Globe Life, through its subsidiaries, owns or leases buildings that are used in the normal course of business. Globe Life owns and occupies over 500,000 combined square feet in McKinney, Texas (headquarters) and at the Waco, Texas and Oklahoma City, Oklahoma campuses. Additionally, the Company leases other buildings across the U.S. for business purposes.
1)Economic and other conditions leading to unexpected changes in lapse rates and/or sales of our policies, as well as levels of mortality, morbidity, and utilization of health care services that differ from Globe Life's assumptions;
4)Interest rate changes that affect product sales and/or investment portfolio yield;
11)Reported amounts in the consolidated financial statements which are based on management estimates and judgments which may differ from the actual amounts ultimately realized; and
•Net income as a return on equity ("ROE") was 11.6% and net operating income as an ROE, excluding net unrealized gains on the fixed maturity portfolio(1) was 14.5%.
•Total premium increased 5% over the same period in the prior year. Life premium increased 5% for the period from $2.4 billion in 2018 to $2.5 billion in 2019. Life underwriting margin increased 8% from $652 million in 2018 to $703 million in 2019.
•Net investment income increased 3% over the same period in the prior year. In addition, excess investment income increased 5% over the prior year.
•Total net sales increased 6% over the same period in the prior year from $584 million to $621 million.
•In 2019, the Company repurchased 3.9 million Globe Life Inc. common shares at a total cost of $350 million for an average share price of $89.04.
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 net unrealized gains, which are primarily attributable to fluctuation in interest rates on the available-for-sale portfolio. The impact of the adjustment to exclude net unrealized gains on fixed maturities is $2.0 billion and $426 million for 2019 and 2018, respectively.
In 2019, the largest contributor of total underwriting margin was the life insurance segment and the primary distribution channel was American Income Life Division. The following tables represent the breakdown of total underwriting margin by operating segment and distribution channel for the year ended December 31, 2019.
Life insurance premium income increased 5% to $2.5 billion over the prior year total of $2.4 billion. Life net sales rose 4% to $430 million for the year of 2019. First-year collected life premium rose 3% to $329 million. Life underwriting margins, as a percent of premium, increased to 28% in 2019 from 27% in the prior year. Underwriting margin increased to $703 million for the year ended December 31, 2019, 8% over the same period in 2018.
A discussion of each of Globe Life's segments follows. The following discussions are presented in the manner we view our operations, as described in Note 14-Business Segments.
•Net sales is annualized premium issued (gross premium that would be received during the policies' first year in force and assuming that none of the policies lapsed or terminated), net of cancellations in the first thirty days after issue, except in the case of our Direct to Consumer Division, where net sales is annualized premium issued at the time the first full premium is paid after any introductory offer period has expired. We believe that net sales is a better indicator of the rate of premium growth as compared with annualized premium issued.
Life insurance is the Company's predominant segment, with 2019 life premium representing 70% of total premium and life underwriting margin representing 74% of the total. Additionally, investments supporting the reserves for life products produce the majority of excess investment income attributable to the investment segment.
The table below discloses average life exclusive producing agents by distribution channel.
(1)The average producing agent count is based on the actual count at the end of each week during the year.
Health premium accounted for 30% of our total premium in 2019, while the health underwriting margin accounted for 25% of total underwriting margin, reflective of the lower underwriting margin as a percent of premium for health compared with life insurance. As noted under the caption Life Insurance, the Company has emphasized life insurance sales relative to health due to life’s superior profitability and its greater contribution to excess investment income.
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 for each of the last three years.
The following table discloses first-year collected health premium by distribution channel.
The United American Division consists of non-exclusive independent agencies who may also sell for other companies. The United American Division was Globe Life's largest health agency in terms of health premium income.
This division is also Globe Life's largest producer of Medicare Supplement insurance. The United American Division represents 78% of all Medicare Supplement premium and 95% of Medicare Supplement net sales. Medicare Supplement premium in this agency rose 10% to $406 million in 2019 over the prior period balance of $370 million. Underwriting margin as a percent of premium was 14%, down from 16% for the prior year. This decrease was primarily due to higher policy obligations and amortization of deferred acquisition costs as a percentage of premium in 2019 compared with 2018.
The Family Heritage Division primarily markets limited-benefit supplemental health insurance in non-urban areas. Most of its policies include a cash-back feature, such as a return of premium, where any excess of premiums over claims paid is returned to the policyholder at the end of a specified period stated within the insurance policy. Underwriting margin as a percent of premium was 25%, up from 24% for the year ended December 31, 2018. The increase was primarily attributable to favorable policy obligations in the current period compared with the prior year. A focused effort across the division for more consistent recruiting activity along with two targeted incentive programs in the second half of 2019 helped drive the 5% average producing agent count growth in 2019 as noted below.
Management also views excess investment income per diluted common share as an important and useful measure to evaluate the performance of the investment segment. It is defined as excess investment income divided by the total diluted weighted average shares outstanding, representing the contribution by the investment segment to the consolidated earnings per share of the Company. Since implementing our share repurchase program in 1986, we have used $7.8 billion of excess cash flow at the Parent Company to repurchase Globe Life Inc. common shares after determining that the repurchases provided a greater risk adjusted after-tax return than other investment alternatives. If we had not used this excess cash to repurchase shares, but had instead invested it in interest-bearing assets, we would have earned more investment income and had more shares outstanding. As excess investment income per diluted common share incorporates all capital resources, we view excess investment income per diluted share as a useful measure to evaluate the investment segment.
Should interest rates, especially long-term rates, rise, Globe Life's net investment income would benefit due to higher interest rates on new purchases. While such a rise in interest rates could adversely affect the fair value of the fixed maturities portfolio, we could withstand an increase in interest rates of approximately 115 to 120 basis points before the net unrealized gains on our fixed maturity portfolio as of December 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 the ability to hold our investments to maturity.
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 mandate that interest rate assumptions for a particular block of business be “locked in” for the life of that block of business. Each calendar year, we set the discount rate to be used to calculate the benefit reserve liability and the amortization of the deferred acquisition cost asset for all insurance policies issued that year. That rate is based on the new money yields that we expect to earn on cash flow received in the future from policies of that issue year, and cannot be changed. The discount rate used for policies issued in the current year has no impact on the in force policies issued in prior years as the rates of all prior issue years are also locked in. As such, the overall discount rate for the entire in force block of 5.6% is a weighted average of the discount rates being used from all issue years. Changes in the overall weighted-average discount rate over time are caused by changes in the mix of the reserves and the deferred acquisition cost asset by issue year on the entire block of in force business. Business issued in the current year has very little impact on the overall weighted-average discount rate due to the size of our in force business.
Since actuarial discount rates are locked in for life on essentially all of our business, benefit reserves and deferred acquisition costs are not affected by interest rate fluctuations unless a loss recognition event occurs. Due to the strength of our underwriting margins, we do not expect an extended low interest rate environment to cause a loss recognition event.
Information about interest on net policy liabilities is shown in the following table.
Despite our intent to hold fixed maturity investments for a long period of time, investments are occasionally sold or called, resulting in a realized gain or loss. These gains and losses generally occur only incidentally, usually as the
result of bonds sold because of deterioration in investment quality of issuers or calls by the issuers. Investment losses are also caused by write downs due to impairments. We do not engage in trading investments for profit. Therefore, gains or losses which occur in protecting the portfolio or its yield, or which result from events that are beyond our control, are only secondary to our core insurance operations of providing insurance coverage to policyholders. In a bond exchange offer, bondholders may consent to exchange their existing bonds for another class of debt securities. The exchanges on our bonds have generally been the result of mergers and acquisitions, and are offered to move debt to the new or surviving entity.
The following table summarizes our tax-effected realized gains (losses) by component for each of the three years ended December 31, 2019.
(1)Fixed maturity acquisitions included unsettled trades of $8 million in 2019, $41 thousand in 2018 and $0 in 2017.
For investments in callable bonds, the actual life of the investment will depend on whether the issuer calls the investment prior to the maturity date. Given our investments in callable bonds, the actual average life of our investments cannot be known at the time of the investment. Absent sales and "make-whole calls", however, the average life will not be less than the average life to next call and will not exceed the average life to maturity. Data for both of these average life measures is provided in the above chart.
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. As of December 31, 2019, Globe
(1)Tax-equivalent basis. The yield on tax-exempt securities is adjusted to produce a yield equivalent to the pretax yield on taxable securities.
At December 31, 2019, fixed maturities had a fair value of $18.9 billion, compared with $16.3 billion at December 31, 2018. The net unrealized gain position in the fixed-maturity portfolio increased from $544.5 million at December 31, 2018 to $2.5 billion at December 31, 2019 due to decreases in interest rates during the period.
An analysis of the fixed maturity portfolio by a composite quality rating at December 31, 2019 and 2018 is shown in the following tables. The composite rating for each security, other than private-placement securities managed by third parties, is the average of the security’s ratings as assigned by Moody’s Investor Service, Standard & Poor’s, Fitch Ratings, and Dominion Bond Rating Service, LTD. The ratings assigned by these four nationally recognized statistical rating organizations are evenly weighted when calculating the average. The composite quality rating is created using a methodology developed by Globe Life using ratings from the various rating agencies noted above. The composite quality rating is not a Standard & Poor's credit rating. Standard & Poor's does not sponsor, endorse or promote the composite quality rating and shall not be liable for any use of the composite quality rating. Included in the chart below are private placement fixed maturity holdings of $581 million at amortized cost ($609 million at fair value) for which the ratings were assigned by the third party managers.
An analysis of changes in our portfolio of below-investment grade fixed maturities at amortized cost is as follows:
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 December 31, 2019.
The following table illustrates the market risk sensitivity of our interest-rate sensitive fixed maturity portfolio at December 31, 2019 and 2018. This table measures the effect of a parallel shift in interest rates (as represented by the U.S. Treasury curve) on the fair value of the fixed maturity portfolio. The data measures the change in fair value arising from an immediate and sustained change in interest rates in increments of 100 basis points.
The 7.3% increase in insurance administrative expenses was primarily due to an increase in information technology expenses. The increase in information technology costs reflects investments related to data analytics capabilities, administrative systems modernization, and information security programs. The increase in stock-based compensation expense was primarily due to higher expense associated with equity awards, reflecting the Parent Company's increasing share price over the past several years.
Globe Life has an ongoing share repurchase program that began in 1986, and is reviewed quarterly by management and annually reaffirmed by the Board of Directors. The program was reaffirmed on August 8, 2019. With no specified authorization amount, we determine the amount of repurchases based on the amount of the excess cash flow at the Parent Company, general market conditions, and other alternative uses. The majority of these purchases are made from excess cash flow. Excess cash flow at the Parent Company is primarily comprised of dividends received from the insurance subsidiaries less interest expense paid on its debt, dividends paid to Parent Company shareholders, and other limited operating activities. Additionally, when stock options are exercised, proceeds from these exercises and the resulting tax benefit are used to repurchase additional shares on the open market to minimize dilution as a result of the option exercises. The Board of Directors has authorized the Parent Company’s share repurchase program in amounts and with timing that management, in consultation with the Board, determines to be in the best interest of the Company and its shareholders.
Insurance Subsidiary Liquidity. The operations of our insurance subsidiaries have historically generated substantial cash inflows in excess of immediate cash needs. Cash inflows for the insurance subsidiaries primarily include premium and investment income. In addition to investment income, maturities and scheduled repayments in the investment portfolio are cash in-flows. 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. Excess cash available from the insurance subsidiaries’ operations is generally distributed as a dividend to the Parent Company, subject to regulatory restrictions. The dividends are generally paid in amounts equal to the subsidiaries’ prior year statutory net income excluding realized capital gains. While the leading source of the excess cash is investment income, a significant portion of the excess cash also comes from underwriting income due to our high underwriting margins and effective expense control.
The Parent Company expects to have readily available funds for 2020 and the foreseeable future to conduct its operations and to maintain target capital ratios in the insurance subsidiaries through internally generated cash flow and the credit facility. In the unlikely event that more liquidity is needed, the 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.
As of December 31, 2019, we had no unconsolidated affiliates and no guarantees of the obligations of third party entities. All of the Parent Company's guarantees were guarantees of the performance of consolidated subsidiaries, as disclosed in Note 6-Commitments and Contingencies.
(4)Pension obligations are primarily liabilities in trust funds that are calculated in accordance with the terms of the pension plans. They are offset by invested assets in the trusts, which are funded through periodic contributions by Globe Life in a manner which will provide for the settlement of the obligations as they become due. Therefore, our obligations are offset by those assets when reported on Globe Life's Consolidated Balance Sheets. At December 31, 2019 these pension obligations were $665 million, offset by assets of $469 million in the pension assets. The schedule of pension benefit payments covers ten years and is based on the same assumptions used to measure the pension obligations, except there is no interest assumption because the payments are undiscounted. Please refer to Note 9-Postretirement Benefits for more information on pension obligations.
Capital Resources. The Parent Company's capital structure consists of short-term debt (the commercial paper facility and the current maturity of funded debt), long-term debt, and shareholders’ equity.
Debt: The carrying value of the long-term debt was $1.3 billion at December 31, 2019, which decreased from $1.4 billion a year earlier. A complete analysis and description of long-term debt issues outstanding is presented in Note 11-Debt.
On September 27, 2018, the Parent Company completed the issuance and sale of $550 million in aggregate principal of the Company's 4.55% Senior Notes due 2028. The notes were sold pursuant to the Company's shelf registration statement on Form S-3. The net proceeds from the sale of the notes were $543 million, after giving effect to the underwriting discounts and commissions and offering expenses payable by the Parent Company. The Company used the net proceeds from the sale of the notes to redeem the $293 million outstanding principal amount on the Company's 9.25% Senior Notes on October 29, 2018, the payment of $11 million for the make-whole premium plus accrued and unpaid interest of $10 million, and to fund $150 million of additional capital to its insurance subsidiaries. The Parent Company used the remaining net proceeds to repay outstanding commercial paper and for general corporate purposes.
Our goal is to maintain statutory capital within our insurance subsidiaries at levels necessary to support our current ratings. For 2019, Globe Life targeted a consolidated Company Action Level RBC ratio of 300% to 320%. The Company concludes that this capital level is more than adequate and sufficient to support its current ratings, given the nature of its business and its risk profile. As of December 31, 2019, our consolidated Company Action Level RBC ratio was 318%.
Shareholders’ equity was $7.3 billion at December 31, 2019, compared with $5.4 billion at December 31, 2018, an increase of $1.9 billion or 35%. During the twelve months since December 31, 2018, shareholders’ equity was increased by $1.5 billion of after-tax unrealized gains as well as $761 million of net income during this period. Shareholders' equity was reduced by $350 million in share purchases under the repurchase program and an additional $109 million in share purchases to offset the dilution from stock option exercises.
We plan to use excess cash available at the Parent Company as efficiently as possible in the future. Possible uses of excess cash flow include, but are not limited to, share repurchases, acquisitions, increases in shareholder dividends, investment in securities, or repayment of short-term debt. We will determine the best use of excess cash
after ensuring that targeted capital levels are maintained in our insurance subsidiaries. If market conditions are favorable, we currently expect that share repurchases will continue to be a primary use of those funds.
Approximately 89% of our liabilities for future policy benefits at December 31, 2019 were traditional insurance liabilities where the liability is determined as the present value of future benefits less the present value of the portion of the gross premium required to pay for such benefits. The assumptions used in estimating the future benefits for this portion of business are set at the time of contract issue. These assumptions are “locked in” and are not revised for the lifetime of the contracts, except where there is a premium deficiency, as defined in Note 1-Significant Accounting Policies under the caption Future Policy Benefits. Otherwise, variability in the accrual of policy reserve liabilities after policy issuance is caused only by variability of the inventory of in force policies.
At times, the values of our fixed maturities can also be affected by illiquidity in the financial markets. Illiquidity would contribute to a spread widening, and accordingly to unrealized losses, on many securities that we would expect to be fully recoverable. Even though our fixed maturity portfolio is available for sale, we have the ability and intent to hold the securities until maturity as a result of our strong and stable cash flows generated from our insurance products. Considerable information concerning the policies, procedures, classification levels, and other relevant data concerning the valuation of our fixed maturity investments is presented in Note 1-Significant Accounting Policies and in Note 4-Investments under the captions Fair Value Measurements in both notes.
Investments in fixed maturities classified as available for sale are reported at fair value in the financial statements. The investments without readily determinable market values are valued using significant unobservable inputs such as credit ratings and discount rates. These inputs involve considerable judgment by management.
Auditing these inputs required especially subjective judgment and required the involvement of our fair value specialists to fully evaluate them.
•With the assistance of our fair value specialists, we developed independent estimates of fair value for a selection of securities and compared our estimates to management’s estimates.
The Company’s management sets assumptions in (1) recording a liability for policy benefit payments that will be made in the future (future policy benefits) and (2) determining amortization of deferred acquisition costs. The most significant assumptions include mortality, morbidity, and persistency. Assumptions are determined based upon published studies and analysis of Company specific experience, adjusted for changes in exposure and other relevant factors. Given the inherent uncertainty of these significant assumptions, auditing the development of such assumptions involved especially subjective judgment.
(2)On January 1, 2019, Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), became effective and the Company recorded a cumulative-effect adjustment to the opening balance of retained earnings to account for the adoption. See further discussion in Note 1-Significant Accounting Policies.
"Globe Life" and the "Company" refer to Globe Life Inc., an insurance holding company incorporated in Delaware in 1979, and its subsidiaries and affiliates. Its primary subsidiaries are Globe Life And Accident Insurance Company, American Income Life Insurance Company, Liberty National Life Insurance Company, Family Heritage Life Insurance Company of America, and United American Insurance Company.
In 2016, Globe Life sold one of its operating segments, Medicare Part D. The financial results of this business are excluded from the Company's continuing operations including the Notes to the Consolidated Financial Statements. The Company received final settlement related to the assets and liabilities in 2019.
Investments: Globe Life classifies all of its fixed maturity investments as available for sale. Investments classified as available for sale are carried at fair value with unrealized gains and losses, net of taxes, reflected directly in accumulated other comprehensive income ("AOCI"). Policy loans, which represent loans provided to policyholders using cash values as collateral, are carried at unpaid principal balances. Other long-term investments include limited partnerships, commercial mortgage loan participations, equity securities, and real estate. Investments in equity securities are reported at fair value with changes in fair value, net of taxes, reflected directly in "Realized Gains (Losses)" in the Consolidated Statements of Operations. Investments in real estate are reported at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful life. Investments in limited partnerships consist of low-income housing tax credits and investment funds. We have elected the fair value option method for our investment funds and the net asset value is used to approximate fair value, as a practical expedient, with fluctuations in fair value reflected directly in "Realized Gains (Losses)" in the Consolidated Statements of Operations. Short-term investments include investments in interest-bearing assets with original maturities of twelve months or less. Gains and losses realized on the disposition of investments are determined on a specific identification basis.
•Level 3-fair values are based on inputs that are considered unobservable where there is little, if any, market activity for the asset or liability as of the measurement date. In this circumstance, the Company has to rely on values derived by independent brokers or internally-developed assumptions. Unobservable inputs are developed based on the best information available to the Company which may include the Company’s own data or bid and ask prices in the dealer market.
For all asset classes within Globe Life's significant security types, third-party pricing services use a common valuation technique to model the price of the investments using observable market data. The foundation for these models consists of developing yield spreads based on multiple observable market inputs, including but not limited to: benchmark yield curves, actual trading activity, new issue yields, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, sector-specific data, economic data, and other inputs that are corroborated in the market. Pricing vendors monitor and review their pricing data continuously with current market and economic data feeds, augmented by ongoing communication within the dealer community.
Globe Life invests in a portfolio of private placement fixed maturities that are not actively traded. This portfolio is managed by third-parties. The portfolio managers provide valuations for the bonds based on a pricing matrix utilizing observable inputs, such as the benchmark treasury rate and published sector indices, and unobservable inputs such as an internally-developed credit rating. If observable inputs cannot be corroborated, the fair values are classified as Level 3.
The fair values for each class of security and by valuation hierarchy level are indicated in Note 4-Investments under the caption Fair value measurements, and Note 9-Postretirement Benefits under the caption Pension Assets.
Impairment of Investments: Globe Life's portfolio of fixed maturities fluctuates in value due to changes in interest rates in the financial markets as well as other factors. Fluctuations caused by market interest rate changes have little bearing on whether or not the investment will be ultimately recoverable; and therefore, the Company considers declines in value resulting from changes in market interest rates to be temporary. In certain circumstances, however, the Company will conclude the decline in the value of a security to be other-than-temporary and correspondingly write the book value of the security down to its fair value, realizing an investment loss.
•The financial condition of the issuer and the prospects for recovery in fair value of the security
considered credit loss and the portion of loss which is due to other factors. The credit loss portion is charged to earnings while the loss due to other factors is charged to other comprehensive income. The credit loss portion of an impairment is determined as the difference between the security’s amortized cost and the present value of expected future cash flows discounted at the security’s original effective yield rate. The temporary portion is the difference between this present value of expected future cash flows and fair value (as discounted by a market yield). The expected cash flows are determined using judgment and the best information available to the Company. Inputs used to derive expected cash flows include expected default rates, current levels of subordination, and loan-to-collateral value ratios.
DAC and VOBA are amortized in a systematic manner which matches these costs with the associated revenues. Policies other than universal life-type policies are amortized with interest over the estimated premium-paying period of the policies in a manner which charges each year’s operations in proportion to the receipt of premium income. Universal life-type policies are amortized with interest in proportion to estimated gross profits. The assumptions used to amortize acquisition costs include interest, mortality, morbidity, and persistency, and are consistent with those used to estimate the liability for future policy benefits. For interest-sensitive and deposit-type products, these assumptions are reviewed on a regular basis and are revised if actual experience differs significantly from original expectations. For all other products, amortization assumptions are generally not revised once established.
capitalized are included as a component of DAC. Additionally, they are amortized in the same manner as other DAC. Direct to Consumer advertising costs charged to earnings and included in other operating expense were $9.5 million, $9.0 million, and $9.3 million in 2019, 2018, and 2017, respectively. At December 31, 2019, unamortized capitalized advertising costs included within DAC were $1.3 billion at December 31, 2019 and $1.3 billion at December 31, 2018.
Goodwill: The excess cost of a business acquired over the fair value of net assets acquired is reported as goodwill. In accordance with the guidance, Goodwill is subject to impairment testing on an annual basis, or whenever potential impairment triggers occur. Impairment testing involves the performance of a qualitative analysis, which involves assessing current events and circumstances to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Globe Life tested its goodwill annually as of June 30th for each of the years 2017 through 2019. The Company's goodwill was not impaired in any of those periods.
As noted in Accounting Pronouncements Adopted in the Current Year, the Company early adopted ASU 2017-04. In accordance with the new guidance, in the event the fair value is less than the carrying value, further testing is required to determine the amount of impairment, if any. If there is an impairment in the goodwill of any reporting unit, it is written down and charged to earnings in the period of the test.
Low-Income Housing Tax Credit Interests: Globe Life invests in limited partnerships that provide low-income housing tax credits and other related federal income tax benefits to the Company. Globe Life holds passive interests in limited partnerships that provide investment returns through the provision of tax benefits (principally from the transfer of federal or state tax credits related to federal low-income housing). These investments are considered to be VIEs and do not qualify for consolidation. The carrying value of the Company's investment in these entities was $206 million and $226 million at December 31, 2019 and 2018, respectively, and was included in "Other assets" on the Consolidated Balance Sheets. As of December 31, 2019, Globe Life was obligated under future commitments of $52 million, which are recorded in "Other liabilities". For guaranteed investments acquired prior to January 1, 2015, the Company utilizes the effective-yield method of amortization, while the proportional method of amortization is utilized for all non-guaranteed and guaranteed investments acquired on or after January 1, 2015. All amortization expense is recorded in "Income tax benefit (expense)" on the Consolidated Statements of Operations.
Property and Equipment: Property and equipment, included in “Other assets,” is reported at cost less accumulated depreciation. Depreciation is recorded primarily on the straight line method over the estimated useful lives of these assets which range from three to ten years for equipment and fifteen to forty years for buildings and improvements. Ordinary maintenance and repairs are charged to income as incurred. Impairments, if any, are recorded when certain events and circumstances become evident that the fair value of the asset is less than its carrying amount. Original cost of property and equipment was $298 million at December 31, 2019 and $256 million at December 31, 2018. Accumulated depreciation was $137 million at the end of 2019 and $121 million at the end of 2018. Depreciation expense was $16 million in 2019, $13 million in 2018, and $11 million in 2017. Internally generated software costs are expensed as incurred in the preliminary project phase and post-implementation phase, and are capitalized during the application development stage. Additionally, implementation costs incurred in a hosting arrangement that is a service contract are capitalized. (See additional information on the adoption of ASU 2018-15 under Accounting Pronouncements Adopted in the Current Year.)
Future Policy Benefits: The liability for future policy benefits for annuity and universal life-type products is represented by policy account value. The liability for future policy benefits for all other life and health products, approximately 89% of total liabilities for future policy benefits, is determined on the net level premium method. This method provides for the present value of expected future benefit payments less the present value of expected future net premiums, based on estimated investment yields, mortality, morbidity, persistency, and other assumptions which were considered appropriate at the time the policies were issued. For limited-payment contracts, a deferred profit liability is also recorded which causes profits to emerge over the life of the contract in proportion to policies in force.
Assumptions used for traditional life and health insurance products are based primarily on Company experience. Assumptions for interest rates range from 2.5% to 7.0% for Globe Life's insurance companies with an overall
The expected term is generally derived from Company experience. However, expected terms are determined based on the simplified method as permitted under the ASC 718, Stock Compensation, topic when Company experience is insufficient. On April 26, 2018, the shareholders approved the Globe Life Inc. 2018 Incentive Plan, formerly the Torchmark Corporation 2018 Incentive Plan (the "2018 Incentive Plan"). The 2018 Incentive Plan replaced all previous plans. The 2018 Incentive Plan allows for option grants for employees with a seven-year contractual term which vest over three years in addition to ten-year grants which vest over five years as permitted by the previous plans. Director grants vest over six months. The Company has sufficient experience with seven-year grants that vest in three years, but insufficient historical experience with five-year vesting. Therefore, the Company has used the simplified method to determine the expected term for the ten-year grants with five-year vesting and will do so until adequate experience is developed. Volatility and risk-free interest rates are assumed over a period of time consistent with the expected term of the option. Volatility is measured on a historical basis. Monthly data points are utilized to derive volatility for periods greater than three years. Expected dividend yield is based on current dividend yield held constant over the expected term. Once the fair value of an option has been determined, it is amortized on a straight-line basis over the employee’s service period for that grant (from the grant date to the date the grant is fully vested). Expenses for restricted stock and restricted stock units are based on the grant date fair value allocated on a straight-line basis over the service period. Performance share expense is recognized based on management’s estimate of the probability of meeting the metrics identified in the performance share award agreement, assigned to each service period as these estimates develop.
Stock-based compensation expense is included in “Other operating expense” in the Consolidated Statements of Operations. Globe Life management views all stock-based compensation expense as a Corporate and Other expense and, therefore, presents it as such in its segment analysis. More information concerning the Company's segments is provided in Note 14-Business Segments.
The excess, if any, of shareholder’s equity of the insurance subsidiaries on a GAAP basis over that determined on a statutory basis is not available for distribution by the insurance subsidiaries to the Parent Company without regulatory approval. Insurance subsidiaries’ statutory capital and surplus necessary to satisfy regulatory requirements in the aggregate was $506 million at December 31, 2019. More information on the restrictions on the payment of dividends can be found in Note 12-Shareholders' Equity.
The Company's statutory financial statements are presented on the basis of accounting practices prescribed by the insurance department of the state of domicile of each insurance subsidiary. While all states have adopted the National Association of Insurance Commissioners’ ("NAIC") statutory accounting practices ("NAIC SAP") as the basis for statutory accounting, certain states have retained prescribed practices of their respective insurance code or administrative code which can differ from NAIC SAP. For Globe Life's life insurance companies, there are no significant differences between NAIC SAP and the accounting practices prescribed by the states of domicile.
Portfolio Composition: Summaries of fixed maturities available for sale by cost or amortized cost and estimated fair value at December 31, 2019 and 2018 are as follows. Redeemable preferred stock is included within the corporates by sector.
A schedule of fixed maturities available for sale by contractual maturity date at December 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.
(1)There were no unsettled sales in the periods ended December 31, 2019, 2018 and 2017.
The following table represents quantitative information about Level 3 fair value measurements:
Unrealized Loss Analysis: The following table discloses information about fixed maturities available for sale in an unrealized loss position.
Globe Life's entire fixed maturity portfolio consisted of 1,633 issues at December 31, 2019 and 1,548 issues at December 31, 2018. The weighted-average quality rating of all unrealized loss positions at amortized cost as of December 31, 2019 was BBB- compared with BBB+ as of December 31, 2018. The drop in quality rating is attributed to the overall decreasing interest rate that has caused certain securities to move from an unrealized loss position to an unrealized gain position.
The following tables disclose unrealized investment losses by class and major sector of fixed maturities available for sale at December 31, 2019 and 2018, respectively. Globe Life considers these investments to be only temporarily impaired.
Gross unrealized losses decreased from $428 million at December 31, 2018 to $83 million at December 31, 2019, a decrease of $345 million. The decrease in the gross unrealized losses from the prior year was primarily attributable to the decrease in market interest rates.
Other-than-temporary impairments (OTTI): Gross unrealized losses may fluctuate quarter over quarter due to adverse factors in the market that affect our holdings, such as changes in the interest rates or credit spreads. While the Company holds securities that may be in an unrealized loss position from time to time, Globe Life has the ability and intent to hold these investments to recovery. Additionally, the Company does not expect to be required to sell any of its securities due to the strong cash flows generated by its insurance operations.
In accordance with the other-than-temporary impairment policy, the Company evaluated its fixed maturities available for sale in an unrealized loss position to determine if there was any impairment for the year. Based on the results of the evaluation, the Company concluded there were no other-than-temporary impairments for the years ended December 31, 2019 and 2018. During the year ended 2017, the Company recorded $245 thousand ($159 thousand, net of tax) in impairment.
As of December 31, 2019, previously written down securities remaining in the portfolio were carried at a fair value of $61 million, or less than 0.4% of the fair value of the fixed maturity portfolio. Globe Life is continuously monitoring the market conditions impacting its portfolio.
As of December 31, 2019, state and municipal governments represented 9% of invested assets at fair value. Such investments are made throughout the U.S. At December 31, 2019, the state and municipal bond portfolio at fair value was invested in securities issued within the following states: Texas (22%), Michigan (8%), New York (7%), Florida (6%), Washington (6%), and Ohio (5%). Otherwise, there was no concentration within any given state greater than 5%.
Securities, cash, and short-term investments held on deposit with various state and federal regulatory authorities had an amortized cost and fair value, respectively, of $816 million and $956 million at December 31, 2019 and $712 million and $763 million at December 31, 2018.
(1)Diversified commercial mortgage loan portfolio primarily invested in high quality, floating rate, transitional senior mortgage loans secured by U.S. commercial real estate. Expected life is 7 years for non-redeemable fund.
(2)Opportunistic credit seeking to capitalize on locations across global, public and private residential, commercial, corporate and specialty credit markets.
(3)Equity investments in core infrastructure assets less sensitive to economic cycles, with long-term contractual cash flows, often operating in monopolistic environments invested across sectors including airports, midstream, ports, power generation, renewables, liquefied natural gas off-take, rail, utilities, waste, and other. Expected life is approximately 10 years.
(1)Annual net operating income divided by annual mortgage debt service (principal and interest).
As of December 31, 2019 and 2018, the Company evaluated the commercial mortgage loan portfolio on a loan-by-loan basis to determine any allowance for loan loss. Factors considered include, but are not limited to, collateral value, loan-to-value ratio, debt service coverage ratio, local market conditions, credit quality of the borrower and tenants, and loan performance. As of December 31, 2019 and 2018, there was no allowance for loan loss.
Insurance affiliates also assume insurance risks of other external companies. Life reinsurance assumed represented 1.4% of life insurance in force at December 31, 2019 and reinsurance assumed on life and accident and health products represented 0.6% of premium income for 2019.
Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in excess of one year at December 31, 2019 were as follows:
Guarantees: At December 31, 2019, Globe Life had in place three guarantee agreements, of which were either Parent Company guarantees of subsidiary obligations to a third party, or Parent Company guarantees of obligations between wholly-owned subsidiaries. As of December 31, 2019, Globe Life had no liability with respect to these guarantees.
Letters of Credit: Globe Life has guaranteed letters of credit in connection with its credit facility with a group of banks as disclosed in Note 11-Debt. The letters of credit were issued by TMK Re, Ltd., a wholly-owned subsidiary, to secure TMK Re, Ltd.’s obligation for claims on certain policies reinsured by TMK Re, Ltd. that were sold by other Globe Life insurance companies. These letters of credit facilitate TMK Re, Ltd.’s ability to reinsure the business of Globe Life's insurance carriers. The agreement expires in 2021. The maximum amount of letters of credit available is $250 million. The Parent Company would be liable to the extent that TMK Re, Ltd. does not pay the reinsured party. On April 2, 2019, the letters of credit were amended to reduce the current amount outstanding to $150 million from $155 million outstanding as of December 31, 2018. As of December 31, 2019, the letters of credit outstanding were $150 million.
Litigation: Globe Life Inc. and its subsidiaries, in common with the insurance industry in general, are subject to litigation, including putative class action litigation, alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of the Parent Company's insurance subsidiaries, employment discrimination, worker classification, and miscellaneous other causes of action. Based upon information presently available, and in light of legal and other factual defenses available to the Parent Company and its subsidiaries, management does not believe that it is reasonably possible that such litigation will have a material adverse effect on Globe Life's financial condition, future operating results or liquidity; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future. This bespeaks caution, particularly in states with reputations for high punitive damage verdicts. Globe Life's management recognizes that large punitive damage awards bearing little or no relation to actual damages continue to be awarded by juries in jurisdictions in which the Company has substantial business, creating the potential for unpredictable material adverse judgments in any given punitive damage suit.
On October 18, 2018, putative class action litigation was filed against Torchmark Corporation and American Income Life in California’s Los Angeles County Superior Court (Golz v. American Income Life Insurance Company, et al., Case No. 18STCV01354) (Golz Action). American Income Life removed the case to the United States District Court for the Central District of California (Case No. 2:18-cv-09879 R (SSx)). An amended complaint was filed on February 5, 2019. On February 6, 2019, Torchmark Corporation was dismissed without prejudice and the case proceeded with respect to American Income Life. On April 2, 2019, the District Court granted American Income Life’s motion to dismiss four of the five causes of action asserted. The amended complaint’s remaining claim alleges that plaintiff, as an American Income Life insurance agent trainee in California, was an employee who should have been compensated accordingly. The plaintiff seeks to represent a class of individuals in California who trained to contract as American Income Life agents and who subsequently worked as contracted agents. The class period is alleged to begin four years prior to the complaint’s filing. The complaint seeks restitution under the California Business and Professions Code for alleged unfair business practices such as failure to pay minimum wage and overtime, failure to provide meal and rest breaks, and failure to reimburse business expenses.
On December 14, 2018, putative class action litigation was filed against American Income Life in United States District Court for the Northern District of California (Hamilton v. American Income Life Insurance Company, Case No. 4:18-cv-7535-KAW) (Hamilton Action). An amended complaint was filed on January 23, 2019. The plaintiffs, former insurance sales agents of American Income Life, are suing on behalf of all current and former trainees and sales agents who sold insurance for American Income Life in the State of California for the last four years prior to the filing of the complaint. The lawsuit alleges that putative class members are employees and asserts claims under the California Labor Code, California Business and Professions Code, and California Private Attorney General Act. The complaint seeks compensatory damages, penalties and attorney fees on claims for failure to pay minimum wage and overtime, failure to provide meal and rest breaks, failure to appropriately pay agents at termination, failure to provide itemized wage statements, failure to reimburse expenses, misclassification and unfair business practices.
At the end of each period, the liability for unpaid health claims includes an estimate of claims incurred but not yet reported to the Company. Such estimates are updated regularly based upon the Company’s most recent claims data with recognition of emerging experience trends. Due to the nature of the Company’s health business, the payment lags are relatively short and most claims are fully paid within a year from the time incurred. Fluctuations in claims experience can lead to either over or under estimation of the liability for any given year. The difference between the estimate made at the end of the prior period and the actual experience during the period is reflected above under the caption “Incurred related to: Prior years.”
Below is the reconciliation of the liability of "Policy claims and other benefits payable" in the Consolidated Balance Sheets.
In each of the years 2017 through 2019, deferred income tax expense (benefit) was incurred because of certain differences between net income before income tax expense (benefit) as reported on the Consolidated Statements of Operations and taxable income as reported on Globe Life's income tax returns. As explained in Note 1-Significant Accounting Policies, these differences caused the consolidated financial statement book values of some assets and liabilities to be different from their respective tax bases.
The effective income tax rate differed from the expected U.S. federal statutory rate of 21% for 2019 and 2018 and 35% for 2017 as shown below:
Globe Life's tax liability is adjusted to include a provision for uncertain tax positions taken or expected to be taken in a tax return. However, during the years 2017 through 2019, Globe Life did not have any uncertain tax positions which resulted in unrecognized tax benefits.
Globe Life has qualified noncontributory defined benefit pension plans and contributory savings plans that cover substantially all employees. There is also a nonqualified noncontributory supplemental executive retirement plan (SERP) that covers a limited number of employees. The tables included herein will focus on the defined benefit plans and SERP.
Pension Plans: Cost for the defined benefit pension plans has been calculated on the projected unit credit actuarial cost method. All plan measurements for the defined benefit plans are as of December 31 of the respective year. The defined benefit pension plans covering the majority of employees are qualified and funded. Contributions are made to funded pension plans subject to minimums required by regulation and maximums allowed for tax purposes. Globe Life's SERP provides to a limited number of executives an additional supplemental defined pension benefit. The supplemental benefit is based on the participant’s qualified plan benefit without consideration to the regulatory limits on compensation and benefit payments applicable to qualified plans, except that eligible compensation is capped at $1 million. The SERP is nonqualified and unfunded. However, a Rabbi Trust has been established to support the liability for this plan. The trust consists of life insurance policies on the lives of plan participants with an unaffiliated insurance carrier as well as an investment account. Since this plan is nonqualified, the investments and the policyholder value of the insurance policies in the Rabbi Trust are not included as defined benefit plan assets, but rather assets of the Company. They are included in “Other Assets” in the Consolidated Balance Sheets.
Defined benefit and SERP plan contributions were $21.6 million in 2019, $52.8 million in 2018, and $21.3 million in 2017. In 2020, the Company expects to make a similar contribution to the plans as in 2019.
Pension Assets: Plan assets in the funded plans consist primarily of investments in marketable fixed maturities and equity securities that are valued at fair value. Globe Life measures the fair value of its financial assets, including the assets in its benefit plans, in accordance with accounting guidance which establishes a hierarchy for asset values and provides a methodology for the measurement of value. Please refer to Note 1-Significant Accounting Policies under the caption Fair Value Measurements, Investments in Securities for a complete discussion of valuation procedures. The following table presents the assets of the Company's defined benefit pension plans at December 31, 2019 and 2018.
(1)A fund including marketable securities that mirror the S&P 500 index.
(3)Included in other long-term investments is an investment fund that reports the Pension Plan's pro-rata share of the limited partnership's net asset value per share or its equivalent (NAV), as a practical expedient for fair value. The Pension Plan owns approximately 1% of the investment fund. As of December 31, 2019, the expected term of the investment fund is approximately 5 years and the unfunded commitment of the investment fund is $4.1 million. The investment is non-redeemable. The investment fund strategy is opportunistic, applying a comprehensive relative value approach across various asset classes and opportunities in public and private markets, geographies, and capital structures.
Globe Life's investment objectives for its plan assets include preservation of capital and purchasing power as well as long-term growth. Globe Life seeks to preserve capital through investments made in high quality securities with adequate diversification by issuer and industry sector to minimize risk. The portfolio is monitored continuously for changes in quality and diversification mix. The preservation of purchasing power is intended to be accomplished through asset growth, exclusive of contributions and withdrawals in excess of the rate of inflation. Globe Life intends to maintain investments that when combined with future plan contributions will produce adequate long-term growth to provide for all plan obligations. It is also Globe Life's objective that the portfolio’s investment return will meet or exceed the return of a balanced market index.
Allowed investments are limited to equities, fixed maturities, and short-term investments (invested cash). The assets are to be invested in a mix of equity and fixed income investments that best serve the objectives of the pension plan. Factors to be considered in determining the asset mix include funded status, annual pension expense, annual pension contributions, and balance sheet liability. Equities can include common and preferred stocks, securities convertible into equities, mutual funds and exchange traded funds that invest in equities, equity interests in limited partnerships, and other equity-related investments. Primarily, equities are listed on major exchanges and adequate market liquidity is required. Fixed maturities primarily consist of marketable debt securities rated investment grade at purchase by a major rating agency. Short-term investments include fixed maturities with maturities less than one
Globe Life's equity securities include an exchange traded fund that mirrors the S&P 500 index which better aligns with a passive approach rather than an actively managed portfolio. At December 31, 2019, there were no restricted investments contained in the portfolio. Plan contributions have been invested primarily in fixed maturity and equity securities during the three years ended December 31, 2019.
Net periodic benefit cost for the defined benefit plans by expense component was as follows:
The portion of other comprehensive income that is expected to be reflected in pension expense in 2020 is as follows:
Globe Life has estimated its expected pension benefits to be paid over the next ten years as of December 31, 2019. These estimates use the same assumptions that measure the benefit obligation at December 31, 2019, taking estimated future employee service into account. Those estimated benefits are as follows:
The following table summarizes Globe Life's noncash transactions, which are not reflected on the Consolidated Statements of Cash Flows:
The following table presents information about the terms and outstanding balances of Globe Life's debt.
(2)Interest paid at 1 month LIBOR plus 125 basis points, resets each month.
Funded debt: On September 27, 2018, Globe Life completed the issuance and sale of $550 million in aggregate principal of Globe Life's 4.55% Senior Notes (the "notes") due 2028. The notes were sold pursuant to Globe Life's shelf registration statement on Form S-3. The net proceeds from the sale of the notes were $543 million, after giving effect to the underwriting discounts and commissions and offering expenses payable by Globe Life. Globe Life used the net proceeds from the sale of the notes to redeem the $293 million outstanding principal amount on Globe Life's 9.25% Senior Notes on October 29, 2018, the payment of $11 million for the make-whole premium plus accrued and unpaid interest of $10 million, and to fund $150 million of additional capital to its insurance subsidiaries. Globe Life used the remaining net proceeds to repay outstanding commercial paper and for general corporate purposes. The Company recorded an $11 million loss on redemption of debt to Realized Gains (Losses) on the Consolidated Statements of Operations for the make-whole premium and removal of unamortized debt issuance cost.
Commercial paper outstanding and any amortization payments of the term loan due within one year are reported as short-term debt on the Consolidated Balance Sheets. A table presenting selected information concerning Globe Life's commercial paper borrowings is presented below.
There was no activity related to the preferred stock in years 2017 through 2019.
Restrictions: Restrictions exist on the flow of funds to Globe Life Inc. from its insurance subsidiaries. Statutory regulations require life insurance subsidiaries to maintain certain minimum amounts of capital and surplus. Dividends from insurance subsidiaries of Globe Life Inc. are restricted based on regulations by their states of domicile. Additionally, insurance company distributions are generally not permitted in excess of statutory surplus. Subsidiaries are also subject to certain minimum capital requirements. Subsidiaries of Globe Life paid cash dividends to the Parent Company in the amount of $480 million in 2019, $448 million in 2018, and $454 million in 2017. As of December 31, 2019, dividends from insurance subsidiaries to the Parent Company available to be paid in 2020 are limited to the amount of $412 million without regulatory approval, such that $1.0 billion was considered restricted net assets of the subsidiaries. Dividends exceeding these limitations may be available during the year pending regulatory approval. While there are no legal restrictions on the payment of dividends to shareholders from Globe Life's retained earnings, retained earnings as of December 31, 2019 were restricted by lenders’ covenants which require the Company to maintain and not distribute $4.0 billion from its total consolidated retained earnings of $5.6 billion.
(3)Plan allows for grant of restricted stock such that each stock grant reduces shares available for grant in a range from 3.10 shares to 3.88 shares.
A summary of stock compensation activity for each of the three years ended December 31, 2019 is presented below:
An analysis of option activity for each of the three years ended December 31, 2019 is as follows:
Additional information about Globe Life's stock option activity as of December 31, 2019 and 2018 is as follows:
Selected stock option activity for the three years ended December 31, 2019 is presented below:
Additional information concerning Globe Life's unvested options is as follows at December 31:
Restricted Stock: Restricted stock grants consist of time-vested grants, restricted stock units, and performance shares. Time-vested restricted stock is available to both senior executives and directors. The employee grants generally vest over five years and the director grants vest over six months. Restricted stock units are available only to directors. They vest over six months and are not converted to shares until the directors’ retirement, death, or disability. Director restricted stock and restricted stock units are generally granted on the first work day of the year.
Following are the restricted stock units outstanding for each of the three years ended December 31, 2019. All restricted stock units were fully vested at the end of each year of grant.
Below is the final determination of the performance share grants in 2015 to 2017:
For the 2018 and 2019 performance share grants, actual shares that could be distributed range from 0 to 318 thousand for the 2018 grants and 0 to 313 thousand shares for the 2019 grants.
A summary of restricted stock grants for each of the years in the three-year period ended December 31, 2019 is presented in the table below.
An analysis of the weighted-average grant-date fair values per share of unvested restricted stock is as follows for the year 2019:
Globe Life's reportable segments are based on the insurance product lines it markets and administers: life insurance, supplemental health insurance, and annuities. These major product lines are set out as reportable segments because of the common characteristics of products within these categories, comparability of margins, and the similarity in regulatory environment and management techniques. There is also an investment segment which manages the investment portfolio, debt, and cash flow for the insurance segments and the corporate function. The Company's chief operating decision makers evaluate the overall performance of the operations of the Company in accordance with these segments.
Globe Life markets its insurance products through a number of distribution channels, each of which sells the products of one or more of Globe Life's insurance segments. Our distribution channels consist of the following exclusive agencies, American Income Life Division (American Income), Liberty National Division (Liberty National) and Family Heritage Division (Family Heritage); an independent agency, United American Division (United American); and our Direct to Consumer Division (Direct to Consumer). The tables below present segment premium revenue by each of Globe Life's distribution channels.
Globe Life holds a sizable investment portfolio to support its insurance liabilities, the yield from which is used to offset policy benefit, acquisition, administrative and tax expenses. This yield or investment income is taken into account when establishing premium rates and profitability expectations of its insurance products. In holding such a portfolio, investments are sold, called, or written down from time to time, resulting in a realized gain or loss. These gains or losses generally occur as a result of disposition due to issuer calls, compliance with Company investment policies, or other reasons often beyond management’s control. Unlike investment income, realized gains and losses are incidental to insurance operations, and only overall yields are considered when setting premium rates or insurance product profitability expectations. While these gains and losses are not relevant to segment profitability or core operating results, they can have a material positive or negative result on net income. For these reasons, management removes realized investment gains and losses when it views its segment operations.
The following tables set forth a reconciliation of Globe Life's revenues and operations by segment to its major income statement line items. See Note-1 Significant Accounting Policies for additional information concerning reconciling items of segment profits to pretax income.