Globe Life Inc (GL) — Q3 2021 Earnings Call Transcript

Thank you. Good morning, everyone. Joining the call today are Gary Coleman and Larry Hutchison, our Co-Chief Executive Officers; Frank Svoboda, our Chief Financial 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, 2020 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 Gary Coleman.

Thank you, Mike, and good morning, everyone. In the third quarter, net income was $189 million or $1.84 per share compared to $189 million or $1.76 per share a year ago. Net operating income for the quarter was $182 million or $1.78 per share, an increase of 2% per share from a year ago. On a GAAP reported basis, return on equity was 8.9% and book value per share is $84.52. Excluding unrealized gains and losses on fixed maturities, return on equity was 12.5% and book value per share is $57.11, up 9% from a year ago. In our life insurance operations, as we've noted before, we have seen improved persistency since the onset of the pandemic. In the third quarter, life premium revenue increased 8% from a year ago to $729 million. Life underwriting margin was $162 million, down 5% from a year ago. The decline in margin is due primarily to higher-than-expected COVID-related claims resulting from the impact of the Delta variant. Frank will discuss this further in his comments. For the full year, we expect life premium revenue to grow 8% to 9% and underwriting margin to decline about 5%. In health insurance, premium revenue grew 4% over the year ago quarter to $299 million, and health underwriting margin was up 6% to $77 million. The increase in underwriting margin was due primarily to improved claims experience and increased premium. For the year, we expect health premium revenue to grow 5% to 6% and underwriting margin to grow around 11%. Administrative expenses were $68 million for the quarter, up 8% from a year ago. As a percentage of premium, administrative expenses were 6.6%, the same as the year-ago quarter. For the full year, we expect administrative expenses to grow 8% to 9% and be around 6.7% of premium due primarily to higher IT and information security costs, higher pension expense and a gradual increase in travel and facilities costs. I will now turn the call over to Larry for his comments on the third quarter marketing operations.

Thank you, Gary. I'm very pleased with the overall agency results. Looking forward, the addition of virtual recruiting and selling opportunities will continue to enhance our ability to grow. I will now discuss current trends at each distribution channel. At American Income, life premiums were up 12% over the year ago quarter to $356 million, and life underwriting margin was up 11% to $111 million. The higher underwriting margin is primarily due to improved persistency and higher sales in recent quarters. In the third quarter of 2021, net life sales were $74 million, up 9%. The increase in net life sales is primarily due to increased agent count. The average producing agent count for the third quarter was 9,959, up 7% from the year-ago quarter but down 5% from the second quarter. The producing agent count at the end of the third quarter was 9,800. I've often mentioned the stairstep nature of our agency growth; it is normal to see a decline in agent counts after periods of high growth as attrition occurs and more emphasis is placed on training new agents. I remain optimistic regarding our ability to grow this agency over the long term regardless of economic conditions. At Liberty National, life premiums were up 6% over the year ago quarter to $79 million, and life underwriting margin was up 10% to $16 million. The increase in underwriting margin is due primarily to higher sales in recent quarters and lower policy obligations. Net life sales increased 33% to $18 million and net health sales were $7 million, up 19% from the year ago quarter due primarily to increased agent count and increased agent productivity. The average producing agent count for the third quarter was 2,706, up 6% from the year ago quarter but flat compared to the second quarter. The producing agent count at Liberty National ended the quarter at 2,700. We are pleased with Liberty National's continued sales growth. At Family Heritage, health premiums increased 8% over the year ago quarter to $87 million, and health underwriting margin increased by 9% to $24 million. The increase in underwriting margin is due primarily to improved claims experience and improved persistency. Net health sales were down 1% to $19 million due to a decreased agent count. The average producing agent count for the third quarter was 1,152, down 16% from the year ago quarter and down 6% from the second quarter. The producing agent count at the end of the quarter was 1,192. The focus will continue to be on recruiting for the remainder of the year.

Thanks, Larry. We'll now turn to our investment operations. Excess investment income, which we define as net investment income less required interest on net policy obligations and debt was $59 million, flat compared to a year ago. On a per share basis, reflecting the impact of our share repurchase program, excess investment income grew 5%. For the full year, we expect excess investment income to decline approximately 2% but be up 1% to 2% on a per share basis. In the third quarter, we invested $325 million in investment-grade fixed maturities, primarily in the municipal, industrial, and financial sectors. We invested at an average of 3.19%, an average rating of A plus and an average life of 29 years. We also invested $56 million in limited partnerships that have deadline characteristics. These investments are expected to produce incremental additional yield and are in line with our conservative investment philosophy. For the entire fixed maturity portfolio, the third quarter yield was 5.21%, down 10 basis points from the third quarter of 2020. As of September 30, the fixed maturity portfolio yield was 5.20%. Invested assets were $19 billion, including $17.6 billion of fixed maturities at amortized cost. Of the fixed maturities, $16.8 billion are investment grade with an average rating of A minus. And below investment grade bonds are $782 million compared to $840 million a year ago. The percentage of below investment-grade bonds at fixed maturities is 4.4%, and excluding net unrealized gains in the fixed maturity portfolio, below investment-grade bonds as a percentage of equity are 13%. Overall, the total portfolio is rated A minus compared to BBB plus a year ago. Bonds rated BBB are 54% of the fixed maturity portfolio. While this ratio is in line with the overall bond market, it is 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. Because we invest long, a key criterion utilized in our investment process is that an issuer has the ability to survive multiple cycles. We believe that the BBB securities that we acquire provide the best risk-adjusted, capital-adjusted returns due in large part to our unique ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets. Low interest rates continue to pressure investment income. At the midpoint of our guidance, we're assuming an average new money rate for fixed maturities of around 3.45% for the fourth quarter and a weighted average rate of around 3.9% in 2022. At these new money rates, we expect the annual yield on the fixed maturity portfolio to be around 5.21% for the full year 2021 and 5.11% in 2022. Fortunately, the impact of lower new money rates on our investment income is somewhat limited as we expect to have average turnover of less than 2% per year in our investment portfolio over the next five years. While we would like to see higher interest rates going forward, low rates can drive a lower to a longer interest rate environment. Now I will turn the call over to Frank for his comments on capital and liquidity.

Thanks, Gary. First, I want to spend a few minutes discussing our share repurchase program, available liquidity, and capital position. In the third quarter, the company repurchased 1 million shares of Globe Life Inc. common stock at a total cost of $96.5 million at an average share price of $94.13. For the full year, we have utilized approximately $310 million of cash to purchase 3.2 million shares at an average price of $97.17. The parent ended the third quarter with liquid assets of approximately $280 million, down from $545 million in the prior quarter. The decrease is primarily due to the redemption of the $300 million outstanding principal amount of our 6.18% junior subordinated debentures due 2056. In addition to these liquid assets, the parent company will generate excess cash flow during the remainder of 2021. 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 and the dividends paid to Globe Life's shareholders. We anticipate the parent company's excess cash flow for the full year to be approximately $360 million, of which approximately $25 million will be generated in the fourth quarter of 2021. Taking into account the liquid assets of $280 million at the end of the third quarter, plus $25 million of excess cash flows expected to be generated in the fourth quarter, we will have approximately $305 million of assets available to the parent for the remainder of the year. As I'll discuss in more detail in just a few moments, this amount is sufficient to support the targeted capital levels within our insurance operations and to maintain the share repurchase program for the remainder of the year. 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 a primary use of the parent's excess cash flows. At this time, the midpoint of our earnings guidance reflects $90 million to $100 million of share repurchases in the fourth quarter. In addition, we anticipate using approximately $90 million to $100 million of the parent assets to maintain our insurance subsidiaries RBC levels. Thus, taking into account the expected $305 million of assets available to the holding company less the $180 million to $200 million expected to be used for buybacks and subsidiary capital needs, we expect to have in the range of $105 million to $125 million of available assets at the holding company at the end of the year. This is approximately $55 million to $75 million in excess of the $50 million of liquid assets we have historically targeted at the holding company. We will continue to evaluate the potential impact of the pandemic on our capital needs. However, we expect that most, if not all, of this excess liquidity will be returned to the shareholders in 2022, absent other more favorable alternatives. Now regarding capital levels at our insurance subsidiaries, our goal is to maintain our capital at levels necessary to support our current ratings. As noted on previous calls, Globe Life targets a consolidated company action level RBC ratio in the range of 300% to 320%. At December 31, 2020, our consolidated RBC ratio was 309%. At this RBC ratio, our insurance subsidiaries have approximately $50 million of capital over the amount required at the low end of our consolidated RBC target of 300%. This excess capital, along with the $305 million of liquid assets that we expect to be available at the parent, provides sufficient capital to fund future capital needs. The drivers of additional capital needs in 2021 primarily relate to investment downgrades, changes in the newly adopted NAIC RBC C1 investment factors, growth of our business and higher COVID claims. With respect to downgrades, our year-to-date downgrades have totaled $291 million but have been offset by $224 million in upgrades, including a net upgrade of $110 million in the third quarter. At this time, in our base scenario, we are not expecting any significant NAIC one-notch net downgrades or material credit losses in the fourth quarter, consistent with the favorable outlook we continue to see in our portfolio. In August, the NAIC fully adopted the new and expanded C1 investment factors. The adoption of these factors will result in higher amounts of required capital for our portfolio. In addition, higher sales, growth of our in-force business and higher COVID claims also increased our capital needs. As I mentioned previously, we anticipate $90 million to $100 million will be needed at our insurance subsidiaries to maintain the midpoint of our consolidated RBC target for 2021, including the estimated $50 million of capital relating to the higher C1 charges. As previously noted, the parent company has ample liquidity to cover this additional capital. At this time, I'd like to provide a few comments related to the impact of COVID-19 on third quarter results. Through September 30, the company has incurred approximately $82 million of COVID life claims, including $33 million in the third quarter on approximately 95,000 deaths reported by the CDC. The claims incurred in the third quarter were significantly higher than anticipated, primarily due to the significant impact the Delta variant has had on infection rates and death totals, especially in southern states, and in younger ages met earlier in the pandemic. Our third quarter COVID life claims include approximately $17 million incurred in our direct-to-consumer division or approximately 7.1% of its third quarter premium income, approximately $8.4 million of COVID life claims occurred at Liberty National, 10.6% of its premium for the quarter, and approximately $6.7 million at American Income or 1.9% of its third quarter premium. As indicated on prior calls, we estimated that we would incur COVID life claims of roughly $2 million for every 10,000 U.S. deaths. While this was a good benchmark for our claims incurred through June 30, the spread of the COVID Delta variant has impacted our in-force book of business differently than the effect of COVID in prior quarters. In the third quarter, COVID shifted to a younger population where Globe Life has higher risk exposure, both in terms of number of policies and average face amount. In addition, we're also seeing a greater concentration of COVID deaths in the southern region of the United States where a greater proportion of our in-force policies reside. Given our experience to date and available information on the COVID deaths from the CDC and other sources, including the observed changes in the geography of the pandemic and the ages of people dying from COVID, we now estimate that our incurred losses in the second half of this year will be approximately $3.5 million for every 10,000 U.S. deaths. While continued changes in the mix of death in terms of geography or the age of those impacted by COVID will impact this estimate going forward, we anticipate the level of losses per U.S. death to range from $3 million to $4 million for every 10,000 U.S. deaths in 2022. At the midpoint of our guidance for 2022, we have assumed $3.5 million of incurred losses per 10,000 deaths. To date, we have experienced low levels of COVID claims on policies sold since the start of the pandemic. In fact, over two-thirds of our clients through September 30 are related to policies issued before 2010. Of the nearly 3 million policies sold since March 1, 2020, only 231 COVID claims have been paid through the end of the third quarter, totaling approximately $2.8 million in death benefits. In addition to COVID losses, we continue to experience higher policy obligations from non-COVID causes of death and lower policy lapses. The increase from non-COVID causes of death are primarily medical related, including heart and circulatory issues, non-lung cancer, and neurological disorders. The losses we are seeing are elevated over 2019 levels, due at least in part to the pandemic and the existence of either delayed or unavailable healthcare. In the third quarter, the policy obligations relating to non-COVID causes of death and lapses were slightly more than we anticipated, primarily due to higher reserves associated with better persistency at our direct-to-consumer channel. Higher-than-expected non-COVID claims and direct-to-consumer during the quarter were mostly offset by lower-than-expected non-COVID claims experience at Liberty National. For the full year, we anticipated on our last call that we would incur approximately $70 million in excess policy obligations in 2021, with about $42 million of those related to higher reserves due to lower policy lapses in 2020 and 2021. We now anticipate that our total excess obligations will be approximately $78 million, of which approximately $48 million related to higher reserves from lower lapses. Finally, with respect to our earnings guidance for 2021 and 2022. After taking into account various estimates of COVID deaths in the U.S. in the fourth quarter, we estimate fourth quarter COVID deaths of approximately 75,000 to 125,000, resulting in approximately $25 million to $45 million of COVID incurred losses. At the midpoint of our guidance, we estimate approximately $35 million of COVID losses on 100,000 U.S. deaths. The 100,000 U.S. deaths is consistent with the October 15 projection by the IHME. As a result of the higher COVID claims in the second half of this year than previously anticipated, we are lowering the midpoint of our guidance from $7.44 to $6.95 with a range of $6.85 to $7.05 for the year ended December 31, 2021. The $0.49 decrease in the midpoint is almost entirely due to an increase in COVID incurred losses of nearly $63 million or $0.48 of earnings per share over the amount previously anticipated. Looking forward to 2022, we anticipate that COVID deaths will continue to be with us throughout the year but at a lower level than in 2021. We estimate COVID deaths could range from 100,000 deaths for the year to 200,000 and that our losses per 10,000 U.S. deaths could range from $3 million to $4 million. At the midpoint of our guidance, we anticipate between $50 million to $55 million of COVID-incurred losses on approximately 150,000 U.S. deaths, most of which are expected to occur in the first half of the year. Absent the impact of COVID, we believe our core earnings should be strong, buoyed by premium growth in the 6% to 8% range as a result of strong sales in 2021 and continued favorable persistency. We also anticipate that the level of excess policy obligations will moderate somewhat, resulting in underwriting margins as a percentage of premium, excluding COVID losses, returning to pre-pandemic levels of around 28%. We also anticipate our health underwriting income to increase 4% to 7% during the year, with underwriting margins as a percent of premium approximately 24% to 25%. Overall, we estimate our earnings for 2022 will range from $7.95 to $8.75 with a midpoint of $8.35. The wider-than-historical range is to take into account the wide range of potential impacts of COVID in 2022, which are largely dependent on the emergence of new variants, adoption and effectiveness of available vaccines and therapeutics, masking practices and many other factors. Our 2022 results also reflect a full year of operations for our newest acquisition, Beazley Benefits, which has been rebranded as Globe Life Benefits. The acquisition, which we closed upon in the third quarter, is expected to add over $50 million of health premium in 2022 and over $11 million of underwriting income. We are excited about the future of this new acquisition and the ability to grow this business over the long term. The agency fits well into our overall business model as they offer group supplemental health insurance solutions to employer groups through brokers, and this is complementary to our existing agencies that focus more on individual sales. Their underwriting results will be reflected in our other health lines along with our United American General Agency division. Those are my comments. I will now return the call back to Larry.

Thank you, Frank. Those are our comments. We will now open the call up for questions.

First, I just had a question on margins in the Life business. And it seems like Direct Response margins have declined a lot more than in other channels. And obviously, COVID has something to do with it. But is the makeup geographic and age group for Direct Response that much different than the other channels that the only reason is causing it? Or is it something other than COVID that's driving the sharp drop in margins that drive this cost?

Well, Jimmy, when considering direct-to-consumer, it's important to note that this segment has a higher mortality rate compared to our other channels. In the third quarter, the impact of COVID was about 7% for direct-to-consumer, while Liberty National experienced 10.6%. This difference is partly due to a higher concentration in the southern regions and age groups that were more affected by the Delta variant, particularly those in their 40s to 50s, who had greater exposure to mortality. Direct-to-consumer has also faced significant challenges from COVID, more so than other lines of business. For the entire year, we anticipate that direct-to-consumer will see a 5.7% increase in policy obligations, primarily driven by lapses, compared to excess non-COVID claims. In contrast, Liberty National and American Income's excess non-COVID claims have remained relatively stable, ranging from flat to about 1.5%.

And then how do you think about your ability to be able to sort of retain the agency that you've hired through the pandemic, especially early on, you had seen a big pickup in recruiting because of the tight labor or weak labor market. And now it seems like the labor market has improved even in some of the previously troubled sectors, such as travel and hospitality. So is there a risk that if, as the economy recovers further, that agent growth becomes an issue beyond this year? And any sort of metrics you're able to share on retention would be helpful as well.

In terms of major retention, we think the ability to sell with the digital presentation has made that agent opportunity more attractive. And therefore, we've seen an increase in retention and particularly the American Income versus the prior two years. Agents are now going to make more presentations, spend less time away from home, and they incur far fewer travel expenses. The digital presentation is also with the geographic restriction for the agents' sales leads. So, in addition to that, virtual recruiting will continue to be effective. We can reach more recruits and virtual training has proven to be well accepted and efficient. Right now, about 80% to 85% of the sales of American Income are virtual. We think that will continue past the pandemic.

I have a couple of questions regarding direct-to-consumer. I understand you've discussed several aspects of it. Specifically, only 231 of the COVID claims originated from business written after 2019 across all businesses. Given this context, I would like to know what percentage of claims from the 29 new post-2019 vintages in direct-to-consumer were. Additionally, do you think the surge in claims within direct-to-consumer was due to adverse selection, or as you've referred to it, adverse persistency?

Yes, Andrew, out of the 230 additional claims, about half are in direct-to-consumer. So it's not entirely concentrated in that area. Regarding the second part of your question, I'm not exactly sure what to say. I think that’s just more about the numbers. I don't have a specific reason for the total claims or where they are originating from.

So I need to clarify my thoughts after the call, but let’s consider that it's half of 231 claims in the direct-to-consumer segment. Does that number indicate adverse selection in the business written after 2019? Or is it a typical figure compared to other business written post-2019 or during the pandemic? Does it seem like a standard COVID-related number in relation to everything else?

Yes, I'm going to say that might be just a little bit higher, but that's not a number that gives us great pause with respect to looking at claims over that period on that business. We're always going to have some claims that come in, especially in our direct-to-consumer business. There will always be some claims that will happen in the first and second durations, if you will, after the policy has been issued. And for that level, it really doesn't give us any real concern.

This is Larry. You've been talking about the COVID situation beginning in March of 2020. In terms of adverse selection, since that time, we've monitored income and insurance applications or an indication of the changes in the risk profile. That monitoring includes factors like age, amount of insurance, and geography. At this point, we've not seen any material change in the risk profile, and so we're comfortable with those direct-to-consumer sales to date.

That's good to hear. And then just one follow-up on American Income. Year-over-year, the agent count looked fine. It was up 7%. But sequentially, the American Income ending agents were down 5% in the third quarter. And I'm wondering if this implies any recruiting or retention concerns; would love to have your feedback on that.

Sure. The decrease in agent count is primarily driven by lower new agent recruiting. There's been a negative impact on recruiting across the three agencies because there are so many work opportunities in this current economy. And we believe as COVID declines in economic conditions normalize, our recruiting will return to normal levels. And again, as I stated earlier to Jim, the ability to sell with the digital presentation has made that agent opportunity much more attractive as agents are now able to make more presentations. They can utilize leads better. They can work from home, and they incur far fewer travel expenses. We think that will help with retention and recruiting as we go forward.

Can you talk about your expectations for 2022 free cash flow and what you have assumed in your guidance for share repurchases?

Yes. Our free cash flow is expected to decrease slightly. For 2022, we anticipate it to be around $280 million to $320 million, down from approximately $360 million in 2021. This decrease is primarily due to an increase of $50 million in COVID-related losses in 2021 compared to 2020, along with the considerable growth in our agency businesses and their sales. As we have mentioned in previous calls, double-digit growth in those agencies will lead to additional strain in the first year, although it bodes well for the long term. Therefore, a slight decrease is not surprising. So, at the midpoint, we're looking at about $300 million, and we have planned for share repurchases in the range of $340 million to $380 million throughout the year, expecting to use some of that excess cash at the holding company.

And then just to clarify for the health business, the growth in margin that you talked about, does that include the Beazley business?

It does.

So the $11 million?

Yes. And on the premium side, the $50 million of premiums as well.

And then I guess, lastly, just around expenses. Can you talk about what your assumption is for admin expenses, which I think were a bit elevated this year from some of the IT investments and other things? Do you see that continuing? Or will that start to revert to a more normal level?

Yes, Erik, administrative expenses for 2022, we expect to be up around 8%. That includes about $4 million for Beazley. Excluding that, the expenses will be up 7%. And again, we will still see higher information technology and information security costs, also slightly higher travel and facility costs as well.

Couple more numbers questions. Can you give us your excess net investment income guidance for 2022?

Yes. At the midpoint of the guidance, we're looking at excess investment income being down around 2%. On a per share basis, it will be up 1% to 2%.

On the Life business, the 28% margin, excluding COVID, was that just excluding direct COVID claims? Or do you also make an adjustment for any indirect impacts?

That is just the direct COVID claims, excluding that for the year.

Okay. Can you quantify what you assumed regarding any indirect COVID impact for 2022?

Yes. For 2022, in total, about 1.5% of premium is what we're anticipating at the midpoint, with about half of that roughly 0.8% or so due to the continued higher lapses and then the other 0.7% being still a little bit of elevated claims predominantly still at the DTC market or the channel.

So if you excluded that too, you would actually expect a 29% plus margin in life.

That's exactly right. So yes, excluding both the COVID and what we've seen in other higher policy obligations, we would say around 29.6%, 29.5%, a little bit higher than where we were in 2019. Really because with the strong persistency again and the higher premium base, then the amortization percentage is being a little less as a percent of premium. And that's probably elevated; that will probably be 1% to 1.5% lower than those historic levels. So the 2019 levels anyway.

Most of my questions have been answered, but I do have one. Sadly, COVID remained around longer than we thought when we sat probably at the beginning of the year and a year ago. Given that, what are you doing to encourage maybe wellness programs among your life insurers to better deal with it from a long-term perspective?

I will say that we continue from an organization perspective to support those organizations that are around good health practices and helping to support those types of lifestyle. But I would say nothing specific, if you will, around some of the more sensitive areas around masking and some of those politically charged topics.

I have a few follow-up questions regarding free cash flow. I want to confirm the $280 million to $320 million you mentioned for 2022. This figure does not include your common dividend, so I should add that back when considering total shareholder capital generation. Is that correct?

That's correct. And we would anticipate somewhere in the $80 million to $82 million of common dividends in 2022.

So my question is about your free cash flow conversion. I heard your comments on the overall impact of COVID and the sales stream. However, when I look at the ratio and compare it to GAAP earnings, it has now fallen below 50%. Historically, it has been a bit higher, but that number has been declining. Have you considered this as part of your corporate strategy to improve that ratio? I understand that growth presents certain challenges, but when I compare your ratio to peers, like Net Life, which is up to 70%, your proportion of cash flow relative to GAAP earnings appears to be an outlier on the lower side. Is that something you've thought about as a way to enhance that?

We acknowledge the concerns regarding our cash flow relative to GAAP earnings. While it was lower than historical levels of 70% to 80%, the recent tax law improved our GAAP earnings due to a reduced tax rate. However, it didn't significantly affect our statutory income, as our tax base remained largely unchanged and our cash taxes did not decrease substantially. This has contributed to a slight decline in those levels because our statutory capital hasn’t changed much. The impact of COVID over the last couple of years, along with low interest rates, has slowed the growth of our basic statutory income. Despite this, we are committed to maintaining strong sales growth, which is crucial for the future. Investing in new sales may temporarily affect our ability to return excess cash flow as a percentage of our GAAP earnings, but we believe that once we move beyond COVID, our statutory earnings will improve significantly in the coming years.

All right. Thank you for joining us this morning, and we'll talk to you again next quarter.