Globe Life (GL) had a strong first quarter of 2020, despite the ongoing Covid-19 pandemic. Like every other company, Globe Life anticipates some interruption to the business in the upcoming quarters/year.
However, as we will see, Globe Life has set themselves up to thrive even with the downturns caused by Covid-19 with strong insurance premiums from both segments, as well as strong sales performance from the teams out in the field.
Globe Life also has created a strong investment portfolio that will provide income and safety in the coming years.
Let’s dive in and take a look.
Globe Life, formerly known as Torchmark Corporation, is a life and health insurance company based out of McKinney, Texas. The company currently has a market cap of $7.87 billion and an enterprise value of $9.58 billion.
Ok, let’s discuss some of the first-quarter results.
Net income for the first quarter was $166 million or $1.52 a share compared to the previous year’s quarter of $185 million or $1.65 a share. The drop in income was attributed to the $25 million of tax provision write-offs for credit losses associated with the fixed maturities.
Globe Life reports all the net income across four segments and the results for the quarter:
- Life Insurance Underwriting margin – $178,803 million
- Health Insurance Underwriting margin – $63,465 million
- Annuity Underwriting margin – $2,270 million
- Excess Investment Income – $62,737 million
Net operating income for the quarter was $189 million for $1.73 a share, which was an increase of 5 percent over the same quarter of 2019.
On a GAAP basis, the return on equity was 9.6 percent, and the book value per share was $60.98. On a non-GAAP basis, the return on equity was 14.1 percent, and book value per share was $49.66, which grew 9 percent compared to the previous year-ago quarter.
In the life insurance operations, Globe Life’s premium revenue increased 4 percent to $650 million with a life underwriting margin of $179 million, or an increase of 5 percent.
Health insurance also saw growth in the premium revenue to the tune of $280 million, or 5 percent, with the health underwriting margin growing 3 percent for $63 million against the comparable first quarter a year ago.
Globe Life saw an increase in administrative expenses of 7 percent for $63 million, which was in life with expectations. The company expects administrative expenses to grow 5 percent in the upcoming year.
Globe Life also reported a 1 percent increase in the net investment income, while excess investment income dropped 4 percent.
In this crazy world that we live in now, growth is going to be an uphill battle for the next year or so, but then things will start to improve, right?
One aspect that Globe Life has shown as strength is growth in the insurance premiums over the years.
Chart courtesy of data from Seeking Alpha
Globe Life utilizes independent business owners as agents, which allows for greater independence and flexibility when searching for new business. As the pandemic continues, this flexibility will allow Globe Life agents to continue to seek out more business using the digital options available to them.
But even better, the continuation of this style of policy acquisition will likely continue into the future, which sets Globe Life up to remain profitable from an underwriting perspective long into the future.
Although sales were down for the quarter, the company reported that they were seeing an uptick in business towards the end of the quarter.
Over the past five years, premium growth has been 3.97 percent CAGR, which I expect Globe to continue into the future.
There might be some headwinds shortly based on the company’s performance in the last crisis, which saw a decrease in premiums over the three years. The rate of decrease was (1.67)%, which was expected an likely will occur over the next three quarters and into 2021.
Overall going into the balance of 2020, I expect that Globe Life’s premiums will remain flat to slightly up, around 1% given the success they have witnessed with the growth of agents and the transition to digital sales channels.
Next up the investment portfolio. Which was down 4% from the year-ago quarter, with the per-share value dropping 2 percent from $0.58 to $0.57, a result of the new accounting rules requiring investments to be listed as gains or losses regardless of whether realized or not.
The portfolio is currently allocated to 94 percent corporate, of which $15,599 million is investment grade, with the remaining $740 million below investment grade. The portfolio currently is yielding 5.39 percent, compared to the yield of 5.53 percent from the first quarter of 2019.
Of the fixed maturities purchased in the first quarter to the tune of $211 million, that amount has an effective yield of 3.8 percent, and the average maturity is 14 years.
All of which is great and indicates the investment portfolio is on a strong footing, and considering the bond market’s current situation, the yields purchased are decent, with long-term Treasury rates hovering in the 1.3 to 1.4 percent for 30-year bonds.
Another factor helping Globe Life in the short-term is the Fed propping up the bond market by buying corporate bonds, although the effects of this effort likely won’t know for a few quarters at the earliest.
Let’s move on to the risk associated with Globe Life.
The first risk that Globe Life faces in the upcoming quarter and into next year is the continuing low-interest-rate environment. As life insurance companies invest most of their underwriting profit in the bond market, the impact of those low-interest rates over the long-term will hurt.
In the case of Globe Life, the short-term impact will be minimal as the company has longer-term maturities to match the long-term tail risks associated with life insurance policies. Those longer-term maturities help the company whether shorter-term storms like we are experiencing today.
The other risk that Globe Life faces that will continue as long as the pandemic remains a threat to the health of all us is the higher mortality that is expected as a result of the Covid-19 pandemic.
The company expects pressure on the underwriting margins for both the life insurance segment and the health insurance segment in the rest of 2020.
The exact impacts on the policies are unknown at this time, but the company is cautious about the impacts in the remaining year.
The investment portfolio struggled mightily during the last crisis. It was the biggest source of earnings losses during the years from 2007 to 2009; after that period, Globe Life altered its portfolio from 80 percent corporates to 94 percent corporates. The changes have helped stabilize the investment portfolio and reduce the risk of losses from the shaky investments.
Globe Life mentioned that the current turnover of the portfolio for the rest of the year would remain at the current 2 percent and expects that it will have a negative impact on the portfolio over the balance of 2020.
In the short-term, the portfolio will experience a 2 to 4 percent turnover as a result of calls on highly-rated municipals.
The risk to the investment portfolio is, of course, the complete collapse of the bond market and the meltdown of corporate bonds, this is unlikely given the Fed’s stated mandated that the will do whatever it takes to keep things afloat.
Relative to other life insurance companies, Globe Life carries a current quant rating of neutral from Seeking Alpha, along with others in the sector such as Prudential (PRU), Met Life (MET), and Lincoln National (LNC).
Globe Life also carries a higher P/E at 10.47 GAAP per TTM, compared to the others mentioned above. But Globe Life also carries a higher revenue growth CAGR of 5.17 percent over five years.
The company also has higher profit margins and higher returns on equity and assets for the same period.
With all that said, I still believe the company is undervalued based on the profitability of the company, both past and future potential.
Below are the assumptions I am using for the valuation based on an excess returns model, basing all the numbers on the TTM:
- Return on Equity – 10.22%
- Retention Ratio – 89.40%
- Expected Growth Rate – 9.13%
- Cost of Equity – 7.71%
- Beta 1.17
- Risk-free rate -0.69
- Risk Premium – 6
Given the current share price of $71.43 as of the morning of June 10, 2020, we get a margin of safety of 22%, give or take. Based on the valuation above, I believe a price target of $88 to $92 is achievable.
Based on all the research and comparison to others in the industry, I think that Globe Life is a buy, and I will be adding a position soon.
The company has proven over the long-term that it has great profitability and has done a fantastic job creating growth opportunities during the pandemic while trying to mitigate any potential risks the company could face.
Of course, the financial sector has taken a beating and has not returned to pre-COVID levels as of yet, with all the glory going the Nasdaq’s way. However, I think over the long-term, Globe Life is a strong company that will provide excellent growth potential both in share appreciation and dividend growth over the coming years.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.