Business Segments

9 Months Ended

Sep. 30, 2019

Note 9—Business Segments

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

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

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

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

The majority of the Company’s required interest on net policy liabilities (benefit reserves less the deferred acquisition cost asset) is not credited to policyholder accounts. Instead, it is an actuarial assumption for discounting cash flows in the computation of benefit reserves and the amortization of the deferred acquisition cost asset. Investment income required to fund the required interest on net policy liabilities is removed from the investment segment and applied to the insurance segments to eliminate the effect of the required interest from the insurance segments. As a result, the investment segment measures net investment income against the required interest on net policy liabilities and financing costs, while the insurance segments simply measure premiums against net policy benefits and expenses. Management believes this presentation facilitates a more meaningful analysis of the Company’s underwriting and investment performance as the underwriting results are based on premiums, claims, and expenses and are not affected by unanticipated fluctuations in investment yields.

As noted, Globe Life's core operations are insurance and investment management. The insurance segments issue policies for which premiums are collected for the eventual payment of policy benefits. In addition to policy benefits, operating expenses are incurred including acquisition costs, administrative expenses, and taxes. Because life and health contracts can be long term, premium receipts in excess of current expenses are invested. Investment activities, conducted by the investment segment, focus on seeking quality investments with a yield and term appropriate to support the insurance product obligations. These investments generally consist of fixed maturities and, over the long term, the expected yields are taken into account when setting insurance premium rates and product profitability expectations. As a result, fixed maturities are generally held for long periods to support the liabilities, and the Company generally expects to hold investments until maturity. However, dispositions of investments occur from time to time, generally for reasons such as credit concerns, calls by issuers, or other factors.

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

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

The following tables set forth a reconciliation of Globe Life's revenues and operations by segment to its major income statement line items:



	Three Months Ended September 30, 2019
	Life			Health			Annuity			Investment			Corporate & Other			Adjustments		Consolidated
Revenue:
Premium	$	630,824		$	269,166		$	3		$	—		$	—		$	—	$	899,993
Net investment income	—			—			—			228,905			—			—		228,905
Other income	—			—			—			—			438			—		438
Total revenue	630,824			269,166			3			228,905			438			—		1,129,336
Expenses:
Policy benefits	406,963			170,875			7,854			—			—			—		585,692
Required interest on reserves	(167,719		)	(21,955		)	(10,832		)	200,506			—			—		—
Required interest on DAC	50,948			6,395			125			(57,468		)	—			—		—
Amortization of acquisition costs	108,798			29,151			500			—			—			—		138,449
Commissions, premium taxes, and non-deferred acquisition costs	50,375			23,759			5			—			—			—		74,139
Insurance administrative expense⁽¹⁾	—			—			—			—			60,570			—		60,570
Parent expense	—			—			—			—			2,472			—		2,472
Stock-based compensation expense	—			—			—			—			11,533			—		11,533
Interest expense	—			—			—			21,094			—			—		21,094
Total expenses	449,365			208,225			(2,348		)	164,132			74,575			—		893,949
Subtotal	181,459			60,941			2,351			64,773			(74,137		)	—		235,387
Non-operating items	—			—			—			—			—			—		—
Measure of segment profitability (pretax)	$	181,459		$	60,941		$	2,351		$	64,773		$	(74,137	)	$	—	235,387

Realized gain (loss)—investments																		11,943
Income before income taxes per Condensed Consolidated Statements of Operations																		$	247,330


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



	Three Months Ended September 30, 2018
	Life			Health			Annuity			Investment			Corporate & Other			Adjustments				Consolidated
Revenue:
Premium	$	605,547		$	255,201		$	2		$	—		$	—		$	—			$	860,750
Net investment income	—			—			—			221,627			—			—				221,627
Other income	—			—			—			—			416			(23		)	(2)	393
Total revenue	605,547			255,201			2			221,627			416			(23		)		1,082,770
Expenses:
Policy benefits	396,701			162,574			8,581			—			—			—				567,856
Required interest on reserves	(160,058		)	(20,965		)	(11,831		)	192,854			—			—				—
Required interest on DAC	48,907			6,136			145			(55,188		)	—			—				—
Amortization of acquisition costs	103,792			25,162			538			—			—			—				129,492
Commissions, premium taxes, and non-deferred acquisition costs	47,609			22,041			5			—			—			(23		)	(2)	69,632
Insurance administrative expense⁽¹⁾	—			—			—			—			55,812			3,590			(3)	59,402
Parent expense	—			—			—			—			2,667			1,578			(4)	4,245
Stock-based compensation expense	—			—			—			—			10,412			—				10,412
Interest expense	—			—			—			22,433			—			—				22,433
Total expenses	436,951			194,948			(2,562		)	160,099			68,891			5,145				863,472
Subtotal	168,596			60,253			2,564			61,528			(68,475		)	(5,168		)		219,298
Non-operating items	—			—			—			—			—			5,168			(3,4)	5,168
Measure of segment profitability (pretax)	$	168,596		$	60,253		$	2,564		$	61,528		$	(68,475	)	$	—			224,466

Realized gain (loss)—investments																				1,032
Administrative settlements																				(3,590		)
Non-operating fees																				(1,578		)
Income before income taxes per Condensed Consolidated Statements of Operations																				$	220,330


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


(2)	Elimination of intersegment commission.


(3)	In 2018, the Company recorded $3.6 million in administrative settlements related to state regulatory examinations. These administrative settlements were included in "Policyholder benefits" in the Consolidated Statements of Operations.

(4)

Non-operating fees.



	Nine Months Ended September 30, 2019
	Life			Health			Annuity			Investment			Corporate & Other			Adjustments				Consolidated
Revenue:
Premium	$	1,886,314		$	802,132		$	4		$	—		$	—		$	—			$	2,688,450
Net investment income	—			—			—			683,003			—			—				683,003
Other income	—			—			—			—			1,077			—				1,077
Total revenue	1,886,314			802,132			4			683,003			1,077			—				3,372,530
Expenses:
Policy benefits	1,227,616			511,403			23,792			—			—			—				1,762,811
Required interest on reserves	(496,894		)	(65,131		)	(32,840		)	594,865			—			—				—
Required interest on DAC	151,270			19,019			383			(170,672		)	—			—				—
Amortization of acquisition costs	327,407			83,508			1,521			—			—			—				412,436
Commissions, premium taxes, and non-deferred acquisition costs	150,567			70,719			16			—			—			—				221,302
Insurance administrative expense⁽¹⁾	—			—			—			—			179,177			5,900			(2,3)	185,077
Parent expense	—			—			—			—			7,987			—				7,987
Stock-based compensation expense	—			—			—			—			33,348			—				33,348
Interest expense	—			—			—			63,804			—			—				63,804
Total expenses	1,359,966			619,518			(7,128		)	487,997			220,512			5,900				2,686,765
Subtotal	526,348			182,614			7,132			195,006			(219,435		)	(5,900		)		685,765
Non-operating items	—			—			—			—			—			5,900			(2,3)	5,900
Measure of segment profitability (pretax)	$	526,348		$	182,614		$	7,132		$	195,006		$	(219,435	)	$	—			691,665

Realized gain (loss)—investments																				18,426
Administrative settlements																				(400		)
Legal proceedings																				(5,500		)
Income before income taxes per Condensed Consolidated Statements of Operations																				$	704,191


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


(2)	During the first quarter of 2019, Globe Life recorded $400 thousand in administrative settlements related to state regulatory examinations.


(3)	Legal proceedings—See Note 5 for further discussion.



	Nine Months Ended September 30, 2018
	Life			Health			Annuity			Investment			Corporate & Other			Adjustments				Consolidated
Revenue:
Premium	$	1,806,384		$	758,439		$	12		$	—		$	—		$	—			$	2,564,835
Net investment income	—			—			—			658,279			—			—				658,279
Other income	—			—			—			—			1,180			(76		)	(2)	1,104
Total revenue	1,806,384			758,439			12			658,279			1,180			(76		)		3,224,218
Expenses:
Policy benefits	1,196,616			483,654			25,852			—			—			—				1,706,122
Required interest on reserves	(474,373		)	(62,095		)	(35,733		)	572,201			—			—				—
Required interest on DAC	145,126			18,228			448			(163,802		)	—			—				—
Amortization of acquisition costs	312,168			74,311			1,710			—			—			—				388,189
Commissions, premium taxes, and non-deferred acquisition costs	142,253			66,502			19			—			—			(76		)	(2)	208,698
Insurance administrative expense⁽¹⁾	—			—			—			—			166,560			3,590			(3)	170,150
Parent expense	—			—			—			—			7,806			1,578			(4)	9,384
Stock-based compensation expense	—			—			—			—			29,969			—				29,969
Interest expense	—			—			—			66,466			—			—				66,466
Total expenses	1,321,790			580,600			(7,704		)	474,865			204,335			5,092				2,578,978
Subtotal	484,594			177,839			7,716			183,414			(203,155		)	(5,168		)		645,240
Non-operating items	—			—			—			—			—			5,168			(3,4)	5,168
Measure of segment profitability (pretax)	$	484,594		$	177,839		$	7,716		$	183,414		$	(203,155	)	$	—			650,408

Realized gain (loss)—investments																				14,796
Administrative settlements																				(3,590		)
Non-operating fees																				(1,578		)
Income before income taxes per Condensed Consolidated Statements of Operations																				$	660,036


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


(2)	Elimination of intersegment commission.


(3)	In 2018, the Company recorded $3.6 million in administrative settlements related to state regulatory examinations. These administrative settlements were included in "Policyholder benefits" in the Consolidated Statements of Operations.

(4)

Non-operating fees.