Globe Life Inc. (NYSE:GL) Q3 2023 Earnings Call Transcript

Globe Life Inc. (NYSE:GL) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: Hello, and welcome to the Globe Life Incorporated Third Quarter 2023 Earnings Release Conference Call. Please note this conference is being recorded and for duration of the call your lines will be on listen-only. However, you have the opportunity to ask questions [Operator Instructions] I will now hand you over to your host, Stephen Mota, Senior Director, Investor Relations, to begin today’s conference. Thank you.

Stephen Mota: Thank you. Good morning, everyone. Joining the call today, Frank Svoboda and Matt Darden, our Co-Chief Executive Officers; Tom Kalmbach, our Chief Financial Officer; Mike Majors, our Chief Strategy Officer; and Brian Mitchell, our General Counsel. Some of our comments or answers to your questions may contain forward-looking statements that provided for general guidance purposes only. Accordingly, please refer to our earnings release 2022 10-K and any subsequent Forms 10-Q on file with the SEC. Some of our comments may also contain non-GAAP measures. Please see our earnings release and website for discussion of these terms and reconciliations to GAAP measures. I will now turn the call over to Frank.

An elderly couple with their arms around each other, holding a frame of life insurance.

Frank Svoboda: Thank you Stephen and good morning everyone. In the third quarter, net income was $257 million, or $2.68 per share, compared to $191 million, or $1.94 per share a year ago. Net operating income for the quarter was $260 million, or $2.71 per share, an increase of 24% from a year ago. The strong growth in net income and net operating income is due in part to the re-measurement loss taken in the year-ago quarter due to the unlocking of assumptions under LDTI. Tom will discuss this further in his comments. On a GAAP-reported basis, return on equity through September 30th is 22.6% and book value per share is $48.51. Excluding accumulated other comprehensive income, or AOCI, return on equity is 14.7% and book value per share as of September 30th is $74.31, up 11% from a year ago.

In our life insurance operations, premium revenue for the third quarter increased 4% from the year-ago quarter to $788 million. For the year, we expect life premium revenue to grow between 3.5% to 4%. Life underwriting margin was $300 million, up 21% from a year ago. The increase in life underwriting margin was due in part to a re-measurement gain recognized this quarter due to improved claims experience versus a re-measurement loss taken in the year-ago quarter. At the midpoint of our guidance, we expect life underwriting margin for the full year to grow a little over 5% and as a percent of premium to be approximately 38%. In health insurance, premium grew 3% to $331 million and health underwriting margin was down 4% to $97 million due in part to a re-measurement gain recognized in the third quarter of 2022 that was greater than what was recognized in the current quarter.

For the year, we expect health premium revenue to grow around 3%. At the midpoint of our guidance, we expect health underwriting margin to be relatively flat and as a percent of premium to be around 29%. Administrative expenses were $75 million for the quarter, down 1% from a year ago, primarily due to a decrease in pension and other employee related costs. As a percentage of premium, administrative expenses were 6.7% compared to 7% a year ago. For the full year 2023, we expect administrative expenses to be approximately 6.8% of premium in line with our previous expectations. I will now turn the call over to Matt for his comments on the third quarter of marketing operations.

Matt Darden: Thank you, Frank. First, I’m going to start with American Income Life. Here, life premiums were up 6% over the year ago quarter to $400 million and the life underwriting margin was up 8% to $181 million. In the third quarter of 2023, net life sales were $81 million, which is up 6% from the year ago quarter, primarily due to growth in agent count. The average producing agent count for the third quarter was 10,993, up 16% from the year ago quarter and up 5% from the second quarter. I am encouraged to see the growth in agent count in sales. We’re seeing positive results from the recruiting and sales initiatives put in place at the end of last year. At Liberty National, life premiums were up 7% over the year ago quarter to $88 million and life underwriting margin was up 39% to $27 million.

Net life sales increased 31% to $24 million and net health sales were $9 million, which is up 19% from the year ago quarter due primarily to increase in agent count. The average producing agent count for the third quarter was 3,339, up 20% from the year ago quarter. Liberty continues to generate positive momentum through strong recruiting and agency leadership growth. Ongoing implementation of new technology over the past few years has enabled agency leadership to more effectively monitor and manage agent activity. Now Family Heritage. Here the health premiums increased 8% over the year ago quarter to $100 million, while the health underwriting margin declined 3% to $36 million. Net health sales were up 15% to $25 million due to increased agent count and productivity.

The average producing agent count for the third quarter was 1,323, up 7% from the year ago quarter. Moving forward, this agency will continue to focus on recruiting with additional initiatives to incentivize agency middle management growth, which will lead to growth in new offices and agent count. In our direct-to-consumer division at Globe Life, life premiums increased 1% over the year ago quarter to $248 million and life underwriting margin increased 86% to $63 million due to lower policy obligations. Net life sales were $26 million, down 8% from the year ago quarter, primarily due to declines in direct mail and insert media activity. While we will continue our efforts to grow direct-to-consumer sales activity, our primary focus will be maximizing the underwriting margin dollars on new sales by managing the rising advertising and distribution costs associated with acquiring this new business.

In addition to the ability to produce new business at a healthy margin, the direct-to-consumer division provides significant support in the form of brand impressions and sales leads to our agencies that is critical to the strong growth they are seeing. At United American General Agency, here the health premiums increased 2% over the year ago quarter to $137 million. Health underwriting margin of $15 million, or 11% of premium, is flat from the year ago quarter. Net health sales were $16 million, up 20% over the year ago quarter, due to a 6% increase in individual Medicare supplement sales and increased activity at Globe Life benefits. Onto projections, now based on the trends that we are seeing and our experience with our business, we expect that average producing agent count trends for the full year 2023 to be as follows.

At American Income Life, an increase of around 12%, at Liberty National, an increase of around 18%, at Family Heritage, an increase of around 11%. Net life sales for the full year 2023 are expected to be as follows. American Income Life, we anticipate approximately 15% growth in the fourth quarter, which will result in full year growth of approximately 4%; Liberty National, an increase of around 23%; and direct-to-consumer, a decrease of around 5%. Net health sales for the full year 2023 are expected to be as follows. Liberty National, an increase of around 17%; Family Heritage, an increase of around 18%; and United American General Agency, an increase of around 20%. Now for 2024, at the midpoint of our 2024 guidance, we expect sales growth for the full year of 2024 to be as follows.

For life sales, American Income, high single digit, Liberty National, mid-teens growth, and direct-to-consumer, relatively flat, as we continue to focus on profitability. For health sales, we expect Liberty National to have mid-teens growth, Family Heritage low double digit growth, and United American General Agency low single digit growth. I’ll now turn the call back to Frank.

Frank Svoboda: Thanks, Matt. We will now turn to the investment operations. Excess investment income, which we define as net investment income less required interest, was $34 million, up from $10 million from the year-ago quarter. Net investment income was $267 million, up 8%, or $20 million from the year-ago quarter due to higher yields on fixed maturities and short-term investments, and an increase in floating interest rates on our commercial mortgage loans, including those held in limited partnerships. Required interest is up 5% over the year-ago quarter, in line with the increase in net policy liabilities. For the full year, we expect net investment income to grow approximately 7% due to the combination of the favorable rate environment and steady growth in our invested assets, and expect excess investment income to grow approximately $25 million.

Now regarding our investment yield. In the third quarter, we invested $427 million in investment-grade maturities, primarily in the municipal and financial sectors. We invested at an average yield of 6.15%, an average rating of A+, and an average life of 27 years, taking advantage of opportunities in the municipal sector to obtain higher yield, as well as higher quality. We also invested approximately $100 million in commercial mortgage loans and limited partnerships that have debt-like characteristics. These investments are expected to produce additional yield and are in line with our conservative investment philosophy. For the entire fixed maturity portfolio, the third quarter yield was 5.19%, up 2 basis points from the third quarter of 2022, and up 1 basis point from the second quarter.

As of September 30th, the portfolio yield was 5.23%. Now regarding the investment portfolio. Invested assets are $20.7 billion, including $18.9 billion of fixed maturities at amortized cost. Of the fixed maturities, $18.4 billion are investment-grade with an average rating of A minus. Overall, the total portfolio is rated A minus, same as a year ago. As a reminder, we have information on our website regarding our banking and commercial loan investments. Our fixed maturity investment portfolio has a net unrealized loss position of approximately $2.6 billion due to the current market rates being higher than the book yield on our holdings. As we have historically noted, we are not concerned by the unrealized loss position and is mostly interest-rate driven.

We have the intent and, more importantly, the ability to hold our investments to maturity. Bonds rated BBB are 48% of the fixed maturity portfolio, compared to 52% from the year-ago quarter. While this ratio is the lowest it has been in over 10 years, it is high relative to our peers. However, keep in mind that we have little or no exposure to higher risk assets, such as derivatives, common equities, residential mortgages, CLOs, and other asset-backed securities held by our peers. Additionally, unlike many other insurance companies, we do not have any exposure to direct real estate investments or private equities. We believe that BBB securities that we acquire generally provide the best risk-adjusted, capital-adjusted returns due in part to our ability to hold securities to maturity, regardless of fluctuations in interest rates or equity markets.

Below-investment grade bonds are $493 million compared to $543 million a year ago. The percentage of below-investment grade bonds to total fixed maturities is only 2.6%. At the midpoint of our guidance for the full year 2023, we expect to invest approximately $1.1 billion in fixed maturities at an average yield of 5.9% and approximately $310 million in commercial mortgage loans and limited partnership investments with debt-like characteristics, at an average yield of approximately 8.3%. Also at the midpoint of our guidance, we expect the average yield earned on the fixed maturity portfolio to be around 5.19% for the full year 2023 and slightly higher at approximately 5.23% for the full year 2024. With respect to our commercial mortgage loans and limited partnerships, we anticipate the yield impacting net investment income to be in the range of 7.1% to 7.2% for both 2023 and 2024.

As we said before, we are pleased to see higher interest rates as this has a positive impact on operating income by driving up net investment income with no impact to our future policy benefits, since they are not interest sensitive. Now I will turn the call over to Tom for his comments on capital and liquidity.

Tom Kalmbach: Thanks, Frank. First, let me spend a few minutes discussing our share repurchase program, available liquidity and capital position. The Parent began the year with liquid assets of $91 million and ended the third quarter with liquid assets of approximately $69 million. In the third quarter, the company repurchased approximately 755,000 shares of Globe Life Inc. common stock for a total cost of $84 million. The average share price for these repurchases was $111.52. To date, the fourth quarter, we have purchased 165,000 shares for a total cost of $18 million at an average share price of $108.36 resulting in repurchases year-to-date of 2.9 million shares for a total cost of $321 million at an average share price of $111.63.

In addition to the liquid assets held by the Parent, the Parent Company generated excess cash flows during the third quarter and will continue to do so for the remainder of 2023. The Parent Company’s excess cash flow, as we define it, results primarily from the dividends received by the Parent from its subsidiaries less the interest paid on debt. We anticipate the Parent Company’s excess cash flow for the full year will be approximately $425 million and available to return to its shareholders in the form of dividends and through share repurchases. As previously noted, we had approximately $69 million of liquid assets at the end of the quarter, slightly above the $50 million to $60 million of liquid assets we have historically targeted. In addition to the $69 million of liquid assets, we expect to generate $35 million to $40 million of excess cash flows in the fourth quarter of 2023, providing us with approximately $90 million of assets available to the Parent for the remainder of 2023 after taking into consideration the approximately $18 million of share repurchases to date in the fourth quarter.

We anticipate distributing approximately $21 million to our shareholders in the form of dividend payments for the remainder of 2023. Excuse me. As mentioned on previous calls, we will use our cash as efficiently as possible. We still believe that share repurchases provide the best return or yield to our shareholders over other available alternatives. Thus, we anticipate share repurchases will continue to be the primary use of the Parent’s excess cash flows after the payment of shareholder dividends. It should be noted that the cash received by the Parent Company from our insurance operations and after our subsidiaries have made substantial investments during the year to generate new sales, expand and modernize our information technology and other operational capabilities as well as to acquire new, long-duration assets to fund their future cash needs.

The remaining amount is sufficient to support the targeted capital levels within our insurance operations and maintain the share repurchase program for 2023. In our earnings guidance, we anticipate approximately $465 million will be returned to shareholders in 2023, including approximately $380 million through share repurchases. Now with regards to capital levels at our insurance subsidiaries. Our goal is to maintain our capital levels necessary to support our current ratings. Globe Life targets a consolidated company action level RBC ratio in the range of 300% to 320%. As discussed on previous calls, our consolidated RBC ratio was 321% at the end of 2022. In light of credit losses incurred to date, we anticipate our overall year-end RBC ratio to be at the midpoint of our range or approximately 310%.

At this point, we do not anticipate any significant credit losses or downgrades for the remainder of the year. But to the extent any do occur, we are well positioned to address any capital needed by our insurance subsidiaries to maintain RBC levels at the midpoint of our range. Now with regards to policy obligations for the current quarter. As we have discussed on prior calls, we have included the historical operating summary results under LDTI for each of the quarters in 2022 within the supplemental financial information available on our website. In addition, we included an exhibit that details the remeasurement gain or loss by distribution channel. The total remeasurement gain of $19 million for the quarter reflects both current period fluctuations in experience from expected and the impact of assumption changes made in the quarter.

Also, as noted on prior calls, life and health assumption changes were made in the third quarter of 2022 with an expectation of higher mortality in the Life segment and more favorable claim trends in the Health segment. In the third quarter of ‘23, we again updated those, both our life and health assumptions, lapse, mortality and morbidity. And as we expected, the overall impact on third quarter results was not significant with a combined decrease in total life and health obligations of approximately $3 million. The life assumption changes increased life obligations by approximately $2 million in the quarter, while health assumption changes decreased health obligations by approximately $5 million In addition to the assumption changes, the remeasurement gain or loss also indicates experience fluctuations.

For the third quarter, life policy obligations were favorable when compared to our assumptions of mortality and persistency. The remeasurement gain related to experience fluctuations for the Life segment resulted in $13 million of lower life policy obligations and $3 million of lower health policy obligations, primarily as a result of favorable claim experience versus expected. Now with regards to earnings guidance for 2023, we are projecting net operating income per diluted share will be in the range of $10.49 to $10.65 and for the year ending December 31, 2023. The $10.50 midpoint of our guidance is $0.10 higher than what we had indicated last quarter, largely due to favorable policy obligations in the third quarter. Our guidance anticipated – our guidance anticipates the continuation of recent favorable short-term trends, although at a lower level than the third quarter.

For the full year 2023, we anticipate life underwriting margins to be approximately 38% of premium and health underwriting margins to be approximately 29% of premium. Total acquisition cost, including the amortization of deferred acquisition costs as well as nondeferred acquisition costs and commissions are expected to be 21% of premium, which is consistent with the third quarter. Now with regards to 2024 guidance, for the full year 2024, we estimate net operating earnings per diluted share will be in the range of $11 to $11.60, representing 7% growth at the midpoint of the range. We anticipate life and health underwriting income to grow consistent with premium growth with life and health underwriting margins as a percentage of premium to fall within the same ranges as 2023 or about 39% for life and 28% to 30% for health.

At the midpoint of our guidance, we anticipate life premiums growing at approximately 5% and health premiums growing at around 7%. In addition, higher interest rates are expected to favorably impact excess investment income as we anticipate it to increase 7% to 9% at the midpoint of our guidance. Although 2023 results are not final for the year, at this time, we anticipate Parent excess cash flows available to return to shareholders in 2024 will be a little over $400 million, slightly lower than 2023 due in part to the impact of 2023 statutory income and realized losses and the cost of agency sales growth offsetting the benefits from favorable mortality trends and higher investment yields. Finally, let me comment on the merger announcement of Evry Health.

Earlier in the month, we announced entering into a merger agreement with Evry Health, a small, regional health care company locally focused in the major urban areas of Texas. Evry is a start-up with a technology focus to provide outstanding customer experience and results in positive health outcomes. We previously had made a small investment in Evry and recently had the opportunity to acquire the whole company. We believe full ownership will allow Evry to grow, but more importantly, allow us to directly assess how we can utilize Evry’s technology to enhance Globe’s customer experience and service offerings. We do not expect Evry to have a significant impact on 2023 or 2024 results. Those are my comments. I’ll now turn it back to Mota.

Stephen Mota: Thank you, Tom. Those are our comments, and we will now open up the call for questions.

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Wes Carmichael from Wells Fargo. Please go ahead.

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