GLOBE LIFE INC. - Quarter Report: 2019 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one) | |
ý | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2019 | |
¨ | 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
![torchmarklogocolora01rgba49.jpg](https://www.sec.gov/Archives/edgar/data/0000320335/000032033519000015/torchmarklogocolora01rgba49.jpg)
TORCHMARK CORPORATION
(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) |
Registrant’s telephone number, including area code (972) 569-4000
NONE
Former name, former address and former fiscal year, if changed since last report.
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $1.00 par value per share | TMK | 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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes ý 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 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 | ý | 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 ý
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 April 30, 2019 | |||
Common Stock, $1.00 Par Value | 109,940,525 |
INDEX
Page | |||
Item 1. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 6. | |||
PART I—FINANCIAL INFORMATION
Item 1. | Condensed Consolidated Financial Statements |
TORCHMARK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollar amounts in thousands, except per share data)
March 31, 2019 | December 31, 2018 | ||||||
Assets: | |||||||
Investments: | |||||||
Fixed maturities—available for sale, at fair value (amortized cost: 2019—$15,988,228; 2018—$15,753,471) | $ | 17,223,585 | $ | 16,297,932 | |||
Policy loans | 555,456 | 550,066 | |||||
Other long-term investments (includes: 2019—$118,556; 2018—$108,241 under the fair value option) | 231,934 | 207,258 | |||||
Short-term investments | 125,759 | 63,288 | |||||
Total investments | 18,136,734 | 17,118,544 | |||||
Cash | 67,342 | 121,026 | |||||
Accrued investment income | 255,148 | 243,003 | |||||
Other receivables | 419,610 | 415,157 | |||||
Deferred acquisition costs | 4,185,231 | 4,137,925 | |||||
Goodwill | 441,591 | 441,591 | |||||
Other assets | 559,225 | 549,899 | |||||
Assets related to discontinued operations | 68,557 | 68,577 | |||||
Total assets | $ | 24,133,438 | $ | 23,095,722 | |||
Liabilities: | |||||||
Future policy benefits | $ | 14,084,082 | $ | 13,953,826 | |||
Unearned and advance premiums | 66,924 | 61,208 | |||||
Policy claims and other benefits payable | 357,294 | 350,826 | |||||
Other policyholders' funds | 96,986 | 97,459 | |||||
Total policy liabilities | 14,605,286 | 14,463,319 | |||||
Current and deferred income taxes payable | 1,225,497 | 1,047,737 | |||||
Other liabilities | 557,824 | 453,270 | |||||
Short-term debt | 294,378 | 307,848 | |||||
Long-term debt (estimated fair value: 2019—$1,458,751; 2018—$1,384,455) | 1,355,601 | 1,357,185 | |||||
Liabilities related to discontinued operations | 51,426 | 51,186 | |||||
Total liabilities | 18,090,012 | 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 | 518,529 | 524,414 | |||||
Accumulated other comprehensive income (loss) | 870,067 | 319,475 | |||||
Retained earnings | 5,364,820 | 5,213,468 | |||||
Treasury stock, at cost: (2019—11,292,000 shares; 2018—10,525,147 shares) | (831,208 | ) | (763,398 | ) | |||
Total shareholders’ equity | 6,043,426 | 5,415,177 | |||||
Total liabilities and shareholders’ equity | $ | 24,133,438 | $ | 23,095,722 |
See accompanying Notes to Condensed Consolidated Financial Statements.
1
TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Revenue: | |||||||
Life premium | $ | 624,289 | $ | 598,303 | |||
Health premium | 266,684 | 251,798 | |||||
Other premium | — | 5 | |||||
Total premium | 890,973 | 850,106 | |||||
Net investment income | 226,673 | 218,084 | |||||
Realized gains (losses) | 1,329 | 1,951 | |||||
Other income | 241 | 295 | |||||
Total revenue | 1,119,216 | 1,070,436 | |||||
Benefits and expenses: | |||||||
Life policyholder benefits | 409,692 | 400,581 | |||||
Health policyholder benefits | 170,017 | 160,619 | |||||
Other policyholder benefits | 8,048 | 8,689 | |||||
Total policyholder benefits | 587,757 | 569,889 | |||||
Amortization of deferred acquisition costs | 135,822 | 129,620 | |||||
Commissions, premium taxes, and non-deferred acquisition costs | 73,465 | 69,639 | |||||
Other operating expense | 72,793 | 66,824 | |||||
Interest expense | 21,278 | 21,622 | |||||
Total benefits and expenses | 891,115 | 857,594 | |||||
Income before income taxes | 228,101 | 212,842 | |||||
Income tax benefit (expense) | (42,707 | ) | (39,131 | ) | |||
Income from continuing operations | 185,394 | 173,711 | |||||
Income (loss) from discontinued operations, net of tax | (49 | ) | (111 | ) | |||
Net income | $ | 185,345 | $ | 173,600 | |||
Basic net income (loss) per common share: | |||||||
Continuing operations | $ | 1.68 | $ | 1.52 | |||
Discontinued operations | — | — | |||||
Basic net income per common share | $ | 1.68 | $ | 1.52 | |||
Diluted net income (loss) per common share: | |||||||
Continuing operations | $ | 1.65 | $ | 1.49 | |||
Discontinued operations | — | — | |||||
Diluted net income per common share | $ | 1.65 | $ | 1.49 |
See accompanying Notes to Condensed Consolidated Financial Statements.
2
TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollar amounts in thousands)
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Net income | $ | 185,345 | $ | 173,600 | |||
Other comprehensive income (loss): | |||||||
Investments: | |||||||
Unrealized gains (losses) on fixed maturities: | |||||||
Unrealized holding gains (losses) arising during period | 693,482 | (611,548 | ) | ||||
Reclassification adjustments included in net income | (2,444 | ) | (696 | ) | |||
Foreign exchange adjustment on fixed maturities recorded at fair value | (142 | ) | (585 | ) | |||
Unrealized gains (losses) on fixed maturities | 690,896 | (612,829 | ) | ||||
Unrealized gains (losses) on other investments | 4,043 | (2,853 | ) | ||||
Total unrealized investment gains (losses) | 694,939 | (615,682 | ) | ||||
Less applicable tax (expense) benefit | (145,936 | ) | 129,289 | ||||
Unrealized investment gains (losses), net of tax | 549,003 | (486,393 | ) | ||||
Deferred acquisition costs: | |||||||
Unrealized gains (losses) attributable to deferred acquisition costs | (3,199 | ) | 450 | ||||
Less applicable tax (expense) benefit | 671 | (94 | ) | ||||
Unrealized gains (losses) attributable to deferred acquisition costs, net of tax | (2,528 | ) | 356 | ||||
Foreign exchange translation: | |||||||
Foreign exchange translation adjustments, other than fixed maturities | 3,089 | (1,299 | ) | ||||
Less applicable tax (expense) benefit | (647 | ) | 276 | ||||
Foreign exchange translation adjustments, other than fixed maturities, net of tax | 2,442 | (1,023 | ) | ||||
Pension: | |||||||
Amortization of pension costs | 2,120 | 3,778 | |||||
Less applicable tax (expense) benefit | (445 | ) | (793 | ) | |||
Pension adjustments, net of tax | 1,675 | 2,985 | |||||
Other comprehensive income (loss) | 550,592 | (484,075 | ) | ||||
Comprehensive income (loss) | $ | 735,937 | $ | (310,475 | ) |
See accompanying Notes to Condensed Consolidated Financial Statements.
3
TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
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, 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 ($0.1600 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 | ||||||||||||
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 ($.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 |
(1) | See further discussion in Note 2—New Accounting Standards. |
See accompanying Notes to Condensed Consolidated Financial Statements.
4
TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollar amounts in thousands)
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Cash provided from operating activities | $ | 423,285 | $ | 382,389 | |||
Cash provided from (used for) investing activities: | |||||||
Disposition of investments: | |||||||
Fixed maturities available for sale—sold | 34,997 | — | |||||
Fixed maturities available for sale—matured or other redemptions | 188,253 | 74,019 | |||||
Total investments disposed | 223,250 | 74,019 | |||||
Acquisition of investments: | |||||||
Fixed maturities—available for sale | (421,111 | ) | (358,753 | ) | |||
Other long-term investments | (22,971 | ) | (53,853 | ) | |||
Total investments acquired | (444,082 | ) | (412,606 | ) | |||
Net (increase) decrease in policy loans | (5,390 | ) | (2,854 | ) | |||
Net (increase) decrease in short-term investments | (62,471 | ) | 47,048 | ||||
Additions to properties | (7,015 | ) | (11,966 | ) | |||
Investment in low-income housing interests | (10,054 | ) | (7,518 | ) | |||
Cash provided from (used for) investing activities | (305,762 | ) | (313,877 | ) | |||
Cash provided from (used for) financing activities: | |||||||
Issuance of common stock | 11,592 | 13,569 | |||||
Cash dividends paid to shareholders | (17,696 | ) | (17,194 | ) | |||
Repayment of debt | (1,250 | ) | (625 | ) | |||
Net borrowing (repayment) of commercial paper | (14,095 | ) | 36,464 | ||||
Acquisition of treasury stock | (110,896 | ) | (109,954 | ) | |||
Net receipts (payments) from deposit-type product | (37,136 | ) | (25,603 | ) | |||
Cash provided from (used for) financing activities | (169,481 | ) | (103,343 | ) | |||
Effect of foreign exchange rate changes on cash | (1,726 | ) | 4,883 | ||||
Net increase (decrease) in cash | (53,684 | ) | (29,948 | ) | |||
Cash at beginning of year | 121,026 | 118,563 | |||||
Cash at end of period | $ | 67,342 | $ | 88,615 |
See accompanying Notes to Condensed Consolidated Financial Statements.
5
TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 1—Significant Accounting Policies
Basis of Presentation: The accompanying condensed consolidated financial statements of Torchmark Corporation (Torchmark or alternatively, the Company) 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 March 31, 2019, and the condensed consolidated results of operations, comprehensive income, and cash flows for the periods ended March 31, 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 consolidated financial statements as of March 31, 2019. |
Accounting Pronouncements Yet to be Adopted | ||||||
Standard | Description | Effective date | Effect on the consolidated financial statements | |||
ASU No. 2016-13/2019-04, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, with clarification guidance issued in April 2019. | This standard provides financial statement users with more decision-useful information about the expected credit losses on financial instruments as well as to change the loss impairment methodology for available-for-sale debt securities by use of an allowance rather than a direct write-down. | This standard will become effective on January 1, 2020. The applicable section of the standard related to debt securities requires a prospective transition. | The Company is in the process of determining the impact this guidance will have on the consolidated financial statements. | |||
6
TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 2—New Accounting Standards (continued)
Standard | Description | Effective date | Effect on the consolidated financial statements | |||
ASU No. 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts | 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, and should be applied on a retrospective basis. Early adoption of the amendments is permitted. | ASU 2018-12 will require changes to the Company's actuarial systems and data inputs related to the valuation of the future policy benefits. Additionally, it will significantly expand the Company's disclosures. The Company is in the process of evaluating the impact this guidance will have on the consolidated financial statements. | |||
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. | |||
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. | 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 guidance 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 align the accounting for implementation costs of hosting arrangements, regardless of whether they convey a license to the hosted software. Accordingly, the standard requires the capitalization of implementation costs incurred in a hosting arrangement that is a service contract, similar to the treatment for 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 is in the process of determining the impact this guidance will have on the consolidated financial statements. |
7
TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
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
An analysis of the change in balance by component of Accumulated Other Comprehensive Income is as follows for the three month periods ended March 31, 2019 and 2018.
Components of Accumulated Other Comprehensive Income
Three Months Ended March 31, 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 | (485,843 | ) | 356 | (1,023 | ) | — | (486,510 | ) | |||||||||||
Reclassifications, net of tax | (550 | ) | — | — | 2,985 | 2,435 | |||||||||||||
Other comprehensive income (loss) | (486,393 | ) | 356 | (1,023 | ) | 2,985 | (484,075 | ) | |||||||||||
Balance at March 31, 2018 | $ | 1,082,896 | $ | (8,191 | ) | $ | 15,279 | $ | (149,785 | ) | $ | 940,199 |
Three Months Ended March 31, 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 | 550,934 | (2,528 | ) | 2,442 | — | 550,848 | |||||||||||||
Reclassifications, net of tax | (1,931 | ) | — | — | 1,675 | (256 | ) | ||||||||||||
Other comprehensive income (loss) | 549,003 | (2,528 | ) | 2,442 | 1,675 | 550,592 | |||||||||||||
Balance at March 31, 2019 | $ | 984,701 | $ | (6,691 | ) | $ | 8,937 | $ | (116,880 | ) | $ | 870,067 |
8
TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
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 (continued)
Reclassifications out of Accumulated Other Comprehensive Income are presented below for the three month periods ended March 31, 2019 and 2018.
Reclassification Adjustments | ||||||||||
Three Months Ended March 31, | Affected line items in the Statement of Operations | |||||||||
Component Line Item | 2019 | 2018 | ||||||||
Unrealized investment gains (losses) on available for sale assets: | ||||||||||
Realized (gains) losses | $ | (3,670 | ) | $ | (1,386 | ) | Realized investment gains (losses) | |||
Amortization of (discount) premium | 1,226 | 690 | Net investment income | |||||||
Total before tax | (2,444 | ) | (696 | ) | ||||||
Tax | 513 | 146 | Income taxes | |||||||
Total after-tax | (1,931 | ) | (550 | ) | ||||||
Pension adjustments: | ||||||||||
Amortization of prior service cost | 158 | 119 | Other operating expense | |||||||
Amortization of actuarial gain (loss) | 1,962 | 3,659 | Other operating expense | |||||||
Total before tax | 2,120 | 3,778 | ||||||||
Tax | (445 | ) | (793 | ) | Income taxes | |||||
Total after-tax | 1,675 | 2,985 | ||||||||
Total reclassifications (after-tax) | $ | (256 | ) | $ | 2,435 |
9
TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
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 March 31, 2019 and December 31, 2018 are shown below.
March 31, 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 | $ | 390,947 | $ | 16,443 | $ | (1,034 | ) | $ | 406,356 | 2 | |||||||
States, municipalities, and political subdivisions | 1,426,461 | 113,371 | (174 | ) | 1,539,658 | 9 | |||||||||||
Foreign governments | 19,402 | 2,222 | — | 21,624 | — | ||||||||||||
Corporates, by sector: | |||||||||||||||||
Financial | 3,864,828 | 387,731 | (44,465 | ) | 4,208,094 | 24 | |||||||||||
Utilities | 1,984,792 | 279,830 | (9,690 | ) | 2,254,932 | 13 | |||||||||||
Energy | 1,645,409 | 172,802 | (27,409 | ) | 1,790,802 | 10 | |||||||||||
Other corporate sectors | 6,452,950 | 438,527 | (115,784 | ) | 6,775,693 | 40 | |||||||||||
Total corporates | 13,947,979 | 1,278,890 | (197,348 | ) | 15,029,521 | 87 | |||||||||||
Collateralized debt obligations | 57,473 | 25,664 | (5,888 | ) | 77,249 | 1 | |||||||||||
Other asset-backed securities | 145,966 | 3,577 | (366 | ) | 149,177 | 1 | |||||||||||
Total fixed maturities | $ | 15,988,228 | $ | 1,440,167 | $ | (204,810 | ) | $ | 17,223,585 | 100 |
(1) | Amounts reported on the balance sheet. |
(2) | At fair value. |
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) | Amounts reported on the balance sheet. |
(2) | At fair value. |
10
TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 4—Investments (continued)
A schedule of fixed maturities available for sale by contractual maturity date at March 31, 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.
March 31, 2019 | |||||||
Amortized Cost | Fair Value | ||||||
Fixed maturities available for sale: | |||||||
Due in one year or less | $ | 204,444 | $ | 206,980 | |||
Due after one year through five years | 611,042 | 643,173 | |||||
Due after five years through ten years | 1,643,633 | 1,814,976 | |||||
Due after ten years through twenty years | 5,210,071 | 5,843,176 | |||||
Due after twenty years | 8,114,988 | 8,488,204 | |||||
Mortgage-backed and asset-backed securities | 204,050 | 227,076 | |||||
$ | 15,988,228 | $ | 17,223,585 |
Analysis of Investment Operations: Net investment income for the three months ended March 31, 2019 and 2018 is summarized as follows:
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Fixed maturities available for sale | $ | 215,763 | $ | 208,542 | |||
Policy loans | 10,636 | 10,198 | |||||
Other long-term investments | 3,388 | 2,854 | |||||
Short-term investments | 819 | 391 | |||||
230,606 | 221,985 | ||||||
Less investment expense | (3,933 | ) | (3,901 | ) | |||
Net investment income | $ | 226,673 | $ | 218,084 |
Selected information about sales of fixed maturities available for sale is as follows:
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Fixed maturities available for sale: | |||||||
Proceeds from sales | $ | 34,997 | $ | — | |||
Gross realized gains | 46 | — | |||||
Gross realized losses | (3,027 | ) | — |
11
TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 4—Investments (continued)
An analysis of realized gains (losses) is as follows:
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Realized investment gains (losses): | |||||||
Fixed maturities available for sale: | |||||||
Sales and other | $ | 3,670 | $ | 1,386 | |||
Fair value option—change in fair value | (2,185 | ) | 560 | ||||
Other investments | (156 | ) | 5 | ||||
Realized gains (losses) from investments | 1,329 | 1,951 | |||||
Applicable tax | (279 | ) | (410 | ) | |||
Realized gains (losses), net of tax | $ | 1,050 | $ | 1,541 |
Fair Value Measurements: The following tables represent the fair value of fixed maturities available for sale measured on a recurring basis at March 31, 2019 and December 31, 2018.
Fair Value Measurements at March 31, 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 | $ | — | $ | 406,356 | $ | — | $ | 406,356 | |||||||
States, municipalities, and political subdivisions | — | 1,539,658 | — | 1,539,658 | |||||||||||
Foreign governments | — | 21,624 | — | 21,624 | |||||||||||
Corporates, by sector: | |||||||||||||||
Financial | — | 4,163,932 | 44,162 | 4,208,094 | |||||||||||
Utilities | 5,100 | 2,098,883 | 150,949 | 2,254,932 | |||||||||||
Energy | — | 1,750,336 | 40,466 | 1,790,802 | |||||||||||
Other corporate sectors | — | 6,448,950 | 326,743 | 6,775,693 | |||||||||||
Total corporates | 5,100 | 14,462,101 | 562,320 | 15,029,521 | |||||||||||
Collateralized debt obligations | — | — | 77,249 | 77,249 | |||||||||||
Other asset-backed securities | — | 136,023 | 13,154 | 149,177 | |||||||||||
Total fixed maturities | $ | 5,100 | $ | 16,565,762 | $ | 652,723 | $ | 17,223,585 | |||||||
Percentage of total | — | % | 96.2 | % | 3.8 | % | 100.0 | % |
12
TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 4—Investments (continued)
Fair Value Measurements 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 | — | % | 96.1 | % | 3.9 | % | 100.0 | % |
The following tables represent an analysis of changes in fair value measurements using significant unobservable inputs (Level 3) for the three months ended March 31, 2019 and 2018.
Analysis of Changes in Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
Three Months Ended March 31, 2019 | |||||||||||||||
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 | 298 | 4,176 | 10,663 | 15,137 | |||||||||||
Acquisitions | — | — | — | — | |||||||||||
Sales | — | — | — | — | |||||||||||
Amortization | — | 1,162 | 3 | 1,165 | |||||||||||
Other(2) | (126 | ) | (1,458 | ) | (1,817 | ) | (3,401 | ) | |||||||
Transfers in and/or out of Level 3(3) | — | — | — | — | |||||||||||
Balance at March 31, 2019 | $ | 13,154 | $ | 77,249 | $ | 562,320 | $ | 652,723 | |||||||
Percent of total fixed maturities | 0.1 | % | 0.4 | % | 3.3 | % | 3.8 | % |
(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. |
13
TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 4—Investments (continued)
Three Months Ended March 31, 2018 | |||||||||||||||
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 | — | — | — | — | |||||||||||
Included in other comprehensive income | (749 | ) | 4,621 | (12,233 | ) | (8,361 | ) | ||||||||
Acquisitions | — | — | — | — | |||||||||||
Sales | — | — | — | — | |||||||||||
Amortization | — | 1,201 | 4 | 1,205 | |||||||||||
Other(2) | (113 | ) | (1,879 | ) | (1,781 | ) | (3,773 | ) | |||||||
Transfers in and/or out of Level 3(3) | — | — | — | — | |||||||||||
Balance at March 31, 2018 | $ | 13,187 | $ | 75,524 | $ | 568,800 | $ | 657,511 | |||||||
Percent of total fixed maturities | 0.1 | % | 0.5 | % | 3.4 | % | 4.0 | % |
(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.
Three Months Ended March 31, | |||||||||||||||||||||||
2019 | 2018 | ||||||||||||||||||||||
In | Out | Net | In | Out | Net | ||||||||||||||||||
Level 1 | $ | 5,100 | $ | — | $ | 5,100 | $ | — | $ | — | $ | — | |||||||||||
Level 2 | — | (5,100 | ) | (5,100 | ) | — | — | — | |||||||||||||||
Level 3 | — | — | — | — | — | — |
Other investment information: Other long-term investments consist of the following:
March 31, 2019 | December 31, 2018 | ||||||
Investment in limited partnerships(1) | $ | 118,556 | $ | 108,241 | |||
Commercial mortgage loan participations(2) | 110,209 | 96,266 | |||||
Other | 3,169 | 2,751 | |||||
Total other long-term investments | $ | 231,934 | $ | 207,258 |
(1) | See the following section for more information regarding the fair value option method used to account for these investments. |
(2) | Torchmark invests in a portfolio of commercial mortgage loan participations. As of March 31, 2019 and December 31, 2018, the Company evaluated the portfolio on a loan-by-loan basis to determine any allowance for 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 the property type, geographic location, or loan-to-value ratio for any of the loans during the quarter. As of March 31, 2019 and December 31, 2018, there was no allowance for loss. |
14
TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 4—Investments (continued)
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 March 31, 2019, and the changes in fair value for the three months ended March 31, 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: | |||||||||||||||
March 31, 2019 | $ | — | $ | 118,556 | $ | — | $ | 118,556 | |||||||
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 | |||||||||
Three Months Ended March 31, | |||||||||||
2019 | $ | (2,185 | ) | $ | — | $ | (2,185 | ) | |||
2018 | 560 | — | 560 |
Other-Than-Temporary Impairments: 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, Torchmark has the ability and intent to hold these investments to recovery. Additionally, Torchmark 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 three months ended March 31, 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 March 31, 2019 | 83 | 311 | 394 | |||||
As of December 31, 2018 | 495 | 234 | 729 |
Torchmark’s entire fixed maturity portfolio consisted of 1,598 issues at March 31, 2019 and 1,548 issues at December 31, 2018. The weighted average quality rating of all unrealized loss positions as of March 31, 2019 was BBB compared with BBB+ as of December 31, 2018.
15
TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 4—Investments (continued)
The following tables disclose unrealized investment losses by class and major sector of fixed maturities available for sale at March 31, 2019 and December 31, 2018, respectively. Torchmark considers these investments to be only temporarily impaired.
Analysis of Gross Unrealized Investment Losses
At March 31, 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 | $ | 6 | $ | — | $ | 61,709 | $ | (1,034 | ) | $ | 61,715 | $ | (1,034 | ) | |||||||||
States, municipalities and political subdivisions | 14,974 | (26 | ) | 1,056 | (5 | ) | 16,030 | (31 | ) | ||||||||||||||
Corporates, by sector: | |||||||||||||||||||||||
Financial | 69,791 | (1,004 | ) | 388,946 | (15,440 | ) | 458,737 | (16,444 | ) | ||||||||||||||
Utilities | 2,023 | (2 | ) | 177,061 | (5,553 | ) | 179,084 | (5,555 | ) | ||||||||||||||
Energy | 48,948 | (693 | ) | 145,645 | (7,662 | ) | 194,593 | (8,355 | ) | ||||||||||||||
Other corporate sectors | 392,572 | (12,612 | ) | 1,560,588 | (82,520 | ) | 1,953,160 | (95,132 | ) | ||||||||||||||
Total corporates | 513,334 | (14,311 | ) | 2,272,240 | (111,175 | ) | 2,785,574 | (125,486 | ) | ||||||||||||||
Other asset-backed securities | 98 | — | 4,463 | (23 | ) | 4,561 | (23 | ) | |||||||||||||||
Total investment grade securities | 528,412 | (14,337 | ) | 2,339,468 | (112,237 | ) | 2,867,880 | (126,574 | ) | ||||||||||||||
Below investment grade securities: | |||||||||||||||||||||||
States, municipalities and political subdivisions | 85 | (143 | ) | — | — | 85 | (143 | ) | |||||||||||||||
Corporates, by sector: | |||||||||||||||||||||||
Financial | — | — | 104,759 | (28,021 | ) | 104,759 | (28,021 | ) | |||||||||||||||
Utilities | — | — | 12,648 | (4,135 | ) | 12,648 | (4,135 | ) | |||||||||||||||
Energy | 11,207 | (589 | ) | 47,260 | (18,465 | ) | 58,467 | (19,054 | ) | ||||||||||||||
Other corporate sectors | 35,189 | (2,153 | ) | 94,367 | (18,499 | ) | 129,556 | (20,652 | ) | ||||||||||||||
Total corporates | 46,396 | (2,742 | ) | 259,034 | (69,120 | ) | 305,430 | (71,862 | ) | ||||||||||||||
Collateralized debt obligations | — | — | 14,112 | (5,888 | ) | 14,112 | (5,888 | ) | |||||||||||||||
Other asset-backed securities | 14,132 | (343 | ) | — | — | 14,132 | (343 | ) | |||||||||||||||
Total below investment grade securities | 60,613 | (3,228 | ) | 273,146 | (75,008 | ) | 333,759 | (78,236 | ) | ||||||||||||||
Total fixed maturities | $ | 589,025 | $ | (17,565 | ) | $ | 2,612,614 | $ | (187,245 | ) | $ | 3,201,639 | $ | (204,810 | ) |
16
TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 4—Investments (continued)
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: | |||||||||||||||||||||||
States, municipalities and political subdivisions | — | — | — | — | — | — | |||||||||||||||||
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 | ) | |||||||||||||||
Other asset-backed securities | — | — | — | — | — | — | |||||||||||||||||
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 | ) |
17
TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 5—Commitments and Contingencies
Litigation: Torchmark 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 Torchmark’s 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 Torchmark and its subsidiaries, management does not believe that it is reasonably possible that such litigation will have a material adverse effect on Torchmark’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. Torchmark’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 Torchmark and its subsidiaries have 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 Life Insurance Company in California’s Contra Costa County Superior Court (Joh v. American Income Life Insurance Company, Case No. C18-01863). 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). 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 four years prior to the filing of the complaint. The 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 and unfair business practices. The Company continues to assess the amount and thus does not have a reasonable estimate of any potential liability.
On October 18, 2018, putative class action litigation was filed against Torchmark Corporation and American Income Life Insurance Company in California’s Los Angeles County Superior Court (Golz v. American Income Life Insurance Company, et al Case No. 18STCV01354). 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. The amended complaint alleges that the putative class members are employees and asserts claims under the California Labor Code and California Business and Professions Code. The complaint alleges that plaintiff was an American Income insurance agent trainee in California who seeks to represent a class of individuals in California whom American Income classified as independently contracted agent trainees. The class period is alleged to begin four years prior to the complaint’s filing. 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 wages at termination, failure to provide itemized wage statements, failure to reimburse business expenses, and unfair business practices. The Company continues to assess the amount and thus does not have a reasonable estimate of any potential liability.
On December 14, 2018, putative class action litigation was filed against American Income Life Insurance Company 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). 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, and unfair business practices. The Company continues to assess the amount and thus does not have a reasonable estimate of any potential liability.
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TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 5—Commitments and Contingencies (continued)
On January 16, 2019, putative class action litigation was filed against American Income Life Insurance Company in Orange County, California Superior Court (Putros v. American Income Life Insurance Company, Case No. 30-2019-01044772-CU-OE-CXC). 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 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, 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 unfair business practices. The Company continues to assess the amount and thus does not have a reasonable estimate of any potential liability.
With respect to its current litigation, at this time management believes that the possibility of a material judgment adverse to Torchmark is remote, and no estimate of range can be made for loss contingencies that are at least reasonably possible but not accrued.
Note 6—Liability for Unpaid Claims
Activity in the liability for unpaid health claims is summarized as follows:
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Balance at beginning of period | $ | 154,528 | $ | 146,865 | |||
Incurred related to: | |||||||
Current year | 151,230 | 134,542 | |||||
Prior years | 1,166 | (5,001 | ) | ||||
Total incurred | 152,396 | 129,541 | |||||
Paid related to: | |||||||
Current year | 60,055 | 55,130 | |||||
Prior years | 88,445 | 78,722 | |||||
Total paid | 148,500 | 133,852 | |||||
Balance at end of period | $ | 158,424 | $ | 142,554 |
Below is the reconciliation of the liability for "Policy claims and other benefits payable" in the Condensed Consolidated Balance Sheets.
March 31, 2019 | December 31, 2018 | ||||||
Policy claims and other benefits payable: | |||||||
Life insurance | $ | 198,870 | $ | 196,298 | |||
Health insurance | 158,424 | 154,528 | |||||
Total | $ | 357,294 | $ | 350,826 |
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TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands except per share data)
Note 7—Postretirement Benefits
Torchmark has qualified noncontributory defined benefit 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 following tables will focus on the defined benefit plans and SERP.
Pension Assets: The following tables present the assets of Torchmark’s defined benefit pension plans at March 31, 2019 and December 31, 2018.
Pension Assets by Component at March 31, 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 | % of Total | |||||||||||||
Corporate bonds: | |||||||||||||||||
Financial | $ | — | $ | 42,967 | $ | — | $ | 42,967 | 10 | ||||||||
Utilities | — | 40,077 | — | 40,077 | 10 | ||||||||||||
Energy | — | 20,765 | — | 20,765 | 5 | ||||||||||||
Other corporates | — | 86,217 | — | 86,217 | 21 | ||||||||||||
Total corporate bonds | — | 190,026 | — | 190,026 | 46 | ||||||||||||
Exchange traded fund(1) | 178,120 | — | — | 178,120 | 43 | ||||||||||||
Other bonds | — | 249 | — | 249 | — | ||||||||||||
Other long-term investments | — | 9,903 | — | 9,903 | 2 | ||||||||||||
Guaranteed annuity contract(2) | — | 26,604 | — | 26,604 | 6 | ||||||||||||
Short-term investments | 8,212 | — | — | 8,212 | 2 | ||||||||||||
Other | 4,965 | — | — | 4,965 | 1 | ||||||||||||
Total pension assets | $ | 191,297 | $ | 226,782 | $ | — | $ | 418,079 | 100 |
(1) | A fund including marketable securities that mirror the S&P 500 index. |
(2) | Representing a guaranteed annuity contract issued by Torchmark's subsidiary, American Income Life Insurance Company, to fund the obligations of the American Income Pension Plan. |
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TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands except per share data)
Note 7—Postretirement Benefits (continued)
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 | % of 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 Torchmark's subsidiary, American Income Life Insurance Company, to fund the obligations of the American Income Pension Plan. |
SERP: The following table includes information regarding the SERP at March 31, 2019 and December 31, 2018.
March 31, 2019 | December 31, 2018 | ||||||
Premiums paid for insurance coverage | $ | 444 | $ | 2,997 | |||
Total investments: | |||||||
Company owned life insurance | $ | 45,021 | $ | 44,285 | |||
Exchange traded funds | 56,926 | 52,659 | |||||
$ | 101,947 | $ | 96,944 |
Pension Liability: The following table presents liabilities for the defined benefit pension plans and SERP at March 31, 2019 and December 31, 2018.
March 31, 2019 | December 31, 2018 | ||||||
Funded defined benefit pension | $ | 509,998 | $ | 481,792 | |||
SERP | 74,655 | 74,407 | |||||
Pension Benefit Obligation | $ | 584,653 | $ | 556,199 |
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TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands except per share data)
Note 7—Postretirement Benefits (continued)
Net Periodic Benefit Cost: The following table presents the net periodic benefit costs for the defined benefit plans and SERP by expense components for the three month periods ended March 31, 2019 and 2018.
Components of Net Periodic Benefit Cost
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Service cost | $ | 4,982 | $ | 5,277 | |||
Interest cost | 5,964 | 5,493 | |||||
Expected return on assets | (6,966 | ) | (6,363 | ) | |||
Amortization: | |||||||
Prior service cost | 158 | 119 | |||||
Actuarial (gain) loss | 1,894 | 3,636 | |||||
Net periodic benefit cost | $ | 6,032 | $ | 8,162 |
Note 8—Earnings Per Share
A reconciliation of basic and diluted weighted-average shares outstanding is as follows:
Three Months Ended March 31, | |||||
2019 | 2018 | ||||
Basic weighted average shares outstanding | 110,301,527 | 114,179,084 | |||
Weighted average dilutive options outstanding | 2,027,348 | 2,570,418 | |||
Diluted weighted average shares outstanding | 112,328,875 | 116,749,502 | |||
Antidilutive shares | 1,846,151 | 535,143 |
Note 9—Business Segments
Torchmark's reportable segments are based on the insurance product lines it markets and administers: life insurance, 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. Torchmark'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. Torchmark 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.
Torchmark’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 the 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 Torchmark’s debt. Other income and insurance administrative expense are classified in a separate Corporate and other segment.
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TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 9—Business Segments (continued)
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, Torchmark’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 Torchmark 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 Torchmark 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 Torchmark’s operating segments.
Torchmark 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 Torchmark’s segment analysis. The following tables set forth a reconciliation of Torchmark’s revenues and operations by segment to its pre-tax income and each significant line item in its Condensed Consolidated Statements of Operations.
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TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 9—Business Segments (continued)
Reconciliation of Segment Operating Information to the Condensed Consolidated Statement of Operations
Three Months Ended March 31, 2019 | ||||||||||||||||||||||||||||
Life | Health | Annuity | Investment | Corporate & Other | Adjustments | Consolidated | ||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Premium | $ | 624,289 | $ | 266,684 | $ | — | $ | — | $ | — | $ | — | $ | 890,973 | ||||||||||||||
Net investment income | — | — | — | 226,673 | — | — | 226,673 | |||||||||||||||||||||
Other income | — | — | — | — | 241 | — | 241 | |||||||||||||||||||||
Total revenue | 624,289 | 266,684 | — | 226,673 | 241 | — | 1,117,887 | |||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||
Policy benefits | 409,692 | 170,017 | 8,048 | — | — | — | 587,757 | |||||||||||||||||||||
Required interest on reserves | (163,662 | ) | (21,496 | ) | (11,120 | ) | 196,278 | — | — | — | ||||||||||||||||||
Required interest on DAC | 50,024 | 6,283 | 131 | (56,438 | ) | — | — | — | ||||||||||||||||||||
Amortization of acquisition costs | 108,290 | 27,014 | 518 | — | — | — | 135,822 | |||||||||||||||||||||
Commissions, premium taxes, and non-deferred acquisition costs | 50,106 | 23,352 | 7 | — | — | — | 73,465 | |||||||||||||||||||||
Insurance administrative expense(1) | — | — | — | — | 59,191 | 400 | (2) | 59,591 | ||||||||||||||||||||
Parent expense | — | — | — | — | 2,643 | — | 2,643 | |||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | 10,559 | — | 10,559 | |||||||||||||||||||||
Interest expense | — | — | — | 21,278 | — | — | 21,278 | |||||||||||||||||||||
Total expenses | 454,450 | 205,170 | (2,416 | ) | 161,118 | 72,393 | 400 | 891,115 | ||||||||||||||||||||
Subtotal | 169,839 | 61,514 | 2,416 | 65,555 | (72,152 | ) | (400 | ) | 226,772 | |||||||||||||||||||
Non-operating items | — | — | — | — | — | 400 | (2) | 400 | ||||||||||||||||||||
Measure of segment profitability (pretax) | $ | 169,839 | $ | 61,514 | $ | 2,416 | $ | 65,555 | $ | (72,152 | ) | $ | — | 227,172 | ||||||||||||||
Realized gain (loss)—investments | 1,329 | |||||||||||||||||||||||||||
Administrative settlements | (400 | ) | ||||||||||||||||||||||||||
Income before income taxes per Condensed Consolidated Statements of Operations | $ | 228,101 |
(1) | Administrative expense is not allocated to insurance segments. |
(2) | During the first quarter of 2019, Torchmark recorded $400 thousand in administrative settlements related to state regulatory examinations. |
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TMK 2019 FORM 10-Q QTR 1
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 9—Business Segments (continued)
Three Months Ended March 31, 2018 | ||||||||||||||||||||||||||||
Life | Health | Annuity | Investment | Corporate & Other | Adjustments | Consolidated | ||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Premium | $ | 598,303 | $ | 251,798 | $ | 5 | $ | — | $ | — | $ | — | $ | 850,106 | ||||||||||||||
Net investment income | — | — | — | 218,084 | — | — | 218,084 | |||||||||||||||||||||
Other income | — | — | — | — | 323 | (28 | ) | (2) | 295 | |||||||||||||||||||
Total revenue | 598,303 | 251,798 | 5 | 218,084 | 323 | (28 | ) | 1,068,485 | ||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||
Policy benefits | 400,581 | 160,619 | 8,689 | — | — | — | 569,889 | |||||||||||||||||||||
Required interest on reserves | (156,214 | ) | (20,404 | ) | (12,017 | ) | 188,635 | — | — | — | ||||||||||||||||||
Required interest on DAC | 47,944 | 6,013 | 153 | (54,110 | ) | — | — | — | ||||||||||||||||||||
Amortization of acquisition costs | 103,777 | 25,257 | 586 | — | — | — | 129,620 | |||||||||||||||||||||
Commissions, premium taxes, and non-deferred acquisition costs | 47,394 | 22,265 | 8 | — | — | (28 | ) | (2) | 69,639 | |||||||||||||||||||
Insurance administrative expense(1) | — | — | — | — | 55,472 | — | 55,472 | |||||||||||||||||||||
Parent expense | — | — | — | — | 2,292 | — | 2,292 | |||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | 9,060 | — | 9,060 | |||||||||||||||||||||
Interest expense | — | — | — | 21,622 | — | — | 21,622 | |||||||||||||||||||||
Total expenses | 443,482 | 193,750 | (2,581 | ) | 156,147 | 66,824 | (28 | ) | 857,594 | |||||||||||||||||||
Subtotal | 154,821 | 58,048 | 2,586 | 61,937 | (66,501 | ) | — | 210,891 | ||||||||||||||||||||
Non-operating items | — | — | — | — | — | — | — | |||||||||||||||||||||
Measure of segment profitability (pretax) | $ | 154,821 | $ | 58,048 | $ | 2,586 | $ | 61,937 | $ | (66,501 | ) | $ | — | 210,891 | ||||||||||||||
Realized gain (loss)—investments | 1,951 | |||||||||||||||||||||||||||
Income before income taxes per Condensed Consolidated Statements of Operations | $ | 212,842 |
(1) | Administrative expense is not allocated to insurance segments. |
(2) | Elimination of intersegment commission. |
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TMK 2019 FORM 10-Q QTR 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
![]() | How Torchmark Views Its Operations. Torchmark 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, 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. | |
![]() | 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 | ||
![]() | 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 |
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TMK 2019 FORM 10-Q QTR 1
Current Highlights, comparing the first three months of 2019 with the first three months of 2018.
• | Net income as a return on equity (ROE) was 12.9% and net operating income as an ROE, excluding net unrealized gains on the fixed maturity portfolio was 14.7%(1). |
• | Total premium increased 5% over the prior year-ago quarter. Life premium increased 4% for the period from $598 million in 2018 to $624 million in 2019. Life underwriting margin increased 10% from $155 million in 2018 to $170 million in 2019. |
• | Net investment income increased 4% over the prior year-ago quarter. In addition, excess investment income increased 6% over the prior year-ago quarter. |
• | Total net sales increased 4% over the prior year-ago quarter from $139 million to $144 million. |
• | Book value per share increased 8% over the prior year-ago quarter from $50.13 to $54.13. Book value per share, excluding net unrealized gains on the fixed maturity portfolio, increased 11% over the prior year-ago quarter from $40.94 to $45.45(1). |
• | Through March 31, 2019, the Company repurchased 1.1 million shares at a total cost of $89 million for an average share price of $81.32. |
The following represents net income and net operating income for the three months ended March 31, 2019 and 2018.
![a10qchart4copy.jpg](https://www.sec.gov/Archives/edgar/data/0000320335/000032033519000015/a10qchart4copy.jpg)
![a10qchart5copy.jpg](https://www.sec.gov/Archives/edgar/data/0000320335/000032033519000015/a10qchart5copy.jpg)
(1) | Net operating income is considered a non-GAAP measure and it has been used consistently by Torchmark’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 $1.0 million and $1.1 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 $8.68 and $9.19 for 2019 and 2018, respectively.
Summary of Operations. Net income increased 7% to $185 million during the first three months of 2019, compared with $174 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 $1 million in 2019, compared with realized after-tax gains of $2 million for the same period in 2018. On a diluted per common share basis, net income per common share for the three months ended March 31, 2019 increased 11% from $1.49 to $1.65. The percentage growth in net income per share results 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 7%, or $13 million, to $185 million for the three months ended March 31, 2019, compared with $172 million for the same period in 2018.
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TMK 2019 FORM 10-Q QTR 1
Torchmark's operations on a segment-by-segment basis are discussed in depth below. Net operating income has been used consistently by Torchmark’s 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)
Three Months Ended March 31, | ||||||||||||||
2019 | 2018 | Change | % | |||||||||||
Life insurance underwriting margin | $ | 169,839 | $ | 154,821 | $ | 15,018 | 10 | |||||||
Health insurance underwriting margin | 61,514 | 58,048 | 3,466 | 6 | ||||||||||
Annuity underwriting margin | 2,416 | 2,586 | (170 | ) | (7 | ) | ||||||||
Excess investment income | 65,555 | 61,937 | 3,618 | 6 | ||||||||||
Other insurance: | ||||||||||||||
Other income | 241 | 323 | (82 | ) | (25 | ) | ||||||||
Administrative expense | (59,191 | ) | (55,472 | ) | (3,719 | ) | 7 | |||||||
Corporate and other | (13,202 | ) | (11,352 | ) | (1,850 | ) | 16 | |||||||
Pre-tax total | 227,172 | 210,891 | 16,281 | 8 | ||||||||||
Applicable taxes | (42,428 | ) | (38,721 | ) | (3,707 | ) | 10 | |||||||
Net operating income | 184,744 | 172,170 | 12,574 | 7 | ||||||||||
Reconciling items, net of tax: | ||||||||||||||
Realized gains (losses) - investments | 1,050 | 1,541 | (491 | ) | ||||||||||
Part D adjustment - discontinued operations | (49 | ) | (111 | ) | 62 | |||||||||
Administrative settlements | (400 | ) | — | (400 | ) | |||||||||
Net income | $ | 185,345 | $ | 173,600 | $ | 11,745 | 7 |
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TMK 2019 FORM 10-Q QTR 1
In the first quarter of 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 three months ended March 31, 2019.
![a10qchart3copy.jpg](https://www.sec.gov/Archives/edgar/data/0000320335/000032033519000015/a10qchart3copy.jpg)
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Total premium income rose 5% for the three months ended March 31, 2019 to $891 million. Total net sales increased 4% to $144 million, when compared with the same period in 2018. Total first-year collected premium was $118 million for the 2019 period, compared with $114 million for the 2018 period.
Life insurance premium income increased 4% to $624 million over the prior year total of $598 million. Life net sales rose 4% to $105 million for the three month period of 2019. First-year collected life premium rose 2% to $81 million. Life underwriting margins, as a percent of premium, increased to 27% in 2019 from 26% in the prior year period, due to lower policy obligations. Underwriting income increased to $170 million for the first three months of 2019, 10% over the same period in 2018.
Health insurance premium income increased 6% to $267 million over the prior year total of $252 million. Health net sales rose 2% to $39 million for the three month period of 2019. First-year collected health premium rose 8% to $37 million. Health underwriting margins, as a percent of premium, were 23% in both 2019 and 2018. Underwriting income increased to $62 million for the first three months of 2019, 6% over the same period in 2018.
Excess investment income, the measure of profitability of our investment segment, increased 6% during the first three months of 2019 to $66 million from $62 million in the same period in 2018. Growth in excess investment income continues to be impeded by investing at yields lower than the yield on dispositions and the average yield on the entire portfolio. Excess investment income per common share, reflecting the impact of our share repurchase program, increased 9% in 2019 to $0.58 from $0.53 in the same period last year.
Insurance administrative expenses increased 6.7% in 2019 when compared with the prior year period. These expenses were 6.6% as a percentage of premium during the first three 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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TMK 2019 FORM 10-Q QTR 1
A discussion of each of Torchmark's segments is as 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 Globe Life Direct Response 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 to 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, comparing the first three months of 2019 with the first three months of 2018. As demonstrated above, life insurance is our predominant segment, representing 70% of premium income and 73% of insurance underwriting margin in the first three months of 2019. In addition, investments supporting the reserves for life business generate the majority of investment income attributable to the investment segment.
The following table presents the summary of results for life insurance.
Life Insurance Summary of Results (Dollar amounts in thousands) | |||||||||||||||||||
Three Months Ended March 31, | Increase | ||||||||||||||||||
2019 | 2018 | (Decrease) | |||||||||||||||||
Amount | % of Premium | Amount | % of Premium | Amount | % | ||||||||||||||
Premium and policy charges | $ | 624,289 | 100 | $ | 598,303 | 100 | $ | 25,986 | 4 | ||||||||||
Policy obligations | 409,692 | 66 | 400,581 | 67 | 9,111 | 2 | |||||||||||||
Required interest on reserves | (163,662 | ) | (26 | ) | (156,214 | ) | (26 | ) | (7,448 | ) | 5 | ||||||||
Net policy obligations | 246,030 | 40 | 244,367 | 41 | 1,663 | 1 | |||||||||||||
Commissions, premium taxes, and non-deferred acquisition expenses | 50,106 | 8 | 47,394 | 8 | 2,712 | 6 | |||||||||||||
Amortization of acquisition costs | 158,314 | 25 | 151,721 | 25 | 6,593 | 4 | |||||||||||||
Total expense | 454,450 | 73 | 443,482 | 74 | 10,968 | 2 | |||||||||||||
Insurance underwriting margin before other income and administrative expenses | $ | 169,839 | 27 | $ | 154,821 | 26 | $ | 15,018 | 10 |
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TMK 2019 FORM 10-Q QTR 1
The following table presents Torchmark’s life insurance premium by distribution channel.
Life Insurance
Premium by Distribution Channel
(Dollar amounts in thousands)
Three Months Ended March 31, | Increase | |||||||||||||||||
2019 | 2018 | (Decrease) | ||||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % | |||||||||||||
American Income Exclusive Agency | $ | 281,767 | 45 | $ | 262,530 | 44 | $ | 19,237 | 7 | |||||||||
Globe Life Direct Response | 217,559 | 35 | 211,811 | 35 | 5,748 | 3 | ||||||||||||
Liberty National Exclusive Agency | 70,717 | 11 | 69,561 | 12 | 1,156 | 2 | ||||||||||||
Other Agencies | 54,246 | 9 | 54,401 | 9 | (155 | ) | — | |||||||||||
Total | $ | 624,289 | 100 | $ | 598,303 | 100 | $ | 25,986 | 4 |
Annualized life premium in force was $2.5 billion at March 31, 2019, an increase of 4% over $2.4 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) | |||||||||||||||||
Three Months Ended March 31, | Increase | ||||||||||||||||
2019 | 2018 | (Decrease) | |||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % | ||||||||||||
American Income Exclusive Agency | $ | 57,551 | 54 | $ | 55,101 | 54 | $ | 2,450 | 4 | ||||||||
Globe Life Direct Response | 32,447 | 31 | 32,183 | 32 | 264 | 1 | |||||||||||
Liberty National Exclusive Agency | 12,259 | 12 | 11,361 | 11 | 898 | 8 | |||||||||||
Other Agencies | 3,083 | 3 | 2,658 | 3 | 425 | 16 | |||||||||||
Total | $ | 105,340 | 100 | $ | 101,303 | 100 | $ | 4,037 | 4 |
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) | ||||||||||||||||||
Three Months Ended March 31, | Increase | |||||||||||||||||
2019 | 2018 | (Decrease) | ||||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % | |||||||||||||
American Income Exclusive Agency | $ | 47,476 | 58 | $ | 46,907 | 59 | $ | 569 | 1 | |||||||||
Globe Life Direct Response | 21,256 | 26 | 21,586 | 27 | (330 | ) | (2 | ) | ||||||||||
Liberty National Exclusive Agency | 9,394 | 12 | 8,831 | 11 | 563 | 6 | ||||||||||||
Other Agencies | 2,958 | 4 | 2,250 | 3 | 708 | 31 | ||||||||||||
Total | $ | 81,084 | 100 | $ | 79,574 | 100 | $ | 1,510 | 2 |
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TMK 2019 FORM 10-Q QTR 1
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 in recent years by focusing heavily on other affinity groups, third party internet vendor leads, and referrals which has driven growth despite declines in North American union membership. This agency is Torchmark’s largest contributor to life premium at 45% of Torchmark’s 2019 year-to-date total. This agency produced premium income during the first three months of $282 million, an increase of 7% over the comparable prior year period of $263 million. First-year collected premium was $47 million, an increase of 1%. Net sales increased 4% to $58 million in 2019 over the 2018 total of $55 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 agent count increased to 6,865 for the three months ended March 31, 2019, compared with 6,780 for the same period in 2018. As is the case with all Torchmark agencies, the average 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 Globe Life 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 Globe Life 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 the 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 Globe Life 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.
Globe Life Direct Response’s life premium income rose 3% to $218 million, representing 35% of Torchmark’s total life premium in the first three months of 2019. Net sales for this group increased 1%, while first-year collected premium decreased 2% to $21 million. The underwriting margin, as a percent of premium, was 17%, up from 16% in the three months ended March 31, 2018. This increase was primarily attributable to favorable claims in the first three months compared to higher-than-normal claims in 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 $71 million in the first three months of 2019 compared with $70 million for the same period in 2018. Net sales for the Liberty National Exclusive Agency increased 8% to $12 million. The continued increases in net sales reflect changes in the structure of the agency that were put in place several years ago. Recent growth in middle management within the agency will help continue this growth. First-year collected premium increased 6% to $9 million. The underwriting margin as a percent of premium was 25%, up from 24% for the three months ended March 31, 2018. The increase is primarily attributable to higher than normal policy obligations during the first three months of 2018 compared with slightly lower policy obligations during the same period in 2019.
The Liberty National Exclusive Agency's average agent count increased 4% to 2,179 for the three months ended March 31, 2019 compared with 2,087 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's prospecting training program continues to help improve the ability of agents to develop new worksite marketing business.
The Other Agencies distribution channels primarily include independent agencies selling predominantly life insurance. The Other Agencies contributed $54 million of life premium income, or 9% of Torchmark’s total in the first three months of 2019, and contributed 3% of net sales for the period.
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TMK 2019 FORM 10-Q QTR 1
Health insurance, comparing the first three months of 2019 with the first three months of 2018. Health insurance sold by Torchmark primarily includes Medicare Supplement insurance, critical illness coverage, accident coverage, and other limited-benefit plans (e.g. dread disease and critical illness coverage).
Health premium accounted for 30% of our total premium in the 2019 period. Health underwriting margin accounted for 26% of total underwriting margin, reflective of the lower underwriting margin as a percentage of premium for health compared with life insurance. As noted under the caption Life Insurance, we have emphasized life insurance sales relative to health due to life’s superior profitability and its greater contribution to investment income.
The following table presents underwriting margin data for health insurance.
Health Insurance
Summary of Results
(Dollar amounts in thousands)
Three Months Ended March 31, | Increase | ||||||||||||||||||
2019 | 2018 | (Decrease) | |||||||||||||||||
Amount | % of Premium | Amount | % of Premium | Amount | % | ||||||||||||||
Premium | $ | 266,684 | 100 | $ | 251,798 | 100 | $ | 14,886 | 6 | ||||||||||
Policy obligations | 170,017 | 64 | 160,619 | 64 | 9,398 | 6 | |||||||||||||
Required interest on reserves | (21,496 | ) | (8 | ) | (20,404 | ) | (8 | ) | (1,092 | ) | 5 | ||||||||
Net policy obligations | 148,521 | 56 | 140,215 | 56 | 8,306 | 6 | |||||||||||||
Commissions, premium taxes, and non-deferred acquisition expenses | 23,352 | 9 | 22,265 | 9 | 1,087 | 5 | |||||||||||||
Amortization of acquisition costs | 33,297 | 12 | 31,270 | 12 | 2,027 | 6 | |||||||||||||
Total expense | 205,170 | 77 | 193,750 | 77 | 11,420 | 6 | |||||||||||||
Insurance underwriting margin before other income and administrative expense | $ | 61,514 | 23 | $ | 58,048 | 23 | $ | 3,466 | 6 |
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)
Three Months Ended March 31, | Increase | |||||||||||||||||
2019 | 2018 | (Decrease) | ||||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % | |||||||||||||
United American Independent Agency | $ | 102,905 | 38 | $ | 94,331 | 37 | $ | 8,574 | 9 | |||||||||
Family Heritage Exclusive Agency | 71,264 | 27 | 66,219 | 26 | 5,045 | 8 | ||||||||||||
Liberty National Exclusive Agency | 48,156 | 18 | 49,158 | 20 | (1,002 | ) | (2 | ) | ||||||||||
American Income Exclusive Agency | 24,099 | 9 | 22,702 | 9 | 1,397 | 6 | ||||||||||||
Direct Response | 20,260 | 8 | 19,388 | 8 | 872 | 4 | ||||||||||||
Total | $ | 266,684 | 100 | $ | 251,798 | 100 | $ | 14,886 | 6 |
Premium from limited-benefit plans comprise $136 million or 51% of total health premium for 2019 compared with $129 million in the same period in the prior year. Premium from Medicare supplement products make up the remaining 49% at $131 million for 2019 compared with $123 million in the same period in the prior year. Annualized health premium in force was $1.1 billion at March 31, 2019, an increase of 6% over the prior year balance of $1.0 billion.
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TMK 2019 FORM 10-Q QTR 1
Presented below is a table of health net sales by distribution channel.
Health Insurance
Net Sales by Distribution Channel
(Dollar amounts in thousands)
Three Months Ended March 31, | Increase | |||||||||||||||||
2019 | 2018 | (Decrease) | ||||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % | |||||||||||||
United American Independent Agency | $ | 14,894 | 39 | $ | 14,183 | 38 | $ | 711 | 5 | |||||||||
Family Heritage Exclusive Agency | 13,030 | 34 | 13,484 | 36 | (454 | ) | (3 | ) | ||||||||||
Liberty National Exclusive Agency | 5,565 | 14 | 4,977 | 13 | 588 | 12 | ||||||||||||
American Income Exclusive Agency | 3,899 | 10 | 3,386 | 9 | 513 | 15 | ||||||||||||
Direct Response | 1,145 | 3 | 1,575 | 4 | (430 | ) | (27 | ) | ||||||||||
Total | $ | 38,533 | 100 | $ | 37,605 | 100 | $ | 928 | 2 |
Sales of limited-benefit plans comprise $23 million or 59% of total net sales for 2019 compared with $22 million in the same period in the prior year. Medicare supplement sales make up the remaining 41% at $16 million for 2019 compared with $16 million in the same period in the prior year.
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)
Three Months Ended March 31, | Increase | |||||||||||||||||
2019 | 2018 | (Decrease) | ||||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % | |||||||||||||
United American Independent Agency | $ | 16,084 | 43 | $ | 14,085 | 41 | $ | 1,999 | 14 | |||||||||
Family Heritage Exclusive Agency | 11,936 | 32 | 11,369 | 33 | 567 | 5 | ||||||||||||
Liberty National Exclusive Agency | 4,601 | 12 | 4,278 | 12 | 323 | 8 | ||||||||||||
American Income Exclusive Agency | 3,758 | 10 | 3,535 | 10 | 223 | 6 | ||||||||||||
Direct Response | 1,023 | 3 | 1,280 | 4 | (257 | ) | (20 | ) | ||||||||||
Total | $ | 37,402 | 100 | $ | 34,547 | 100 | $ | 2,855 | 8 |
Premium related to limited-benefit plans comprise $20 million or 55% of total first-year collected premium for 2019 compared with $19 million in the same period in the prior year. First-year collected premium from Medicare supplement policies make up the remaining 45% at $17 million for 2019 compared with $15 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 independent agencies who can also sell for other companies. The United American Independent Agency was Torchmark’s largest health agency in terms of health premium income. Premium income was $103 million, representing 38% of Torchmark’s total health premium. Net sales were $15 million, or 39% of Torchmark’s health net sales. This agency primarily produces Medicare Supplement insurance, with Medicare Supplement premium income of $100 million. The United American Independent Agency represents approximately 77% of all Torchmark Medicare Supplement premium and 93% of Medicare Supplement net sales. Medicare Supplement premium in this agency rose 10%. Net sales of the Medicare Supplement product increased 5% in 2019 over the prior year period primarily as a result of an increase in individual sales. First-year collected health premium rose 14% to $16 million.
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TMK 2019 FORM 10-Q QTR 1
The Family Heritage Exclusive Agency primarily markets individual limited-benefit supplemental health insurance in non-urban areas. Most of their policies include a cash-back feature, such as a return of premium whereby 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 $13 million, representing 34% of Torchmark's total net health sales in the first three months of 2019. Health premium income was $71 million for the three month period of 2019, representing 27% of Torchmark’s health premium compared with $66 million or 26% of Torchmark's health premium in the prior year period. Underwriting margin as a percent of premium was 25%, up from 23% for the three months ended March 31, 2018. The increase was primarily attributable to the growing portion of new business sold at margins higher than the business purchased in 2012 which is running off over time. The average agent count was 1,002 for the three months ended March 31, 2019 compared with 988 for the same period in 2018, an increase of 1%.
The Liberty National Exclusive Agency represented 18% of all Torchmark health premium income at $48 million in the three months of 2019. The Liberty National Exclusive Agency markets limited-benefit health supplemental products consisting primarily of critical illness insurance. Much of Liberty National Exclusive Agency’s health business is now generated through worksite marketing. In 2019, health premium income in the Liberty National Exclusive Agency declined $1 million to $48 million from prior year premium. Liberty’s health premium decline is primarily due to the runoff of a block of discontinued Medicare Supplement policies previously sold by the agency.
Other distribution. While some of the Company's distribution channels market health products, their main emphasis is on life insurance. On a combined basis, they accounted for 17% of Torchmark's health premium in the 2019 period. The American Income Exclusive Agency primarily markets accident plans. The Direct Response unit markets primarily Medicare Supplements to employer or union-sponsored groups.
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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TMK 2019 FORM 10-Q QTR 1
Operating expenses, comparing the first three months of 2019 with the first three months of 2018. Operating expenses consist of insurance administrative expenses and Parent Company expenses. Also included is stock compensation expense, which is viewed by us as Parent Company expense. Insurance administrative expenses relate to premium income for a given period; therefore, we measure those expenses as a percentage of premium income. Total expenses are measured as a percentage of total revenues. An analysis of operating expenses is shown below.
Operating Expenses Selected Information
(Dollar amounts in thousands)
Three Months Ended March 31, | |||||||||||
2019 | 2018 | ||||||||||
Amount | % of Premium | Amount | % of Premium | ||||||||
Insurance administrative expenses: | |||||||||||
Salaries | $ | 25,184 | 2.8 | $ | 24,645 | 2.9 | |||||
Other employee costs | 9,693 | 1.1 | 9,687 | 1.1 | |||||||
Information technology costs | 10,173 | 1.1 | 6,803 | 0.8 | |||||||
Legal costs | 2,175 | 0.3 | 2,019 | 0.2 | |||||||
Other administrative costs | 11,966 | 1.3 | 12,318 | 1.5 | |||||||
Total insurance administrative expenses | 59,191 | 6.6 | 55,472 | 6.5 | |||||||
Parent company expense | 2,643 | 2,292 | |||||||||
Stock compensation expense | 10,559 | 9,060 | |||||||||
Administrative settlements | 400 | — | |||||||||
Total operating expenses, per Condensed Consolidated Statements of Operations | $ | 72,793 | $ | 66,824 | |||||||
Insurance administrative expenses: | |||||||||||
Increase (decrease) over prior year | 6.7 | % | 6.9 | % | |||||||
Total operating expenses: | |||||||||||
Increase (decrease) over prior year | 8.9 | % | 7.2 | % |
The 6.7% increase in 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 modernizations, and information security programs. The increase in stock compensation expense was primarily due to higher expense associated with equity awards, reflecting Torchmark's increasing share price over time.
Investments (excess investment income), comparing the first three months of 2019 with the first three months of 2018. 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 the required interest on net policy liabilities and the interest cost associated with capital funding or “financing costs.”
We also view 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 $7.6 billion of cash flow to repurchase Torchmark shares after determining that the repurchases provided a greater 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.
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TMK 2019 FORM 10-Q QTR 1
The following table summarizes Torchmark’s investment income, excess investment income, and excess investment income per diluted common share.
Excess Investment Income
(Dollar amounts in thousands)
Three Months Ended March 31, | Increase (Decrease) | |||||||||||||
2019 | 2018 | Amount | % | |||||||||||
Net investment income | $ | 226,673 | $ | 218,084 | $ | 8,589 | 4 | |||||||
Interest on net insurance policy liabilities: | ||||||||||||||
Interest on reserves | (196,278 | ) | (188,635 | ) | (7,643 | ) | 4 | |||||||
Interest on deferred acquisition costs | 56,438 | 54,110 | 2,328 | 4 | ||||||||||
Net required interest | (139,840 | ) | (134,525 | ) | (5,315 | ) | 4 | |||||||
Financing costs | (21,278 | ) | (21,622 | ) | 344 | (2 | ) | |||||||
Excess investment income | $ | 65,555 | $ | 61,937 | $ | 3,618 | 6 | |||||||
Excess investment income per diluted share | $ | 0.58 | $ | 0.53 | $ | 0.05 | 9 | |||||||
Mean invested assets (at amortized cost) | $ | 16,780,373 | $ | 15,965,283 | $ | 815,090 | 5 | |||||||
Average net insurance policy liabilities(1) | 9,942,946 | 9,613,064 | 329,882 | 3 | ||||||||||
Average debt and preferred securities (at amortized cost) | 1,656,543 | 1,512,948 | 143,595 | 9 |
(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 increased 9% 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.
Net investment income in 2019 was $227 million or 4% greater than the year ago period. Mean invested assets increased 5% during the first three months of 2019 over the same period last year. The effective annual yield rate earned on the fixed maturity portfolio was 5.53% in the first three months of 2019, compared with 5.58% 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 in recent years. While Torchmark may see a slightly higher turnover rate of 4% to 5% in 2019 due to potential 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% to 3% of the portfolio and will not have a material negative impact on investment income.
Should long-term interest rates rise, Torchmark's net investment income would benefit due to higher interest rates on new investments. 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 65 to 70 basis points before the net unrealized gains on our fixed maturity portfolio as of March 31, 2019 would be eliminated. Should interest rates increase further than that, 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 is the amount of net investment income considered by management necessary to “fund” net insurance policy liabilities, which is the net of the benefit reserve liability and 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 interest required by 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 calculated using the actuarial interest assumptions used to discount the benefit reserve liability and to amortize the deferred acquisition costs for our insurance policies in force.
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TMK 2019 FORM 10-Q QTR 1
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. Each calendar year, we set the discount rate to be used to calculate the benefit reserve liability and 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.
Required interest on net insurance policy liabilities increased $5 million or 4% to $140 million, in line with the growth in average net interest-bearing insurance policy liabilities.
Financing costs for the segment primarily consist of interest on our various debt instruments. Interest on our debt decreased in the first three months of 2019 to $21 million compared with $22 million for the same period last year. The decrease on funded debt was primarily attributed to refinancing the 9.25% Senior Notes in October 2018 offset by an increase in short-term interest rates. More information concerning debt can be found in the Capital Resources section of this report.
Analysis of Financing Costs
(Dollar amounts in thousands)
Three Months Ended March 31, | Increase (Decrease) | |||||||||||||
2019 | 2018 | Amount | % | |||||||||||
Interest on funded debt | $ | 17,406 | $ | 18,209 | $ | (803 | ) | (4 | ) | |||||
Interest on term loan | 861 | 698 | 163 | 23 | ||||||||||
Interest on short-term debt | 3,010 | 2,714 | 296 | 11 | ||||||||||
Other | 1 | 1 | — | — | ||||||||||
Financing costs | $ | 21,278 | $ | 21,622 | $ | (344 | ) | (2 | ) |
38
TMK 2019 FORM 10-Q QTR 1
Realized Gains and Losses, comparing the first three months of 2019 with the first three months of 2018. 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.
In the first quarter of 2018, the Company elected 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 per share data)
Three Months Ended March 31, | |||||||||||||||
2019 | 2018 | ||||||||||||||
Amount | Per Share | Amount | Per Share | ||||||||||||
Fixed maturities: | |||||||||||||||
Sales | $ | (2,355 | ) | $ | (0.02 | ) | $ | — | $ | — | |||||
Matured or other redemptions | 5,254 | 0.05 | 1,095 | 0.01 | |||||||||||
Fair value option—change in fair value | (1,726 | ) | (0.02 | ) | 442 | — | |||||||||
Other | (123 | ) | — | 4 | — | ||||||||||
Total realized gains (losses) | $ | 1,050 | $ | 0.01 | $ | 1,541 | $ | 0.01 |
Investments (acquisitions), comparing the first three months of 2019 with the first three months of 2018. Torchmark’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 because our cash flows from operations and invested assets are positive, stable and predictable. 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 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 the yield calculated to the “worst call date.” For non-callable bonds, the worst-call date is always the maturity date. For callable bonds, the worst-call date is the call date that produces the lowest yield (or the maturity date, if the yield calculated to the maturity date is lower than the yield calculated to each call date).
Fixed Maturity Acquisitions Selected Information
(Dollar amounts in thousands)
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Cost of acquisitions: | |||||||
Investment-grade corporate securities | $ | 263,741 | $ | 222,519 | |||
Investment-grade municipal securities | 184,965 | 127,526 | |||||
Other investment-grade securities | 1,958 | 8,708 | |||||
Total fixed maturity acquisitions(1) | $ | 450,664 | $ | 358,753 | |||
Effective annual yield (one year compounded)(2) | 4.88 | % | 4.46 | % | |||
Average life (in years, to next call) | 19.5 | 14.8 | |||||
Average life (in years, to maturity) | 28.2 | 23.4 | |||||
Average rating | A+ | A |
(1) Fixed maturity acquisitions include unsettled trades of $29,553 and $0 as of March 31, 2019 and 2018, respectively.
(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.
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TMK 2019 FORM 10-Q QTR 1
Acquisitions in both periods consisted primarily of corporate bonds with securities spanning a diversified range of issuers, industry sectors, and geographical regions. During 2019, we anticipate calls of higher rated municipal bonds and we plan to reinvest the proceeds from these calls in bonds with similar ratings. The higher average rating in the current period versus the year ago period is due in part to such reinvestment activity.
We are not a party to any credit default swaps or other derivative contracts. We do not participate in securities lending, we have no off-balance sheet investments, and we do not have any exposure to European sovereign debt at March 31, 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 replacement floating rate. As of March 31, 2019, Torchmark 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.
Selected information concerning the fixed-maturity portfolio is as follows:
Fixed Maturity Portfolio Selected Information
At | |||||
March 31, 2019 | December 31, 2018 | March 31, 2018 | |||
Average annual effective yield(1) | 5.51% | 5.55% | 5.57% | ||
Average life, in years, to: | |||||
Next call(2) | 16.9 | 16.9 | 17.3 | ||
Maturity(2) | 18.8 | 18.7 | 19.1 | ||
Effective duration to: | |||||
Next call(2,3) | 10.3 | 10.0 | 10.5 | ||
Maturity(2,3) | 11.2 | 10.8 | 11.3 |
(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) | Torchmark 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. |
40
TMK 2019 FORM 10-Q QTR 1
Fixed Maturities. The following tables summarize certain information about the major corporate sectors and security types held in our fixed maturity portfolio at March 31, 2019 and December 31, 2018.
Fixed Maturities by Sector
At March 31, 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 | $ | 66,264 | $ | 3,991 | $ | (8,718 | ) | $ | 61,537 | $ | 2,005,259 | $ | 247,775 | $ | (15,393 | ) | $ | 2,237,641 | 12 | 12 | |||||||||
Banks | 27,068 | — | (2,138 | ) | 24,930 | 902,037 | 87,811 | (4,477 | ) | 985,371 | 6 | 6 | |||||||||||||||||
Other financial | 74,958 | — | (17,165 | ) | 57,793 | 957,532 | 52,145 | (24,595 | ) | 985,082 | 6 | 6 | |||||||||||||||||
Total financial | 168,290 | 3,991 | (28,021 | ) | 144,260 | 3,864,828 | 387,731 | (44,465 | ) | 4,208,094 | 24 | 24 | |||||||||||||||||
Utilities | |||||||||||||||||||||||||||||
Electric | 36,345 | 315 | (4,135 | ) | 32,525 | 1,465,230 | 237,205 | (7,665 | ) | 1,694,770 | 10 | 10 | |||||||||||||||||
Gas and water | — | — | — | — | 519,562 | 42,625 | (2,025 | ) | 560,162 | 3 | 3 | ||||||||||||||||||
Total utilities | 36,345 | 315 | (4,135 | ) | 32,525 | 1,984,792 | 279,830 | (9,690 | ) | 2,254,932 | 13 | 13 | |||||||||||||||||
Industrial - Energy | |||||||||||||||||||||||||||||
Pipelines | 40,544 | 26 | (1,973 | ) | 38,597 | 913,684 | 89,428 | (7,309 | ) | 995,803 | 6 | 6 | |||||||||||||||||
Exploration and production | 28,110 | 1,464 | (488 | ) | 29,086 | 547,933 | 62,622 | (3,507 | ) | 607,048 | 3 | 3 | |||||||||||||||||
Oil field services | — | — | — | — | 49,833 | 6,868 | — | 56,701 | — | — | |||||||||||||||||||
Refiner | — | — | — | — | 89,157 | 13,884 | — | 103,041 | 1 | 1 | |||||||||||||||||||
Driller | 44,802 | — | (16,593 | ) | 28,209 | 44,802 | — | (16,593 | ) | 28,209 | — | — | |||||||||||||||||
Total energy | 113,456 | 1,490 | (19,054 | ) | 95,892 | 1,645,409 | 172,802 | (27,409 | ) | 1,790,802 | 10 | 10 | |||||||||||||||||
Industrial - Basic materials | |||||||||||||||||||||||||||||
Chemicals | — | — | — | — | 555,681 | 18,217 | (11,246 | ) | 562,652 | 3 | 3 | ||||||||||||||||||
Metals and mining | 60,604 | 4,787 | — | 65,391 | 386,829 | 56,523 | (243 | ) | 443,109 | 2 | 3 | ||||||||||||||||||
Forestry products and paper | — | — | — | — | 111,466 | 9,494 | (513 | ) | 120,447 | 1 | 1 | ||||||||||||||||||
Total basic materials | 60,604 | 4,787 | — | 65,391 | 1,053,976 | 84,234 | (12,002 | ) | 1,126,208 | 6 | 7 | ||||||||||||||||||
Industrial - Consumer, non-cyclical | 33,756 | 349 | (5,627 | ) | 28,478 | 2,094,864 | 118,733 | (45,324 | ) | 2,168,273 | 13 | 13 | |||||||||||||||||
Other industrials | 46,778 | 710 | (1,879 | ) | 45,609 | 1,363,833 | 94,274 | (15,029 | ) | 1,443,078 | 9 | 8 | |||||||||||||||||
Industrial - Transportation | 26,097 | — | (2,137 | ) | 23,960 | 570,997 | 64,663 | (4,303 | ) | 631,357 | 4 | 4 | |||||||||||||||||
Other corporate sectors | 113,222 | 1,105 | (11,009 | ) | 103,318 | 1,369,280 | 76,623 | (39,126 | ) | 1,406,777 | 9 | 8 | |||||||||||||||||
Total corporates | 598,548 | 12,747 | (71,862 | ) | 539,433 | 13,947,979 | 1,278,890 | (197,348 | ) | 15,029,521 | 88 | 87 | |||||||||||||||||
Other fixed maturities: | |||||||||||||||||||||||||||||
Government (U.S., municipal, and foreign) | 440 | 120 | (143 | ) | 417 | 1,836,200 | 131,996 | (1,208 | ) | 1,966,988 | 11 | 11 | |||||||||||||||||
Collateralized debt obligations | 57,473 | 25,664 | (5,888 | ) | 77,249 | 57,473 | 25,664 | (5,888 | ) | 77,249 | — | 1 | |||||||||||||||||
Other asset-backed securities | 14,475 | — | (343 | ) | 14,132 | 145,701 | 3,546 | (365 | ) | 148,882 | 1 | 1 | |||||||||||||||||
Mortgage-backed securities(1) | — | — | — | — | 875 | 71 | (1 | ) | 945 | — | — | ||||||||||||||||||
Total fixed maturities | $ | 670,936 | $ | 38,531 | $ | (78,236 | ) | $ | 631,231 | $ | 15,988,228 | $ | 1,440,167 | $ | (204,810 | ) | $ | 17,223,585 | 100 | 100 |
(1) | Includes Government National Mortgage Association (GNMA). |
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TMK 2019 FORM 10-Q QTR 1
Fixed Maturities by Sector
At 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 GNMAs. |
At March 31, 2019, fixed maturities had a fair value of $17.2 billion, compared with $16.3 billion at December 31, 2018. The net unrealized gain position in the fixed-maturity portfolio increased from $544 million at December 31, 2018 to $1.2 billion at March 31, 2019 due to decreases in interest rates during the period.
Corporate securities, which consist of bonds and redeemable preferred stocks, were the largest component of the fixed maturity portfolio, representing 88% of amortized cost and 87% 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-backed securities. Corporate securities are diversified over a variety of industry sectors and issuers. The total fixed maturity portfolio consisted of 624 issuers.
42
TMK 2019 FORM 10-Q QTR 1
An analysis of the fixed maturity portfolio at March 31, 2019 and December 31, 2018 by a composite quality rating is shown in the tables below. The composite quality rating for each security 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 Torchmark Corporation using ratings from the various rating agencies noted above. (It should be noted that the composite quality rating is not a Standard & Poor's credit rating. Standard and 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 $598 million at amortized cost ($605 million at fair value). The ratings for these holdings were assigned by the third party managers of those securities.
Fixed Maturities by Rating
At March 31, 2019
(Dollar amounts in thousands)
Amortized Cost | % | Fair Value | % | Average Composite Quality Rating on Amortized Cost | |||||||||
Investment grade: | |||||||||||||
AAA | $ | 797,069 | 5 | $ | 835,202 | 5 | |||||||
AA | 1,259,802 | 8 | 1,362,352 | 8 | |||||||||
A | 4,187,083 | 26 | 4,780,810 | 28 | |||||||||
BBB+ | 3,651,360 | 23 | 3,936,943 | 23 | |||||||||
BBB | 3,698,091 | 23 | 3,885,893 | 22 | |||||||||
BBB- | 1,723,887 | 11 | 1,791,154 | 10 | |||||||||
Investment grade | 15,317,292 | 96 | 16,592,354 | 96 | A- | ||||||||
Below investment grade: | |||||||||||||
BB | 422,727 | 2 | 403,541 | 2 | |||||||||
B | 127,748 | 1 | 104,195 | 1 | |||||||||
Below B | 120,461 | 1 | 123,495 | 1 | |||||||||
Below investment grade | 670,936 | 4 | 631,231 | 4 | B+ | ||||||||
$ | 15,988,228 | 100 | $ | 17,223,585 | 100 | ||||||||
Weighted average composite quality rating | BBB+ |
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TMK 2019 FORM 10-Q QTR 1
Fixed Maturities by Rating
At December 31, 2018
(Dollar amounts in thousands)
Amortized Cost | % | Fair Value | % | 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 | |||||||||
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 | |||||||||
Below investment grade | 666,061 | 4 | 600,634 | 4 | |||||||||
$ | 15,753,471 | 100 | $ | 16,297,932 | 100 | B+ | |||||||
Weighted average composite quality rating | BBB+ |
An analysis of the changes in our portfolio of below-investment-grade bonds at amortized cost during the first three months of 2019 is as follows:
Below-Investment-Grade Bonds
(Dollar amounts in thousands)
Balance as of December 31, 2018 | $ | 666,061 | |
Downgrades by rating agencies | 47,422 | ||
Upgrades by rating agencies | (7,392 | ) | |
Disposals | (36,169 | ) | |
Amortization and other | 1,014 | ||
Balance as of March 31, 2019 | $ | 670,936 |
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 13% of our shareholders’ equity, excluding the effect of unrealized gains and losses on fixed maturities as of March 31, 2019.
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TMK 2019 FORM 10-Q QTR 1
Share Purchases. Torchmark has an on-going share repurchase program which began in 1986 that is reviewed quarterly by management and is reaffirmed by the Board of Directors on an annual basis. The program was reaffirmed on August 7, 2018. With no specified authorization amount, we determine the amount of repurchases based on the amount of our excess cash flow, general market conditions, and other alternative uses. These purchases are made at the Parent Company with excess cash flow. Excess cash flow is primarily made up of cash received from the insurance subsidiaries less dividends paid to shareholders and interest paid on our debt. See further discussion in the Capital Resources section below. Share purchases are also made with the proceeds from option exercises by current and former employees in order to reduce dilution. The following chart summarizes share purchases for the three month periods ended March 31, 2019 and 2018.
Analysis of Share Purchases
(Amounts in thousands, except per share data)
Three Months Ended March 31, | |||||||||||||||||||||
2019 | 2018 | ||||||||||||||||||||
Shares | Amount | Average Price | Shares | Amount | Average Price | ||||||||||||||||
Purchases with: | |||||||||||||||||||||
Excess cash flow at the Parent Company | 1,089 | $ | 88,608 | $ | 81.32 | 1,002 | $ | 86,515 | $ | 86.32 | |||||||||||
Option exercise proceeds | 271 | 22,288 | 82.29 | 266 | 23,439 | 88.15 | |||||||||||||||
Total | 1,360 | $ | 110,896 | $ | 81.52 | 1,268 | $ | 109,954 | $ | 86.70 |
Throughout the remainder of this discussion, share purchases will only refer to those made from excess cash flow at the Parent Company.
Financial Condition
Liquidity. Liquidity provides Torchmark with the ability to meet on demand the cash commitments required to support our business operations and meet our financial obligations. Our liquidity is evidenced by consistent positive cash flow, a portfolio of marketable investments, and our 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 restriction. 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.
Three Months Ended March 31, | Twelve Months Ended December 31, | ||||||||||||||
2019 | 2018 | Projected 2019 | 2018 | ||||||||||||
Liquidity Sources: | |||||||||||||||
Dividends from Subsidiaries | $ | 141,549 | $ | 85,137 | $ | 480,000 | $ | 448,142 | |||||||
Excess Cash Flows | 111,733 | 66,176 | 370,000 | 349,243 |
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Additional sources of liquidity for the Parent Company are cash, intercompany receivables, intercompany borrowings, public debt markets, and a credit facility. At March 31, 2019, the Parent Company had $118 million of invested cash and net intercompany receivables. The credit facility is discussed below.
Short-term borrowings. We have 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. We 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 we may issue commercial paper at any time, with total commercial paper outstanding not to exceed the facility maximum, less any letters of credit issued. Interest on the commercial paper program is charged at variable rates. 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, we are subject to certain covenants regarding capitalization. As of March 31, 2019, we were 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 | |||||||||||
March 31, 2019 | December 31, 2018 | March 31, 2018 | |||||||||
Balance of commercial paper at end of period (par value) | $ | 288,000 | $ | 302,100 | $ | 361,290 | |||||
Annualized interest rate | 2.88 | % | 2.93 | % | 2.17 | % | |||||
Letters of credit outstanding | $ | 155,000 | $ | 155,000 | $ | 155,000 | |||||
Remaining amount available under credit line | 307,000 | 292,900 | 233,710 |
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Average balance of commercial paper outstanding during period (par value) | $ | 292,962 | $ | 376,553 | |||
Daily-weighted average interest rate (annualized) | 2.94 | % | 1.92 | % | |||
Maximum daily amount outstanding during period (par value) | $ | 338,000 | $ | 525,990 |
The decrease in commercial paper during the three months ended March 31, 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 three month periods ended March 31, 2019 and 2018.
Torchmark expects to have readily available funds for 2019 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.
Consolidated liquidity. Consolidated net cash inflows from operations were $423 million in the first three months of 2019, compared with $382 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 $188 million during the 2019 period. As previously noted under the caption Short-term borrowings, we have in place a line of credit facility. The insurance companies have no additional outstanding credit facilities.
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Cash and short-term investments were $193 million at March 31, 2019, compared with $184 million at December 31, 2018. In addition to these liquid assets, the entire $17.2 billion (fair value at March 31, 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. Our goal is to maintain statutory capital within our insurance subsidiaries at levels necessary to support our current ratings. Torchmark 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%. At 326%, the Company has $129 million more capital than would be required for an RBC ratio of 300%, the lowest of our target range.
The outstanding long-term debt at book value was $1.4 billion at March 31, 2019 and $1.4 billion at December 31, 2018. An analysis of debt issues outstanding is as follows at March 31, 2019.
Selected Information about Debt Issues
As of March 31, 2019
(Dollar amounts in thousands)
Instrument | Year Due | Interest Rate | Par Value | Book Value | Fair Value | |||||||||||
Notes | 2023 | 7.875% | $ | 165,612 | $ | 164,544 | $ | 194,336 | ||||||||
Senior Notes(1) | 2022 | 3.800% | 150,000 | 148,854 | 152,889 | |||||||||||
Senior Notes | 2028 | 4.550% | 550,000 | 543,310 | 580,877 | |||||||||||
Junior Subordinated Debentures | 2056 | 6.125% | 300,000 | 290,535 | 318,120 | |||||||||||
Junior Subordinated Debentures | 2057 | 5.275% | 125,000 | 123,358 | 127,529 | |||||||||||
Term loan | 2021 | 3.743% | (2) | 92,500 | 92,500 | 92,500 | ||||||||||
1,383,112 | 1,363,101 | 1,466,251 | ||||||||||||||
Less current maturity of term loan(3) | 7,500 | 7,500 | 7,500 | |||||||||||||
Total long-term debt | 1,375,612 | 1,355,601 | 1,458,751 | |||||||||||||
Current maturity of term loan(3) | 7,500 | 7,500 | 7,500 | |||||||||||||
Commercial paper | 288,000 | 286,878 | 286,878 | |||||||||||||
Total short-term debt | 295,500 | 294,378 | 294,378 | |||||||||||||
Total debt | $ | 1,671,112 | $ | 1,649,979 | $ | 1,753,129 |
(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 $7.5 million is classified as short-term debt. |
Issuance of long-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, we acquired 1.1 million of our outstanding common shares under our share repurchase program during the first three months of 2019. These shares were acquired at a cost of $89 million (average of $81.32 per share), compared with purchases of 1.0 million shares at a cost of $87 million (average of $86.32 per share) in the first three months of 2018.
On March 22, 2019, the Company announced that it had declared a quarterly dividend of $0.1725 per share. This dividend was paid on May 1, 2019.
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Shareholders’ equity was $6.0 billion at March 31, 2019. This compares with $5.4 billion at December 31, 2018 and $5.8 billion at March 31, 2018. During the three months since December 31, 2018, shareholders’ equity increased primarily due to $543 million 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 $185 million. Share purchases of $89 million noted above during the period reduced shareholders’ equity.
We are required under GAAP to revalue our 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 Torchmark’s balance sheet, capital structure, and financial ratios in order to provide a more consistent and meaningful portrayal of the Company’s financial position from period to period.
The following table presents selected data related to capital resources. Additionally, the table presents the effect of the GAAP requirement to revalue, to fair market value, our fixed maturity assets on relevant items so that investors and other financial statement users may determine its impact on our capital structure.
Selected Financial Data
(Dollar amounts in thousands, except per share data)
At | |||||||||||||||||||||||
March 31, 2019 | December 31, 2018 | March 31, 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 | $ | 17,223,585 | $ | 1,235,357 | $ | 16,297,932 | $ | 544,461 | $ | 16,635,885 | $ | 1,361,395 | |||||||||||
Deferred acquisition costs(2) | 4,185,231 | (8,469 | ) | 4,137,925 | (5,270 | ) | 4,002,181 | (10,369 | ) | ||||||||||||||
Total assets | 24,133,438 | 1,226,888 | 23,095,722 | 539,191 | 23,182,343 | 1,351,026 | |||||||||||||||||
Short-term debt | 294,378 | — | 307,848 | — | 365,156 | — | |||||||||||||||||
Long-term debt | 1,355,601 | — | 1,357,185 | — | 1,131,215 | — | |||||||||||||||||
Shareholders' equity | 6,043,426 | 969,242 | 5,415,177 | 425,961 | 5,820,301 | 1,067,311 | |||||||||||||||||
Book value per diluted share | 54.13 | 8.68 | 48.11 | 3.79 | 50.13 | 9.19 | |||||||||||||||||
Debt to capitalization(3) | 21.4 | % | (3.1 | )% | 23.5 | % | (1.5 | )% | 20.5 | % | (3.4 | )% | |||||||||||
Diluted shares outstanding | 111,643 | 112,561 | 116,098 | ||||||||||||||||||||
Actual shares outstanding | 109,926 | 110,693 | 113,822 |
(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 insurance purchased. |
(3) | Torchmark’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 11.7 times in the first three months of 2019, compared with 10.8 times in the 2018 period. Interest coverage is computed by dividing interest expense into the sum of pretax income and interest expense.
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Cautionary Statements
We caution readers regarding certain forward-looking statements contained in the previous discussion and elsewhere in this document, and in any other statements made by, or on behalf of Torchmark 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 Torchmark 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 Torchmark 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 Torchmark 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 Torchmark’s assumptions; |
2) | Regulatory developments, including changes in 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; |
11) | Reported amounts in the financial statements which are based on management’s estimates and judgments which may differ from the actual amounts ultimately realized; and |
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. |
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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 three months ended March 31, 2019.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Torchmark, 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 Torchmark 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 Torchmark’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 quarter completed March 31, 2019, an evaluation was performed under the supervision and with the participation of Torchmark management, including the Co-Chairmen and Chief Executive Officers and the Executive Vice President and Chief Financial Officer, of Torchmark’s 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 Torchmark’s 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 March 31, 2019, there have not been any changes in Torchmark’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 annual evaluation which have materially affected, or are reasonably likely to materially affect, Torchmark’s internal control over financial reporting.
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TMK 2019 FORM 10-Q QTR 1
Part II – Other Information
Item 1. Legal Proceedings
Torchmark 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 Torchmark’s 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 Torchmark and its subsidiaries, management does not believe that such litigation will have a material adverse effect on Torchmark’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. Torchmark’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 Torchmark and its subsidiaries have substantial business, creating the potential for unpredictable material adverse judgments in any given punitive damage suit.
See further discussion of litigation and other legal proceedings in Note 5—Commitments and Contingencies.
Item 1A. Risk Factors
Torchmark had no material changes to its risk factors.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Purchases of Certain Equity Securities by the Issuer and Others for the First 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 | ||||||||
January 1-31, 2019 | 386,569 | $ | 79.57 | 386,569 | ||||||||
February 1-28, 2019 | 433,977 | 82.47 | 433,977 | |||||||||
March 1-31, 2019 | 539,878 | 82.14 | 539,878 |
On August 7, 2018, the Torchmark Board of Directors reaffirmed its continued authorization of the Company's 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
(a) | Exhibits |
(10.49) | ||
(10.50) | ||
(10.51) | ||
(31.1) | ||
(31.2) | ||
(31.3) | ||
(32.1) | ||
(101) | Interactive Data Files for the Torchmark Corporation Form 10-Q for the period ended March 31, 2019 |
*Compensatory plan or arrangement.
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TMK 2019 FORM 10-Q QTR 1
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.
TORCHMARK CORPORATION | |||
Date: May 7, 2019 | /s/ Gary L. Coleman | ||
Gary L. Coleman | |||
Co-Chairman and Chief Executive Officer | |||
Date: May 7, 2019 | /s/ Larry M. Hutchison | ||
Larry M. Hutchison | |||
Co-Chairman and Chief Executive Officer | |||
Date: May 7, 2019 | /s/ Frank M. Svoboda | ||
Frank M. Svoboda | |||
Executive Vice President and Chief Financial Officer | |||
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TMK 2019 FORM 10-Q QTR 1