Globe Life Inc. (NYSE:GL) Q4 2022 Earnings Call Transcript

Globe Life Inc. (NYSE:GL) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Hello, and welcome to the Globe Life Fourth Quarter 2022 Earnings Call. My name is George. I’ll be your coordinator for today’s event. Please note, this conference is being recorded, and for duration of the call your lines will be in a listen-only mode. However, you will have the opportunity to ask questions at the end of the call. I’d now like to hand the call over to your host today, Mr. Stephen Mota, Investor Relations Director. Please go ahead, sir.

Stephen Mota: Thank you. Good morning, everyone. Joining the call today are 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 are provided for general guidance purposes only. Accordingly, please refer to our earnings release, 2021 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 a discussion of these terms and reconciliations to GAAP measures. I will now turn the call over to Frank.

: Thank you, Stephen, and good morning, everyone. Before getting started, I want to let you know that due to the ice storms in the DFW area, we are doing this call from multiple locations. So, if there are any issues with connections, please bear with us. Then, Matt and I would like to quickly take this opportunity to thank Gary Coleman and Larry Hutchison once again and acknowledge their accomplishments as Globe Life’s co-CEOs over the last 10 years, including 2022, another good year for Globe Life. Now to the results of the quarter. In the fourth quarter, net income was $212 million, or $2.14 per share compared to $178 million or $1.76 per share a year ago. Net operating income for the quarter was $221 million or $2.24 per share, an increase of 32% from a year ago.

On a GAAP reported basis, return on equity was 12.3%, and book value per share was $49.65. Excluding unrealized losses on fixed maturities, return on equity for the full year was 13.4%, and book value per share as of December 31 was $64.01, up 9% from a year ago. It is encouraging that our return on equity, excluding unrealized gains and losses for the fourth quarter, was 14.3%, reflecting the lessening impact of excess life claims on our operations. In the life insurance operations, premium revenue for the fourth quarter increased 3% from the year ago quarter to $754 million. For the full year 2022, premium income grew 4%. Growth in premium income was challenged due to the lower sales growth we’ve seen this year, primarily in our direct-to-consumer channel in addition to the impact of foreign exchange rates on our Canadian premiums at American Income.

In 2023, we expect life premium to grow around 4%. Life underwriting margin was $212 million, up 45% from a year ago. The increase in margin is due primarily to improved claim experience. With respect to anticipated underwriting income, as we’ve talked about on prior calls, underwriting margin will be calculated differently under the new LDTI accounting rules and is expected to be substantially higher due to the changes required by the new accounting standards. Tom will discuss the expected impact of LDTI in his comments. In health insurance, premium grew 4% to $324 million, and health underwriting margin was up 1% to $82 million. For the full year 2022, premium grew 6%. In 2023, we expect health premium revenue to grow around 3%, lower than 2022 due to lower premium growth in our United American and General Agency operations.

Administrative expenses were $78 million for the quarter, up 12% from a year ago. As a percentage of premium, administrative expenses were 7.2% compared to 6.7% a year ago. For the year, administrative expenses were 7% of premium compared to 6.6% a year ago. In 2023, we expect administrative expenses to be up approximately 3%, and be around 6.9% of premium due primarily to higher IT and information security costs. Higher labor costs are expected to be offset by a decline in pension-related employee benefit costs. I will now turn the call over to Matt for his comments on the fourth quarter marketing operations.

A – Matt Darden: Thank you, Frank. First up is American Income Life. The American Income Life life premiums were up 5% over the year ago quarter to $381 million, and life underwriting margin was up 27% to $130 million. The higher underwriting margin is primarily due to improved claims experience and higher premium. In the fourth quarter of 2022, net life sales were $70 million, down 6% from a year ago quarter. The decline in sales resulted from reduced agent count and agent productivity. The average producing agent count for the fourth quarter was 9,243, down 3% from the year ago quarter and down 2% from the third quarter. The decline from the third quarter to the fourth quarter is consistent with typical seasonal trends. The decline in average agent count from a year ago is due to higher-than-expected attrition throughout 2022, as we have previously discussed.

While the agent count declined from a year ago, I am encouraged as we have seen positive recruiting momentum over the latter part of the fourth quarter into the beginning of this year. We’ve also started to have some success with our new retention efforts. I believe the agency compensation adjustments we have made to emphasize recruiting and retention will help continue this momentum. I am optimistic regarding the long-term growth potential of this agency division. At Liberty National, life premiums were up 4% over the year ago quarter to $82 million, and life underwriting margin was up 74% to $21 million. The increase in the underwriting margin is primarily due to improved claims experience. Net life sales increased 24% to $23 million, and net health sales were $9 million, up 14% from the year ago quarter due mainly to increased productivity and agent count.

The average producing agent count for the fourth quarter was 2,946, up 8% from the year ago quarter and up 6% compared to the third quarter. Liberty continues to build on the momentum that’s been generated over the past year and is well positioned for future growth. At Family Heritage, health premiums increased 7% over the year ago quarter to $94 million, and health underwriting margin increased 2% to $26 million. Net health sales were up 21% to $22 million due to increased agent count and agent productivity. The average producing agent count for the fourth quarter was 1,334, up 12% from the year ago quarter and up 8% compared to the third quarter. As we’ve discussed before, there was a shift in emphasis last year to recruiting and middle management development.

This has paid off nicely as we continue to see positive trends at Family Heritage. In our Direct to Consumer Division at Globe Life, life premiums were flat over the year ago quarter to $238 million, but life underwriting margin increased from $12 million to $39 million. The increase in underwriting margin is primarily due to improved claims experience. Net life sales were $31 million, down 9% from the year ago quarter due to declines in circulation and response rate. This sales decline is consistent with our expectations. As we have mentioned in previous calls, direct-to-consumer marketing is one facet of our business that has been impacted by the current inflationary environment. We’ve had to pull back somewhat on circulation and mailings as increases in postage and paper costs impede our ability to achieve satisfactory return on our investment for specific marketing campaigns.

There is an offset to this as we continue to generate more Internet activity, which has lower acquisition costs than our direct mail marketing. Today, electronics sales are approximately 70% of our business compared to 54% in 2019. I am also encouraged to see some resiliency here as the average premium per issued policy has increased each year for the last several years and was 16% higher in 2022 than in 2019. At United American General Agency, health premiums increased 5% over the year ago quarter to $137 million and health underwriting margin increased 1% to $20 million. Net health sales were $20 million, down 25% compared to the year ago quarter, and this decline is due primarily to the market dynamics we saw throughout 2022, including aggressive pricing by competitors on certain Medicare supplement products and a consumer movement to Medicare Advantage.

Projections: Now based on the trends that we are seeing and our experience with our business, we expect the average producing agent count trends for 2023 to be as follows: American Income Life, high single-digit growth; Liberty National, low double-digit growth; Family Heritage, high single-digit growth. Net life sales trends for the full year 2023 are expected to be as follows: American Income Life, relatively flat; Liberty National, high single-digit to low double-digit growth; Direct to Consumer, relatively flat. Net health sales trends for 2023 are expected to be as follows: Liberty National, a high single digit to the low double-digit increase; Family Heritage, a high single-digit increase; United American General Agency, low single-digit growth.

I will now turn the call back to Frank.

A – Frank Svoboda: Thanks, Matt. We’ll now turn to the investment operations. Excess investment income, which for 2022, we defined as net investment income, less required interest on net policy liabilities and debt, was $63 million, up 7% from the year ago quarter. On a per share basis, reflecting the impact of our share repurchase program, excess investment income was up 10%. Net investment income was $254 million, up 6% from the year ago quarter. On a per share basis, net investment income was up (ph). With the adoption of LDTI in 2023, we will begin viewing excess investment income as net investment income less only required interest. For the full year 2023, we expect net investment income to grow approximately 5% as a result of the favorable rate environment.

With respect to required interest, it will be substantially higher than reported in 2022 as a result of changes related to the adoption of LDTI. As mentioned previously, Tom will further discuss LDTI in his comments. Now regarding investment yield. In the fourth quarter, we invested $239 million in investment-grade fixed maturities, primarily in the financial, municipal and industrial sectors. We invested at an average yield of 6.10%, an average rating of A, and an average life of 21 years. We also invested $104 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 fourth quarter yield was 5.18%, up 1 basis point from the fourth quarter of 2021 and up 1 basis point from the third quarter.

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As of December 31, the portfolio yield was 5.19%. Now regarding the investment portfolio. Invested assets are $20 billion, including $18.3 billion of fixed maturities at amortized cost. Of the fixed maturities, $17.8 billion are investment grade with an average rating of A-minus. Overall, the total portfolio is rated A-minus, same as a year ago. Our investment portfolio has a net unrealized loss position of approximately $1.8 billion due to the high — higher current market rates on our holdings than book yields. We are not concerned by the unrealized loss position and it is mostly interest rate driven. We have the intent and, more importantly, the ability to hold our investments to maturity. Bonds rated BBB are 51% of the fixed maturity portfolio, down from 54% from a year ago.

While this ratio is in line with the overall bond market, it is relative — high relative to our peers. However, we have little or no exposure to higher-risk assets such as derivatives, equities, residential mortgages, CLOs and other asset-backed securities. We believe that the BBB securities that we acquire provide the best risk-adjusted, capital-adjusted returns due in large part to our ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets. Low investment grade bonds are $542 million compared to $702 million a year ago. The percentage of below investment-grade bonds to fixed maturities is 3%. This is as low as this ratio had been for more than 20 years. In addition, below investment-grade bonds plus bond rated BBB are 54% of fixed maturities, the lowest ratio it has been in eight years.

Overall, we are comfortable with the quality of our portfolio, because we primarily invest long. A key criterion utilized in our investment process is that an issuer must have the ability to survive multiple cycles. During 2022, we executed some repositioning of the fixed maturity portfolio to improve yield and quality. Over the course of last year, we sold approximately $359 million of fixed maturities with an average rating of BBB and reinvested the proceeds in higher-yielding securities with an average rating of A-plus. Overall, we believe we are well positioned not only to withstand a market downturn, but also to be opportunistic and purchase higher-yielding securities in such a scenario. I would also mention that we have no direct investments in Ukraine or Russia and do not expect any material impact to our investments in multinational companies that have exposure to these countries.

At the midpoint of our guidance, for the full year 2023, we expect to invest approximately $940 million in fixed maturities at an average yield of 5.5% and approximately $310 million in commercial mortgage loans and limited partnership investments with debt-like characteristics at an average cash yield of 7% to 8%. As we’ve 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 on our future policy benefits, since they are not interest sensitive. Now, I will turn the call over to Tom for his comments on capital, liquidity and LDTI. Tom?

A – Tom Kalmbach: Thanks, Frank. So, in the fourth quarter, the company purchased 490,000 shares of Global Life Inc. common stock for a total cost of $56 million at an average share price of $115.1, and ended the fourth quarter with liquid assets of approximately $91 million. For the full year, we spent approximately $335 million to purchase 3.3 million shares at an average price of $100.90. The total amount spent on repurchases included $55 million of parent company liquidity. In addition to the liquid assets of the parent, the parent company will generate additional excess cash flows during 2023. The 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 $410 million to $450 million and is available to return to its shareholders in the form of dividends and through share repurchases. This amount is higher than 2022, primarily due to lower COVID life losses incurred in ’22, which will result in higher statutory income in ’22 as compared to 2021, thus providing higher dividends to the parent in 2023 that were received in 2022. As previously noted, we had approximately $91 million of liquid assets — $91 million in liquid assets as compared to the $50 million or $60 million of liquid assets we have historically targeted. With the $91 million of liquid assets plus $410 million to $450 million of excess cash flows expected to be generated in 2023, we anticipate having $500 million to $540 million of assets available to the parent in 2023, of which we anticipate distributing approximately $80 million to $85 million to our shareholders in the form of dividend payments.

As noted 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 parent’s excess cash flow after the payment of shareholder dividends. It should be noted that the cash received by the parent company from our insurance operations is after our subsidiaries have made substantial investments during the year to issue new insurance policies, expand and modernization of 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 between $360 million and $400 million of share repurchases will occur during the year. Now with regard to capital levels at our insurance subsidiaries. Our goal is to maintain our capital levels necessary to support current ratings. Global Life targets a consolidated company action level RBC ratio in the range of 300% to 320%. For 2022, since our statutory financial statements are not yet finalized, our consolidated RBC ratio is not yet known. However, we anticipate the final 2022 RBC ratio will be near the midpoint of this range without any additional capital contributions. As noted on the previous call, the new NAIC factors became effective in 2022 related to mortality risk, also known as C2. Given the consistent generation of strong statutory gains from insurance operations and given our product portfolio, these new factors will simply result in even stronger capital adequacy at our target RBC ratios.

Now I’d like to provide you a few comments related to the impact of excess policy obligations on fourth quarter results. Overall, fourth quarter excess policy obligations were in line with our expectations. In the fourth quarter, the company incurred approximately $5 million of COVID life claims related to approximately 31,000 U.S. COVID deaths occurring in the quarter as reported by the CDC and was in line with expectations. We also incurred excess deaths as compared to those expected based on pre-pandemic levels from non-COVID causes, including deaths due to lung disorders, heart and circulatory issues and neurological disorders. We believe the higher level of mortality we have seen is due in large part to the effects of the pandemic. So, as the number of COVID deaths had moderated, so has the number of deaths from other causes.

In the fourth quarter, the impact of excess non-COVID policy — life policy obligations were generally in line with our expectations at about $6 million. For the full year, the company incurred approximately $49 million of COVID life policy obligations related to approximately 243,000 U.S. COVID deaths, an average of $2 million per 10,000 U.S. deaths. In addition, we estimate non-COVID claims resulted in approximately $69 million of higher policy obligations for the full year. The $118 million combined impact of COVID and higher non-COVID policy obligations was around 4% of total life premium in 2022, down from approximately 6% in 2021. Based on the data we currently have available, we estimate incurring approximately $45 million of total excess life policy obligations from both COVID and non-COVID claims in 2023.

We estimate that the total reported U.S. deaths from COVID will be approximately 105,000 at the midpoint of our guidance. Finally, with respect to earnings guidance for 2023. As noted on prior calls, the new accounting standard related to long-duration contracts is effective January 1, 2023. From this point forward, we report 2023 results and guidance under the new accounting requirements. I will do my best to bridge the gap as there are many changes with these new requirements. So, we are projecting net operating income per share will be in the range of $10.20 to $10.50 per diluted common share for the year ending December 31, 2023. The $10.35 midpoint of our guidance is lower than what we had indicated last quarter when including the impact of LDTI adoption.

The reduction is primarily due to a reduction in the expected impact from the adoption of LDTI as we get more information and have refined our assumptions and estimates impacting both 2022 and 2023. In addition to the lower LDPI impact, we anticipate slightly lower premiums, higher customer lead and agency expenses, as well as higher financing costs, which are reflective of higher short-term yields than previously anticipated. We estimate the after-tax impact of implementing the new accounting standard results in an increase in 2023 net operating income in the range of $105 million to $115 million. We are still in the process of determining the full 2022 results under the new standard. Once finalized, it could affect the 2022 — 2023 estimated results.

Going forward, fluctuations in experience and changes in assumptions will result in changes in both future policy obligations and the amortization of DAC as a percent of premium. The largest driver of the increase is lower amortization of deferred acquisition costs, or DAC, than under the prior accounting standard due to the changes in the treatment of renewal commissions, the elimination of interest on DAC balances, the updating of certain assumptions and the methods of amortizing DAC. Due to the treatment of deferred renewal commissions on amortization in our captive agency channels, we do expect that acquisition costs as a percent of premium will increase slightly over the next few years. In addition to the changes affecting the amortization of DAC, the new accounting standard changes how policy obligations are determined under the new standard, life policy up — life policyholder benefits reported in 2021 and 2022 will be required to be restated to reflect the new requirements and will include the impact of unlocking and updating prior assumptions.

For 2023, absent any assumption changes, we expect the following impacts. Life obligations as a percent of premium will be in the range of 40.5% to 42.5%. This is consistent with the average life policy obligation ratio over the last five years. Health obligations as a percent of health premium will be in the range of 50% to 52%. This is about 3% to 4.5% lower than the average health policy obligation percentage over the last five years. For the life and health lines combined, commissions, amortization and non-deferred acquisition costs as a percent of premium will be in the range of 20% to 21.5%, approximately 8% to 9.5% lower than the recent five-year averages. The resulting life underwriting margin as a percent of premium are expected to be in the range of 37% to 38%, and health underwriting margins as a percent of premium in the range of 28% to 29%.

So, offsetting the increases in underwriting income will be a reduction to excess investment income to the elimination of interest accruals on DAC balances that historically have reduced net required interest. In 2022, interest on DAC balances was approximately $260 million. In 2023, this will be zero under the new standards as compared to between $275 million and $285 million of interest accruals on DAC under historical GAAP, that we would have anticipated. In addition, required interest will change due to the changes in reserve balances at transition and restated balances in 2021 and 2022 under the new requirements. We anticipate that required interest in 2023 will be in the range of $910 million to $920 million. With respect to changes in AOCI, we noted in the past few quarters that under the new accounting standard, there is a requirement to remeasure the company’s future policy benefits each quarter, utilizing a discount rate that reflects the upper medium grade fixed income instrument yield and affects the changes — with the effects of the change to be recognized in AOCI, a component of shareholders’ equity.

The upper medium grade fixed income yields generally consist of single A-rated fixed income instruments at a relative — reflective of the currency and tenor of the insurance liability cash flows. As of year-end 2022, had the new accounting standard been in place, we anticipate the after-tax impact on AOCI would have decreased reported equity in the range of $1.3 billion to $1.4 billion. While the GAAP accounting changes will be significant, it’s very important to keep in mind that the changes impact the timing of when future profits will be recognized, and that none of the changes will impact our premium rates, the amount of premium we collect or the amount of claims we ultimately pay. Furthermore, it has no impact on the statutory earnings — statutory capital we’re required to maintain for regulatory purposes or the parent company’s excess cash flows nor will it cause us to make any changes in the products we offer.

Those are my comments. I’ll now turn it over to Matt.

A – Matt Darden: Thank you, Tom. Those are our comments. We will now open the call up for questions.

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Q&A Session

Operator: Thank you very much, sir. Our first question is coming from Jimmy Bhullar from J.P. Morgan. Please go ahead, sir.

Jimmy Bhullar: Hey, good morning. So, I had a question first on direct response sales. They’ve been weak for the last several quarters. Wondering how much of it is a reduction in your part on mailings and circulations versus just weak consumer demand with higher inflation?

Matt Darden: Yes. It’s really on the distribution side. As we’ve talked about in the past, scaling back our mailings and other print media that’s associated with the higher cost these days of the postage in paper. What we’re seeing on the consumer side, as I mentioned in my comments, is actually the sale amount on a per policy basis, the premium amount for each sale is actually going up slightly. So that would indicate to me that it’s really more of a reduction of that cost in the amount of things that we’re distributing, because we are really going to make sure that each one of those mailings and all of our campaigns are profitable. And that’s what the benefit is of switching more of our distribution over time to more of the electronic media side versus the sales side. But I do want to remind everyone that the — all of these channels work together and with the mail does support and drive activity to our other channels such as the call center as well as just online.

Jimmy Bhullar: Okay. And then, maybe with the economy and inflation overall, there had been concerns about policy retention. And it seems like lapses are now close to historical levels, but do you expect that they’ll go up above where they were pre pandemic?

Frank Svoboda: Yes, Jimmy, I think with respect to last level, I mean, you’re right, the fourth quarter did really trend favorably versus the third quarter, while they’re still higher than 2021. We’re actually back to in the fourth quarter around the lapses, the persistency levels pretty much where they were in the fourth quarter of 2019. So, looking forward, I think for the most part, we do think they’ll trend back here to pre-pandemic levels during 2023. Probably Direct to Consumer would probably see those maybe sticking around at slightly higher lapse rates than what we’ve had pre-pandemic, but not that significantly. And Liberty for the most past of first year lasted back to pre-pandemic levels as well.

Jimmy Bhullar: Okay. Thanks. And if I could just ask one more on LDTI, obviously, it’s affecting the timing of income, GAAP income, it doesn’t really change the underlying economics. But do you — and I’m assuming had you not been growing — if you don’t grow the business at some point in the next several years, it would actually have a negative impact on your results. But how do you think about with normal growth, could you reach a point where LDTI goes from being a tailwind to a drag on your results? Do you see that happening in the next like three, four, five years or so?

Frank Svoboda: Yes. Jimmy, we did take a look. I think this is the same question you had asked last year or the last quarter as well…

Jimmy Bhullar: Yes, last quarter.