Globe Life Inc (GL) — Q2 2024 Earnings Call Transcript

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, 2023 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. In the second quarter, net income was $258 million or $2.83 per share compared to $215 million or $2.24 per share a year ago. Net operating income for the quarter was $271 million or $2.97 per share, an increase of 14% from a year ago. On a GAAP reported basis, return on equity through June 30 is 20.8% and book value per share is $58.06. Excluding accumulated other comprehensive income or AOCI, return on equity is 14.5% and book value per share as of June 30 is $82.38, up 14% from a year ago. Before we continue, we would like to address and advance the status of the independent review conducted by the Audit Committee of Globe Life's Board of Directors regarding allegations levied against the company by short sellers. On June 22, 2024, Globe Life filed an 8-K addressing this matter. As noted in the 8-K, the Audit Committee of our Board of Directors conducted an independent investigation of allegations contained in various short seller reports. The Audit Committee was assisted in its review by the law firm, WilmerHale, and the forensic accounting firm, FTI Consulting. The scope of the independent review included all allegations that raise specific questions about the accuracy and integrity of the company's financial statements and disclosures. It also included the company's process for preventing, identifying and responding to misconduct. As stated, the Audit Committee has completed its review and determined that the allegations of financial misconduct were not supported. Additionally, the independent review did not identify any matters requiring adjustments to the company's previously issued financial statements or related disclosures in its filings with the Securities and Exchange Commission. We believe the allegations were false and misleading and were designed to drive down Globe Life's stock price in an effort for the short sellers to profit at the expense of our long-term shareholders. The company stands by its financial results and disclosures, which remain accurate and do not require any adjustments. In addition, the Audit Committee reviewed and confirmed that the company has policies and procedures in place designed to safeguard the quality of the work experience. Compliance with our code of conduct, both internally and in connection with our third-party relationships, is and will continue to be a key focus area for management.

In separate but related issues, we'd like to update you regarding the inquiry by the SEC and the request by the DOJ. As we have previously disclosed, the company received an inquiry from the staff of the Securities and Exchange Commission. The company and the Audit Committee have provided information in response to the SEC's request received to date. And the company is cooperating fully and will continue to do so. At this time, the SEC has not asserted any claims against the company or indicated it intends to do so. Regarding the DOJ, we continue to fully cooperate in responding to requests related to sales practices by certain licensed insurance agents in the Arias Organization who are contracted to sell American Income policies. The DOJ has not asserted any claims or made allegations against the company or American Income or indicated it intends to do so. In conclusion, we'd like to discuss the questions we have received regarding ongoing litigation and the company's process for identifying, assessing and remediating complaints related to alleged misconduct. The various allegations are the subject of litigation in a variety of stages. As you can appreciate, it would not be appropriate for us to comment on terminated contracts or pending lawsuits. But as we've discussed in prior calls, Globe Life takes unethical conduct and any allegations brought to our attention concerning harassment, inappropriate conduct or unethical business practices seriously, and we do not tolerate such behavior. The company has reasonable and appropriate systems in place that are designed to detect and mitigate misconduct and attempted fraudulent activities. Globe Life has a long history of integrity in our business practices and principles while providing our customers with financial protection as well as work opportunities for agents, small business owners and employees to build financial security. We are focused on results and the continued strategic growth of Globe Life. Our field force of approximately 17,000 agents and our 3,500 employees are focused and dedicated to helping families make tomorrow better by working to protect their financial futures. Together, we strive to act in accordance with the highest levels of ethics and integrity at all levels of the organization. Now Frank, let's talk about our results with respect to our insurance operations.

Thanks, Matt. In our life insurance operations, premium revenue for the second quarter increased 4% from the year-ago quarter to $815 million. Life underwriting margin was $320 million, up 8% from a year ago, driven by the premium growth and lower overall policy obligations. For the year, driven by strong premium growth in both our American Income and Liberty National divisions, we expect life premium revenue to grow between 4.5% and 5% at the midpoint of our guidance, and life underwriting margin to grow between 9% and 10%. As a percent of premium, we anticipate life underwriting margin to be in the range of 39% to 41%. In health insurance, premium grew 7% to $352 million, and health underwriting margin was up 9% to $100 million. For the year, we expect health premium revenue to grow approximately 6.5% to 7%, and at the midpoint of our guidance for the full year, we expect health underwriting margin to grow between 1% and 2%, and as a percent of premium to be between 27% and 29%. Administrative expenses were $82 million for the quarter, up 9% from a year ago. As a percentage of premium, administrative expenses were 7%, consistent with our expectations, compared to 6.8% a year ago. For the full year 2024, we expect administrative expenses to be approximately 7% of premium. I will now turn the call over to Matt for his comments on the second quarter marketing operations.

Thank you, Frank. First, I'd like to discuss American Income Life. Here, the life premiums were up 7% over the year-ago quarter to $424 million, and the life underwriting margin was up 7% to $193 million. In the second quarter of 2024, net life sales were $95 million, and this is up 16% from a year ago and is primarily due to the strong growth in our agent count. The average producing agent count for the second quarter was 11,869, and that is up 13% from a year ago. We are seeing strong recruiting activity along with continued improvement in new agent retention. Our new business pipeline for the second quarter is up 16% from the prior year, and I'm very pleased with the sales productivity and agent count trends at American Income. At Liberty National, the life premiums were up 6% over the year-ago quarter to $92 million, and the life underwriting margin was up 9% to $31 million. Net life sales increased 11% to $26 million, and net health sales were $8 million, which is up 4% from the year-ago quarter. Growth in both the life and the health sales was due primarily to the increase in agent count. The average producing agent count for the second quarter was 3,700 and is up 16% from a year ago. Liberty National continues to generate positive recruiting and sales momentum, driven by our investments in technology and the growth in middle management. At Family Heritage, health premiums increased 8% over the year-ago quarter to $106 million, and health underwriting margin increased 12% to $37 million. Net health sales were up 7% to $25 million, and this is primarily due to an increase in agent productivity. The average producing agent count for the second quarter was 1,361, and this is up 1% from a year ago. As we've said before, we continue to emphasize recruiting and middle management development at Family Heritage. I'm encouraged as we have started to see middle management growth, which is up 11% from year-end. In our direct-to-consumer division at Globe Life, life premiums were flat compared to the year-ago quarter at $249 million, while the life underwriting margin increased 13% to $64 million and is due primarily to favorable mortality and continued efforts to maximize our margin dollars. Net life sales were $31 million and are down 3% from the year-ago quarter. As we have previously mentioned, the decline in sales is primarily due to lower customer inquiries as we have reduced marketing spend on certain campaigns that do not meet our profit objectives. Our focus in this area is having a positive impact on our overall margin. We will continue to focus on maximizing underwriting margin dollars on new sales by managing the rising advertising and distribution costs associated with acquiring new business. Additionally, as a reminder, the direct-to-consumer channel provides support to our agency business through brand impressions and the generation of sales leads. At United American General Agency, our health premiums increased 9% over the year-ago quarter to $149 million. Health underwriting margin was $17 million and is up approximately $2 million from the year-ago quarter. Net health sales were $18 million, and this is up approximately $7 million over the year-ago quarter, primarily due to improved market conditions for our Medicare Supplement business. Now I'd like to discuss projections. Based on the trends that we are seeing and the experience with our business, we expect the average producing agent count trends for 2024 to be as follows: at American Income, low double-digit growth; at Liberty National, mid-teens growth; and at Family Heritage, mid-single-digit growth. Our net life sales for 2024 are projected to be as follows: at American Income, mid-teens growth. Here, we are raising our guidance at American Income to reflect strong second quarter experience along with the trends we are seeing. Last quarter, we had tempered our projections just out of an abundance of caution. Liberty National sales anticipate low double-digit growth, and direct-to-consumer is slightly down. Net health sales for 2024 are expected to be as follows: Liberty National, high single-digit growth; Family Heritage, also high single-digit growth; and United American General Agency, low to mid-single-digit growth.

Thanks, Matt. We will now turn to the investment operations. Excess investment income, which we define as net investment income less only required interest, was $43 million, up $11 million from the year-ago quarter. Net investment income was $286 million, up 9% or $24 million from the year-ago quarter. The increase is largely due to strong 6% growth in average invested assets over that period. Additionally, higher interest rates across fixed maturities, commercial mortgage loans, limited partnerships and short-term investments also contributed to the higher growth rate. Acquired interest is up approximately 5.5% over the year-ago quarter, slightly higher than the 5% growth in average policy liabilities. For the full year, we expect net investment income to grow between 7% and 8% due to the combination of the favorable interest rate environment and steady growth in our invested assets. At the midpoint of our guidance, we anticipate that required interest will grow around 5% to 5.5% for the year, resulting in growth in excess investment income of approximately 20% to 25%. Now with respect to our investment yield. In the second quarter, we invested $241 million in investment-grade fixed maturities primarily in the industrial and financial sectors, investing at an average yield of 6.16%, with an average rating of A- and an average life of 35 years. We also invested approximately $115 million in commercial mortgage loans and limited partnerships that have debt-like characteristics, and an average expected cash return of 10%. None of our direct investments in commercial mortgage loans involved office properties. These investments are expected to produce additional cash yield over our fixed maturity investments and are in line with our conservative investment philosophy. For the fixed maturity portfolio, the second-quarter yield was 5.26%, up 8 basis points from the second quarter of 2023 and up 2 basis points for the first quarter. As of June 30, the portfolio yield was 5.24%. Including the cash yield from our commercial mortgage loans and limited partnerships, the second-quarter earned yield was 5.44%. Now regarding the investment portfolio. Invested assets are $21.3 billion, including $19.2 billion from fixed maturities at amortized cost. Of the fixed maturities, $18.7 billion are investment grade with an average rating of A-. Overall, the total fixed maturity portfolio is rated A-, the same as a year ago. Our fixed maturity portfolio has a net unrealized loss position of approximately $1.6 billion due to 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 as it is mostly interest rate driven and currently relates entirely to bonds with maturities that extend beyond 10 years. We have the intent and, more importantly, the ability to hold our investments to maturity. Bonds rated BBB comprised 46% of the fixed maturity portfolio compared to 49% from the year-ago quarter. While this ratio is high relative to our peers, we have little or no exposure to higher-risk assets helped by many of our peers, such as derivatives, equities, residential mortgages, equities, CLOs and other asset-backed securities. We believe that the BBB securities we acquire generally provide the best risk-adjusted and 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 remained below at $564 million compared to $496 million a year ago. The average of below investment grade bonds to total fixed maturities is 2.9%. During the quarter, we did take the opportunity to extend duration on a portion of our portfolio by selling some shorter maturity bonds and investing in longer-dated securities. While we realized a loss on some of the bonds sold, we were able to extend the average life and improve the overall yield of the portfolio and reduce our exposure to smaller regional banks. At the midpoint of our guidance for the full year, we expect to invest approximately $1.2 billion to $1.4 billion in fixed maturities with an average yield of 5.7% to 5.9%, and approximately $500 million to $600 million in commercial mortgage loans and limited partnership investments with debt-like characteristics with an average expected cash return of 8% to 10%. As we've said before, we are pleased to see higher interest rates as this positively impacts operating income by driving up net investment income with no impact on our future policy benefits since they are not interest-sensitive. Now I'll turn the call over to Tom for his comments on capital and liquidity.

Thanks, Frank. First, let me spend a few minutes discussing our available liquidity, share repurchase program and capital position. Parent began the quarter with liquid assets of approximately $65 million and ended the quarter with approximately $35 million of liquid assets. We anticipate concluding the year with liquid assets in the range of $50 million to $60 million, which we have historically targeted. In the second quarter, the company repurchased approximately 3.8 million shares of Globe Life Inc. common stock for a total cost of just over $314 million at an average share price of $81.87, resulting in repurchases to date of approximately 4 million shares for a total cost of approximately $330 million at an average share price of $83.17. Including shareholder dividend payments of $23 million for the quarter, the company returned approximately $337 million to shareholders during the second quarter of 2024 alone, and has returned approximately $375 million year-to-date. The amount of share repurchases during the quarter is higher than usual as we took the opportunity to accelerate repurchases from the second half of the year given the favorable market conditions with share prices below our book value per share. We are able to finance this largely with excess cash flows during the quarter due to the timing of subsidiary dividends and the use of the parent's liquid assets. In addition to the liquid assets held by the parent, the parent company will generate excess cash flows during the remainder of the year. The parent company's excess cash flows, as we define it, results primarily from dividends received from the parent from its subsidiaries less interest paid on debt. We anticipate the parent company's excess cash flow for the full year will be approximately $440 million to $460 million and is available to return to its shareholders in the form of dividends and through repurchases. As mentioned on previous calls, we will use our cash as efficiently as possible. At this time, we 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. We intend to use 2024 excess cash flows to purchase $350 million to $370 million during the year and distribute $85 million to $90 million to our shareholders in the form of dividends. In addition, during the second half of the year, we anticipate raising additional capital to support accelerating approximately $400 million of additional share repurchases in 2024. For the full year, at the midpoint of our earnings guidance, we anticipate approximately $750 million to $770 million of total share repurchases for the full year. Now with regard to our capital levels at the insurance subsidiaries. Our goal is to maintain our capital at levels necessary to support our current ratings. Globe Life targets a consolidated company action RBC ratio in the range of 300% to 320%. At the end of 2023, our consolidated RBC was 314%. At this ratio, our subsidiaries had approximately $85 million of capital over the amount needed to meet the low end of the consolidated RBC target of 300%. In 2024, we currently estimate that no additional capital is needed to maintain the midpoint of our consolidated RBC target of 300% to 320%. Regarding policy obligations during the current quarter, we have included within the supplemental financial information available on our website and exhibit that details the remeasurement gain or loss by distribution channel. As a reminder, in the third quarter of 2023, we updated both our life and health assumptions, and there have been no changes to our long-term assumptions in the period since. No assumptions were made in the second quarter of 2024, and we intend to update life and health assumptions in the upcoming third quarter. In addition to the impact of assumption changes, the remeasurement gain or loss also indicates experienced fluctuations. For the second quarter of 2024, life policy obligations were favorable when compared to our assumptions of mortality and persistency. The remeasurement gain related to experience fluctuations resulted in $12 million of lower life obligations and $3 million of lower health policy obligations. We continue to be encouraged by the recent short-term trends in policy obligations experience. The range of our earnings guidance encompasses potential future remeasurement impacts, inclusive of assumption changes through the remainder of 2024. Recent and longer-term life and health mortality trends will inform the third quarter 2024 update to assumptions. Finally, with respect to our earnings guidance for 2024, for the full year 2024, we estimate that operating earnings per diluted share will be in the range of $11.80 to $12.10, representing 12% growth at the midpoint of the range. The $11.95 midpoint is higher than our previous guidance and reflects recent anticipated improvements in underwriting income results in addition to a greater impact from share repurchases than previously anticipated for the year.

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

Good morning. I have a question regarding lapses. It appears that first-year lapses have increased slightly across all divisions. Is this considered a normal fluctuation, or is there a connection to the economy, inflation, or any changes in your sales or service practices that could be contributing to this increase?

We are very pleased with the recent persistency, especially considering the short seller reports and the ongoing economic conditions. This reflects positively on the stability of our business and indicates that our basic protection products are meeting our customers' needs. Regarding first-year lapses, they have increased slightly at AIL compared to the previous quarter, but are still in line with our 10-year average. It appears to be just a fluctuation. In the DTC segment, our overall first-year lapses align with expectations, showing a slight increase over the previous quarter, which may be linked to sourcing. We observe higher lapses with Internet sales, which could be contributing to this trend. For LND, first-year lapses are consistent with the last quarter, and overall, we consider the lapse results for the business to be fairly good.

And then you had a couple of items below the line that affected your net income. I think one of them was related to M&A, and I'm assuming that's an expense that should not continue. But the legal expenses, how much of those were really cash expenses versus maybe a reserve? And then what are your thoughts about how those numbers will be as you go through this year and the likely impact of that on free cash flow next year?

Yes. The legal expenses are related to expenses we've incurred related to the WilmerHale investigation and the short seller investigating the short-seller allegations. We'd expect some of those to continue a little bit for the rest of the year as we continue to work through those issues. On the M&A expenses, the other expenses there are hard to predict, but at this point, I don't see any of those expenses continuing unless another opportunity emerges that we would pursue.

Yes, Jimmy, I would just add that I wouldn't think that they would continue to be material, if you will, or have any kind of material impact on our excess cash flows as we're thinking about it from next year's perspective or even on the remainder of this year.

Could you clarify if you're considering moving the accelerated buyback activity you typically would have planned for next year into the latter half of this year? Or do you believe you have enough debt capacity to proceed with the buybacks now, assuming stock prices remain stable, and then return to your usual schedule next year?

Exactly. I think we have some debt capacity, Jimmy. We feel like we have some room to finance adding $400 million of additional debt. We'll bring our projected debt cap ratios closer to 25%. We really like to operate in the 23% to 27%. So it's well within the range of our debt capacity.

Jimmy, I'd probably just add that as we continue to take a look at that, and as Tom said, I think we've got adequate capacity there to be kind of where our normal historical ranges have been. But of course, we're also taking a look at just seeing, are there some opportunities around capital management to free up some excess capital within the insurance operations, whether that be through reinsurance or other means and just continuing to look at that as well.

Okay, thank you.

Hey, good morning and thanks for taking my questions. I just had one follow-up on Jimmy's last one. But do you have any idea about the form of whether that's senior notes or commercial paper that you want to use for the financing to finance that accelerated buyback?

We haven't decided on the final form, but my preference would probably lead a little bit towards longer-term debt. It does depend a little bit on the rates that are available in the market. So we'll look at all of our options and select what we think is best for us.

Got it. That's helpful. Just regarding the Audit Committee's investigation, you disclosed that there's no need to restate financials or disclosures. But is there any sort of broader review that's going on regarding some of these short seller allegations, especially around agent behavior in American Income? Or do you not really expect any material organizational changes?

As we had mentioned, the review also included processes for preventing, identifying and responding to misconduct. We have been and always do look at our processes and procedures and controls and have a process in place for continuing to evaluate those and enhance them as necessary. So that'd be no different in the future as we think about what has come out of the review as well as just our normal processes for implementing improvements. As we said, we believe we have the appropriate procedures in place to identify activity that's inappropriate or not in line with our core principles, and we take appropriate action as necessary.

The one thing I would add to that, Wes, is that we really do think of this as just kind of part of our overall third-party risk management processes. Part of that is evaluating the changing risks in that environment and how that changes from time to time. As Matt said, we're always continuing to strive for improvement, and we'll continue to look for ways to enhance what we're currently doing.

Good morning. Thank you very much for the opportunity. My first question, on June 13, I think you filed an 8-K about a tech issue with unauthorized access. Do you have an update on that at all, what the status of that is, please?

Yes. As mentioned in the 8-K, we have started a review of potential vulnerabilities related to access permissions and user identity management for a company web portal. This was in response to an inquiry from a state insurance regulator. We have addressed the identified vulnerabilities and have launched a thorough investigation into the issue. Currently, the investigation is ongoing, and we have not yet determined the complete scope, nature, and overall impact. However, we do know that there has not been a material effect on the company's operations. We do not have any additional information to share at this time, but we will continue to provide updates as they become available.

My other question, I believe at the end of April, there was a share repurchase authorization. It's good through the end of 2025, $1.3 billion. For my math, that would possibly imply a greater amount of buybacks in 2025 than the normal run rate would imply. Can you talk about the optionality to bring forward 2026 cash flows? Thank you.

Yes. I think that was really consistent with my comment of raising additional financing in the second half of the year to the use of additional share repurchases and then we would have our normal excess cash flows in 2025, which should get us fairly close. The other thing Frank had mentioned is we are looking at other options to raise additional capital from our insurance operations through reinsurance and other means. That would be another potential source that would allow us to purchase some additional shares in either 2024 or 2025.

I want to emphasize that this information is still preliminary, and we will provide more details in the next call regarding our expectations for excess cash flows in 2025. Currently, we anticipate that these flows will be higher than what we see available in 2024, indicating some additional capacity. We will delve deeper into this topic in our next call. It’s important to note that the authorization does not require us to act; we will evaluate the situation and aim to buy back shares as long as it is responsible for us to do so.

Yes, thanks. I want to start by discussing the Audit Committee's review. Just to clarify, did they conduct the review and find that there isn't anything more you need to improve regarding how you monitor your sales practices, and that it's essentially business as usual? Considering that you've mentioned you continuously review these matters, it seems there isn't anything additional required from you?

As we've mentioned, the independent review focused on the financial allegations that raised questions about the financial statements and disclosures. Also, it did examine just our company processes for preventing, identifying and responding to misconduct. I'll go back to what I said earlier in that we always continue to look to see if there are areas that we need to enhance. We continually enhance internal controls around a variety of things, including our sales practices. We always look at our processes and procedures for identifying misconduct and addressing those as appropriate. We will continue to do so as far as evaluating those and continuing to enhance those as appropriate.

Got it. Relatedly, regarding the DOJ and the SEC, will we eventually learn about their conclusions? Or if there's nothing significant to report, will there be no final update on this? I'm trying to understand how we should view the timing of these reviews.

Sure. Our intent would be to update you as the material developments happen in both of those cases.

Okay. My final question is about the remeasurement. I want to clarify what's happening because it seems like you conducted an assumption review in the third quarter and will do another one in the third quarter of this year. However, the remeasurement gains in the fourth quarter of last year and the second quarter of this year were quite substantial. Does this suggest that you might have another favorable assumption review in the third quarter? Or are these remeasurement gains actually reflecting some of the assumption changes made last year?

The remeasurement gains that we reported in the quarter are relative to our current assumptions for determining reserves, which were established in the third quarter of 2023. In essence, I'd say yes there. We have seen some remeasurement gains throughout the year on the life business and the health business. Those are indicative of mortality trends that appear to be favorable relative to those valuation assumptions and relative to an endemic assumption that we established back in Q3 of 2023. That’s what we're looking at right now and evaluating just our base mortality assumptions as well as what do we think is an appropriate assumption long-term for the endemic or short term for the endemic. That's what we're finalizing in Q3 and which will result in an update to those assumptions. Given the recent experience, we do anticipate that there will be a favorable remeasurement gain on the life business and hence, the reason for Frank increasing the range of our underwriting margins to 39% to 41%. We do think those will move up a little bit.

It does. Just the last one on that. So just to be clear, is that embedded in your new EPS guidance? Or this would be incremental to the EPS guidance?

Now, it's embedded in our guidance range and what we've tried to reflect what we anticipate in the midpoint of that range as well.

Hi, thanks, good morning. My first question in response to some earlier questions you guys mentioned, looking into a potential reinsurance as a way to free up capital. Can you just expand on what you guys might consider? And then it sounds like this could perhaps be either a 2024 or 2025 event. Do you have a sense of any comments on potential time frame as well?

Yes. We're continuing to evaluate reinsurance opportunities, and we have a financial reinsurance program in place right now. We're just looking at whether it makes sense to expand that program a little bit. Additionally, we think there's an opportunity to manage overall capital in an economic framework like that available in Bermuda. So we're evaluating that option and what that might look like. That's probably a little bit longer term as far as capital management approach. But we think there's some promise in that solution.

I would like to add that we are currently evaluating a few business segments to determine if it would be beneficial for us and our shareholders to divest those areas. We have previously mentioned that we don't possess a significant number of outdated business segments or closed blocks. Therefore, there isn't a lot to consider, but we are reviewing certain aspects.

And then you guys gave us a lot of color on capital. What were the subsidiary dividends in the quarter? And embedded within your capital plans, what's the new guidance for sub dividends for the full year?

The full year dividends from the insurance subsidiaries is just over $460 million, between $460 million and $470 million. We haven't updated our guidance for what dividends will be to the parent in 2025. We'll look at that later in the year. One of the things that will impact, I think, 2025 dividends favorably is there are some valuation manual changes from a statutory accounting perspective that should be favorable to us, and we can give you an update on that next quarter as well.

Hi, thanks. Good morning. A follow-up on the WilmerHale investigation. I guess, did they investigate actual agent misconduct at all? Or is it really just predominantly focused on your own company's procedures to kind of manage agent behavior?

It looked at the company's processes for preventing, identifying and responding to misconduct. The Audit Committee did review and confirm that the company has policies and procedures in place designed to safeguard the work experience for the agents. As we've mentioned before, we're confident in our controls around identifying agent behavior along with our processes for investigating issues that we've become aware of and remediating those as necessary.

Ryan, they also, as I noted before, looked at all the allegations that might have raised questions about the accuracy or integrity of our financial statements and disclosures. To the extent that there were agent behaviors that would have impacted our financial statements or our disclosures, let's just say for instance sales activities, those allegations would have been looked into and seen whether or not there were any reasons for any restatements of any of our previously issued financial reports or disclosures. As we noted before, they did determine that no restatements were necessary.

Which includes prior incidents.

Understood. Got it. And I guess just one more on this specific topic. So if in the future, for example, with the DOJ investigation into some of the specific agents. If they do ultimately determine there was misconduct, do you see that as something that is a liability to you as a company, given that they're independent contractors? Or because of that distinction, do you view that almost as a separate issue?

I think really, as we evaluate that, it looks like currently, as we've said in our statement earlier, they're reviewing the sales activity of just certain agents that were in the Arias Organization. If there's a significant update from a scope perspective, we'd be sure to disclose and update that. But right now, that is the focus of the inquiries so far.

And then just one separate question on free cash flow. You had mentioned a few things. It sounds like that could be positive next year. I think previously, you had talked about looking at ways to get the free cash flow conversion higher. And I think you had mentioned the possibility of getting it up to 60%, at least over time. Can you just give an update on that? And do you expect to make at least part progress towards the 60% in 2025? Or is that something that would occur longer term?

Yes, it's definitely over the longer term. The things that I talked about actually will, I think, be additive and actually kind of are aligned with getting to that 60%. It continues to be something that we're striving towards and looking at opportunities to do. That's where I think the more effective use of the Bermuda regulatory environment could really help support getting to the higher cash conversion ratio.

Some of those - as we've taken a look into it, I think there are some near-term items that may have some impact on the statutory income in 2024 as well that would include expanded excess cash flows in 2025. Tom's right; some of those where it's changing the nature of the conversion ratio dovetailed into 2025, which may not end up materializing until 2026 as far as additional dividends and some of that, even though we'll take a look, obviously, at what we can do from a timing perspective.

Okay, great. Thanks, guys.

Hey, good morning. Would a positive, a very positive 3Q 2024 review possibly imply higher free cash flow? I think you guys have talked about how the remeasurement gains are very favorable.

Some of the remeasurement gains or losses are accounted for under GAAP. The factor that influences free cash flow is statutory earnings. As I have mentioned previously, when there is a remeasurement gain compared to our assumptions in GAAP, about 25% of the difference from our assumptions is reflected. The majority of the effect from these differences in assumptions will be seen in statutory earnings. This is one reason we anticipate improved statutory earnings in 2024, which should result in increased dividends from the subsidiary to the parent company in 2025, along with higher excess cash flows. Additionally, the changes in the valuation manual implemented in 2024 will contribute to higher statutory earnings and may further enhance excess cash flows or dividends to the parent in 2025 from the subsidiaries, leading to increased excess cash flow.

And just a quick follow-up on that one. Is there any additional color you could provide on what the valuation manual change relates to?

It relates to the aggregation of mortality assumptions related to determining principal-based reserves, and the change allows for some clarity around what level of aggregation you can use. By being able to aggregate larger blocks, there's an opportunity to use a more favorable mortality assumption in the valuation of the reserve.

And this is a really broad one. But do you think there's anything else you can do to mitigate the DOJ, SEC overhang?

Unfortunately, that's an independent process outside our control. What we are doing is fully cooperating in both instances as well as providing any additional information or response to inquiries that we get as quickly as possible. Our desire, of course, is to have those progress forward as quickly as possible. The best thing we can do is just be very responsive as we work through those processes.

Thank you.

Good morning. Just on the American Income side. Have there been any changes in senior management or sales managers as a result of your review? It sounds fairly narrow in scope based on the way I've heard it described, focusing on certain agents. But have there been any changes in the management side? Or have there been any agents that have been let go as a result of this?

So you had several questions there. Let me see if I can address them. Regarding the scope being narrow, the narrowness was related to the DOJ investigation focused on specific agents within the Arias Organization. As far as evaluation of the assertions and allegations in the short selling report, that covered very broad areas, pointing out all of our financial items that were raised as well as just our overall processes and systems for controls. Some of the agents that have shown up in some of the articles are terminated agents. They are not here any longer, and that happened long before the investigation that the Audit Committee started. We take appropriate action related to misconduct and we are confident in our processes and controls. We will always continue to enhance that, but it was a broad and wide review, and the outcomes of that we have discussed today.

No one from the recent review has been terminated from sales management or otherwise as a result of that review. Is that a fair statement?

That is not a fair statement, but I'm not at liberty to discuss things that are under litigation trends, etcetera, as I'd mentioned in my prepared call.

Got you. Okay. And then for my follow-up on the remeasurement gains for mortality. Is mortality still somewhat worse compared to pre-pandemic levels? Are we back to normal now, or is it actually showing improvement? I understand it is certainly favorable compared to the conservative assumptions that were put in place as part of LDTI, but I just want to know our current status. Are we fully back, or is it still somewhat adverse?

Yes. Mortality has been fairly consistent over the last few quarters, which is encouraging. We are seeing some improvements compared to the peak. However, certain causes of death, such as heart disease and cancer, remain slightly higher than pre-COVID levels, although they have improved. Neurological disorders, which include stroke and Alzheimer's, continue to show elevated rates. We are monitoring this closely. On a positive note, non-medical deaths have improved and are closer to historical levels, although still a bit elevated. The trends are positive, but we have not fully returned to where we were yet.

Got you. So stroke in Alzheimer's is where you still see somewhat elevation. Okay, that’s helpful. Thank you.

So Tom, just on your comments on the stat valuation changes. Can you sort of give us a rough range of the expected amount, single-digit millions, tens of millions or higher than that, just so we have some idea? I recognize you'll give out the exact details next quarter.

Yes. We'll give you the details, Jimmy, next quarter. We're still going through all of our work, so I want to actually give you a good number and we'll be looking to implement that.

But the fact that you mentioned it sort of would imply that it's more than just a handful of million dollars. Is that a correct assertion?

That's fair, Jimmy. Yes.

Okay. We'll wait another three months. Thank you.

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