
$
298,314

 
$
85.87

Throughout the remainder of this discussion, share purchases will only refer to those made from excess cash flow at the Parent Company.


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Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


FINANCIAL CONDITION
 
Liquidity. Liquidity provides Globe Life with the ability to meet on demand the cash commitments required to support our business operations and meet our financial obligations. Our liquidity is primarily derived from three sources: positive cash flow from operations, a portfolio of marketable securities, and a line of credit facility.

Insurance Subsidiary Liquidity. The operations of our insurance subsidiaries have historically generated substantial cash inflows in excess of immediate cash needs. Sources of cash flows for the insurance subsidiaries include primarily premium and investment income. Cash outflows from operations include policy benefit payments, commissions, administrative expenses, and taxes. The funds to provide for policy benefits, the majority of which are paid in future periods, are invested primarily in long-term fixed maturities as they better match the long-term nature of these obligations. In addition to investment income, maturities and scheduled repayments in the investment portfolio are sources of cash. Excess cash available from the insurance subsidiaries’ operations is generally distributed as a dividend to the Parent Company, subject to regulatory restrictions. The dividends are generally paid in amounts equal to the subsidiaries’ prior year statutory net income excluding realized capital gains. While the leading source of the excess cash is investment income, a significant portion of the excess cash also comes from underwriting income due to our high underwriting margins and effective expense control.
 
Parent Company Liquidity. An important source of Parent Company liquidity is the dividends from its insurance subsidiaries. These dividends are received throughout the year and are used by the Parent Company to pay dividends on common and preferred stock, interest and principal repayment requirements on Parent Company debt, and operating expenses of the Parent Company.
 
Nine Months Ended
September 30,
 
Twelve Months Ended
December 31,
 
2019
 
2018
 
Projected 2019
 
2018
Liquidity Sources:
 
 
 
 
 
 
 
Dividends from Subsidiaries
$
430,114

 
$
372,268

 
$
480,000

 
$
448,142

Excess Cash Flows
354,528

 
304,037

 
370,000

 
349,243


Additional sources of liquidity for the Parent Company are cash, intercompany receivables, intercompany borrowings, public debt markets, and a credit facility. At September 30, 2019, the Parent Company had $59 million of invested cash and net intercompany receivables. The credit facility is discussed below.


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GLOBE LIFE INC.
Management's Discussion & Analysis


Short-Term Borrowings. An additional source of Parent Company liquidity is a credit facility with a group of lenders allowing for unsecured revolving borrowings and stand-by letters of credit up to $750 million, which could be extended up to $1 billion. The Parent Company may request the extension, however, it is not guaranteed. Up to $250 million in letters of credit can be issued against the facility. The facility serves as a back-up credit line for a commercial paper program under which commercial paper may be issued at any time, with total commercial paper outstanding not to exceed the facility maximum, less any letters of credit issued. Interest charged on the commercial paper program resembles variable rate debt due to its short term nature. This facility was amended in May 2016 to extend the maturity date of the facility to May 2021. The amendment also allowed for an additional $100 million term loan to be issued under the facility rate structure. The term loan was issued during 2016 and will be repaid in quarterly escalating installments with a balloon payment of $75 million due in May 2021. Interest on the term loan is computed and paid monthly at 125 basis points plus 1 month LIBOR. In accordance with the agreement, certain covenants regarding capitalization must be met. As of September 30, 2019, the Parent Company was in full compliance with those covenants.

Commercial paper outstanding and any amortization payments of the term loan due within one year are included in short-term debt. The remaining balance of the term loan is included in long-term debt.

The following table presents certain information about our commercial paper borrowings.

Credit Facility—Commercial Paper
(Dollar amounts in thousands)
 
At
 
September 30,
2019
 
December 31,
2018
 
September 30,
2018
Balance of commercial paper at end of period (par value)
$
225,000

 
$
302,100

 
$
317,318

Annualized interest rate
2.39
%
 
2.93
%
 
2.57
%
Letters of credit outstanding(1)
$
150,000

 
$
155,000

 
$
155,000

Remaining amount available under credit line
375,000

 
292,900

 
277,682

(1)
On April 2, 2019, the letters of credit were amended to reduce the current amount outstanding to $150 million from $155 million as of March 31, 2019. As of September 30, 2019, the outstanding balance remained unchanged.

Credit Facility—Commercial Paper Activity
(Dollar amounts in thousands)
 
Nine Months Ended September 30,
 
2019
 
2018
Average balance of commercial paper outstanding during period (par value)
$
296,953

 
$
386,663

Daily-weighted average interest rate (annualized)
2.76
%
 
2.32
%
Maximum daily amount outstanding during period (par value)
$
385,000

 
$
525,990


The decrease in commercial paper during the nine months ended September 30, 2019 reflects timing of cash needs at the Parent Company. We had no difficulties in accessing the commercial paper market under this facility during the nine months ended September 30, 2019 and 2018.

Globe Life expects to have readily available funds for 2020 and the foreseeable future to conduct its operations and to maintain target capital ratios in the insurance subsidiaries through internally-generated cash flow and the credit facility. In the unlikely event that more liquidity is needed, the Parent Company could generate additional funds through multiple sources including, but not limited to, the issuance of debt, an additional short-term credit facility, and intercompany borrowing.


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GLOBE LIFE INC.
Management's Discussion & Analysis


Consolidated Liquidity. Consolidated net cash inflows from operations were $1.0 billion in the first nine months of 2019, compared with $937 million in the same period of 2018. The increase is primarily attributable to fluctuations in the settlement of certain amounts included in other liabilities. In addition to cash inflows from operations, our insurance companies received proceeds from dispositions of fixed maturities available for sale in the amount of $605 million during the 2019 period. As previously noted under the caption Credit Facility, the Parent Company has in place a line of credit facility. The insurance companies have no additional outstanding credit facilities.

Cash and short-term investments were $144 million at September 30, 2019, compared with $184 million at December 31, 2018. In addition to these liquid assets, the entire $18.8 billion (fair value at September 30, 2019) portfolio of fixed income securities is available for sale in the event of an unexpected need. Approximately 97% of our fixed income securities are publicly traded, freely tradable under SEC Rule 144, or qualified for resale under SEC Rule 144A. We generally expect to hold fixed income securities to maturity, and even though these securities are classified as available for sale, we have the ability and intent to hold any securities which are temporarily impaired until they mature. Our strong cash flows from operations, on-going investment maturities, and credit line availability make any need to sell securities for liquidity highly unlikely.
Capital Resources. The Parent Company's capital structure consists of short-term debt (the commercial paper facility and the current maturity of funded debt), long-term funded debt, and shareholders’ equity.


Long-Term Borrowings. The outstanding long-term debt at book value was $1.4 billion at September 30, 2019 and December 31, 2018. An analysis of debt issues outstanding is as follows at September 30, 2019.

Selected Information about Debt Issues
As of September 30, 2019
(Dollar amounts in thousands)
Instrument
Issue Date
 
Maturity Date
 
Coupon Rate
 
Interest Payment Dates
 
Par
Value
 
Book
Value
 
Fair
Value
Notes
5/27/1993
 
05/15/2023
 
7.875%
 
semiannual
 
$
165,612

 
$
164,656

 
$
195,076

Senior notes(1)
9/24/2012
 
09/15/2022
 
3.800%
 
semiannual
 
150,000

 
149,010

 
154,397

Senior notes
9/27/2018
 
09/15/2028
 
4.550%
 
semiannual
 
550,000

 
543,593

 
613,811

Junior subordinated debentures
5/17/2016
 
06/15/2056
 
6.125%
 
quarterly
 
300,000

 
290,567

 
322,200

Junior subordinated debentures
11/17/2017
 
11/17/2057
 
5.275%
 
semiannual
 
125,000

 
123,364

 
101,384

Term loan
6/13/2016
 
05/17/2021
 
3.362%
(2) 
monthly
 
88,750

 
88,750

 
88,750

 
 
 
 
 
 
 
 
 
1,379,362

 
1,359,940

 
1,475,618

Less current maturity of term loan(3)
 
 
 
8,750

 
8,750

 
8,750

Total long-term debt
 
 
 
1,370,612

 
1,351,190

 
1,466,868

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current maturity of term loan(3)
 
 
 
8,750

 
8,750

 
8,750

Commercial paper
 
 
 
225,000

 
224,564

 
224,564

Total short-term debt
 
 
 
233,750

 
233,314

 
233,314

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total debt
 
 
 
$
1,604,362

 
$
1,584,504

 
$
1,700,182

(1)
An additional $150 million par value and book value is held by insurance subsidiaries that eliminates in consolidation.
(2)
Interest paid at 1 month LIBOR plus 125 basis points, resets each month.
(3)
The current amount of the term loan due of $8.8 million is classified as short-term debt.

The Company has not issued any additional long-term debt since the issuance of the $550 million 4.550% Senior Notes in September 2018.

As previously noted under the caption Results of Operations in this report, the Parent Company acquired 3.0 million of its outstanding common shares under its share repurchase program during the first nine months of 2019. These

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GLOBE LIFE INC.
Management's Discussion & Analysis


shares were acquired at a cost of $257 million (average of $85.70 per share), compared with purchases of 2.9 million shares at a cost of $250 million (average of $85.54 per share) in the first nine months of 2018.
On September 3, 2019, the Parent Company announced that it had declared a quarterly dividend of $0.1725 per share. This dividend was paid on November 1, 2019.

Shareholders’ equity was $7.3 billion at September 30, 2019. This compares with $5.4 billion at December 31, 2018 and $5.5 billion at September 30, 2018. During the nine months since December 31, 2018, shareholders’ equity increased primarily due to $1.6 billion of after-tax unrealized gains in the fixed-maturity portfolio as interest rates have decreased over the period. In addition, shareholders' equity was increased by net income of $574 million. Share purchases of $257 million noted above during the period reduced shareholders’ equity.

Our goal is to maintain statutory capital within our insurance subsidiaries at levels necessary to support our current ratings. Globe Life is targeting a consolidated Company Action Level Risk Based Capital (RBC) ratio in the range of 300% to 320% for 2019. The Company believes this capital level is more than adequate and is sufficient to support its current ratings given the nature of its business and its risk profile. At the end of 2018, the RBC ratio was 326%. For 2020, we will continue to target a consolidated RBC ratio in the range of 300% to 320%.

Globe Life is required under GAAP to revalue its available for sale fixed maturity portfolio to fair market value at the end of each accounting period. These changes, net of their associated impact on deferred acquisition costs and income tax, are reflected directly in shareholders’ equity.

While GAAP requires our fixed maturity assets to be revalued, it does not permit interest-bearing insurance policy liabilities supported by those assets to be valued at fair value in a consistent manner, with changes in value applied directly to shareholders’ equity. However, due to the size of both the investment portfolio and our policy liabilities, this inconsistency in measurement can have a material impact on shareholders’ equity. Because of the long-term nature of our fixed maturities and liabilities and the strong cash flows generated by our insurance subsidiaries, we have the intent and ability to hold our securities to maturity. As such, we do not expect to incur realized gains or losses due to fluctuations in the market value of fixed maturities caused by interest rate changes or losses caused by temporarily illiquid markets. Accordingly, management removes the effect of this rule when analyzing the Company's balance sheet, capital structure, and financial ratios in order to provide a consistent and meaningful portrayal of the Company’s financial position from period to period.


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Table of Contents
GLOBE LIFE INC.
Management's Discussion & Analysis


The following table presents selected data related to our capital resources. Additionally, the table presents the effect of this accounting guidance on relevant line items, so that investors and other financial statement users may determine its impact on Globe Life's capital structure. Excluding the effect of unrealized gains and losses on the fixed maturity portfolio from shareholders' equity is considered non-GAAP. Below we include the reconciliation to GAAP.

Selected Financial Data
(Dollar amounts in thousands, except per share data)
 
At
 
September 30, 2019
 
December 31, 2018
 
September 30, 2018
 
GAAP
 
Effect of
Accounting
Rule
Requiring
Revaluation(1)
 
GAAP
 
Effect of
Accounting
Rule
Requiring
Revaluation(1)
 
GAAP
 
Effect of
Accounting
Rule
Requiring
Revaluation(1)
Fixed maturities
$
18,797,674

 
$
2,587,951

 
$
16,297,932

 
$
544,461

 
$
16,231,471

 
$
769,107

Deferred acquisition costs(2)
4,281,018

 
(7,897
)
 
4,137,925

 
(5,270
)
 
4,091,601

 
(7,150
)
Total assets
25,791,906

 
2,580,054

 
23,095,722

 
539,191

 
23,469,488

 
761,957

Short-term debt
233,314

 
—

 
307,848

 
—

 
615,011

 
—

Long-term debt
1,351,190

 
—

 
1,357,185

 
—

 
1,358,947

 
—

Shareholders' equity
7,312,531

 
2,038,243

 
5,415,177

 
425,961

 
5,538,905

 
601,946

 
 
 
 
 
 
 
 
 
 
 
 
Book value per diluted share
65.96

 
18.38

 
48.11

 
3.79

 
48.35

 
5.25

Debt to capitalization(3)
17.8
%
 
(5.3
)%
 
23.5
%
 
(1.5
)%
 
26.3
%
 
(2.3
)%
 
 
 
 
 
 
 
 
 
 
 
 
Diluted shares outstanding
110,855

 
 
 
112,561

 
 
 
114,559

 
 
Actual shares outstanding
108,444

 
 
 
110,693

 
 
 
112,168

 
 
 
(1)
Amount added to (deducted from) comprehensive income to produce the stated GAAP item, per accounting rule ASC 320-10-35-1.
(2)
Includes the value of business acquired (VOBA).
(3)
Globe Life Inc.'s debt covenants require that the effect of this accounting rule be removed to determine this ratio. This ratio is computed by dividing total debt by the sum of total debt and shareholders’ equity.


Interest coverage was 12.0 times in the first nine months of 2019, compared with 10.9 times in the 2018 period. Interest coverage is computed by dividing interest expense into the sum of pre-tax income and interest expense.


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CAUTIONARY STATEMENTS
 
We caution readers regarding certain forward-looking statements contained in the foregoing discussion and elsewhere in this document, and in any other statements made by, or on behalf of Globe Life Inc. whether or not in future filings with the Securities and Exchange Commission. Any statement that is not a historical fact, or that might otherwise be considered an opinion or projection concerning the Company or its business, whether express or implied, is meant as and should be considered a forward-looking statement. Such statements represent management's opinions concerning future operations, strategies, financial results or other developments. We specifically disclaim any obligation to update or revise any forward-looking statement because of new information, future developments, or otherwise.
 
Forward-looking statements are based upon estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control. If these estimates or assumptions prove to be incorrect, the actual results of Globe Life Inc. may differ materially from the forward-looking statements made on the basis of such estimates or assumptions. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments, which may be national in scope, related to the insurance industry generally, or applicable to the Company specifically. Such events or developments could include, but are not necessarily limited to:
 
1)
Economic and other conditions leading to unexpected changes in lapse rates and/or sales of our policies, as well as levels of mortality, morbidity, and utilization of health care services that differ from Globe Life's assumptions;
2)
Regulatory developments, including changes in accounting standards or governmental regulations (particularly those impacting taxes and changes to the Federal Medicare program that would affect Medicare Supplement);
3)
Market trends in the senior-aged health care industry that provide alternatives to traditional Medicare (such as Health Maintenance Organizations and other managed care or private plans) and that could affect the sales of traditional Medicare Supplement insurance.
4)
Interest rate changes that affect product sales and/or investment portfolio yield;
5)
General economic, industry sector or individual debt issuers’ financial conditions that may affect the current market value of securities we own, or that may impair an issuer’s ability to make principal and/or interest payments due on those securities;
6)
Changes in pricing competition;
7)
Litigation results;
8)
Levels of administrative and operational efficiencies that differ from our assumptions;
9)
The ability to obtain timely and appropriate premium rate increases for health insurance policies from our regulators;
10)
The customer response to new products and marketing initiatives; and
11)
Reported amounts in the consolidated financial statements which are based on management estimates and judgments which may differ from the actual amounts ultimately realized.
12)
Compromise by a malicious actor or other event that causes a loss of secure data from, or inaccessibility to, our computer and other information technology systems.

Readers are also directed to consider other risks and uncertainties described in other documents on file with the Securities and Exchange Commission.


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Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
There have been no quantitative or qualitative changes with respect to market risk exposure during the nine months ended September 30, 2019.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures: Globe Life Inc., under the direction of the Co-Chairmen and Chief Executive Officers and the Executive Vice President and Chief Financial Officer, has established disclosure controls and procedures that are designed to ensure that information required to be disclosed by Globe Life Inc. in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to Globe Life Inc.'s management, including the Co-Chairmen and Chief Executive Officers and the Executive Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
 
As of the end of the fiscal period completed September 30, 2019, an evaluation was performed under the supervision and with the participation of Globe Life Inc. management, including the Co-Chairmen and Chief Executive Officers and the Executive Vice President and Chief Financial Officer, of the disclosure controls and procedures (as those terms are defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon their evaluation, the Co-Chairmen and Chief Executive Officers and the Executive Vice President and Chief Financial Officer have concluded that disclosure controls and procedures are effective as of the date of this Form 10-Q. In compliance with Section 302 of the Sarbanes Oxley Act of 2002 (18 U.S.C. § 1350), each of these officers executed a Certification included as an exhibit to this Form 10-Q.

Changes in Internal Control over Financial Reporting: As of the quarter ended September 30, 2019, there have not been any changes in Globe Life Inc.'s internal control over financial reporting or in other factors that could significantly affect this control over financial reporting subsequent to the date of their evaluation which have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
 
Part II—Other Information

Item 1. Legal Proceedings

Globe Life Inc. and its subsidiaries, in common with the insurance industry in general, are subject to litigation, including putative class action litigation, claims involving tax matters, alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of the Parent Company's insurance subsidiaries, employment discrimination, and miscellaneous other causes of action. Based upon information presently available, and in light of legal and other factual defenses available to Globe Life, management does not believe that such litigation will have a material adverse effect on Globe Life's financial condition, future operating results or liquidity; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future. This bespeaks caution, particularly in states with reputations for high punitive damage verdicts. Globe Life's management recognizes that large punitive damage awards bearing little or no relation to actual damages continue to be awarded by juries in jurisdictions in which the Company has substantial business, creating the potential for unpredictable material adverse judgments in any given punitive damage suit.

Additional discussion regarding litigation and unclaimed property audits is provided in Note 5—Commitments and Contingencies.

Item 1A. Risk Factors
 
The Company had no material changes to its risk factors.


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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
Purchases of Certain Equity Securities by the Issuer and Others for the Third Quarter of 2019
Period
 
(a) Total Number
of Shares
Purchased
 
(b) Average
Price Paid
Per Share
 
(c) Total Number of
Shares Purchased as 
Part
of Publicly Announced
Plans or Programs
 
(d) Maximum Number
of Shares (or
Approximate Dollar
Amount) that May
Yet Be Purchased
Under the Plans or
Programs
July 1-31, 2019
 
303,661

 
$
91.56

 
303,661

 
 
August 1-31, 2019
 
613,953

 
86.81

 
613,953

 
 
September 1-30, 2019
 
246,785

 
94.31

 
246,785

 
 

On August 8, 2019, the Globe Life Inc. Board of Directors reaffirmed its continued authorization of its stock repurchase program in amounts and with timing that management, in consultation with the Board, determined to be in the best interest of the Company. The program has no defined expiration date or maximum shares to be repurchased.

Item 6. Exhibits
 
Exhibit No.
 
Description
31.1
  
31.2
  
31.3
  
32.1
  
101.INS
  
XBRL Instance Document- the instance document does not appear in the Interactive Data file because the XBRL tags are embedded within the Inline XBRL document.
101.SCH
 
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB
 
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF
 
Inline XBRL Taxonomy Extension Definition Linkbase Document.
104
 
Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101).



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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
 
GLOBE LIFE INC.
 
 
 
Date: November 11, 2019
 
 
/s/ Gary L. Coleman
 
 
 
Gary L. Coleman
 
 
 
Co-Chairman and Chief Executive Officer
 
 
 
Date: November 11, 2019
 
 
/s/ Larry M. Hutchison
 
 
 
Larry M. Hutchison
 
 
 
Co-Chairman and Chief Executive Officer
 
 
 
Date: November 11, 2019
 
 
/s/ Frank M. Svoboda
 
 
 
Frank M. Svoboda
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 


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