Globe Life Inc (GL) — Q3 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 any subsequent Forms 10-Q on file with the SEC. Some of our comments may also contain non-GAAP measures. Please see our earnings release and website for discussion of these terms and reconciliations to GAAP measures. I will now turn the call over to Frank.

Thank you, Stephen, and good morning, everyone. In the third quarter, net income was $303 million or $3.44 per share compared to $257 million or $2.68 per share a year ago. Net operating income for the quarter was $308 million or $3.49 per share, an increase of 29% from a year ago. On a GAAP reported basis, return on equity through September 30 is 22.4%, and book value per share is $54.65. Excluding accumulated other comprehensive income, or AOCI, return on equity is 15.3%, and book value per share as of the 30th is $83.92, up 13% from a year ago. In our life insurance operations, premium revenue for the third quarter increased 4% from the year ago quarter to $819 million. Life underwriting margin was $387 million, up 29% from a year ago. With the increase in life underwriting margin due primarily to a re-measurement gain related to the unlocking of assumptions. Tom will have more in his comments on this re-measurement gain. 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 4.0% and 4.5% at the midpoint of our guidance and life underwriting margin to grow between 12% and 12.5%. As a percent of premium, we anticipate life underwriting margin to be around 41%. In health insurance, premium revenue grew 7% to $354 million, and health underwriting margin was down 10% to $87 million due primarily to a re-measurement loss related to an unlocking of assumptions. For the year, we expect health premium revenue to grow approximately 6.5% to 7%. At the midpoint of our guidance for the full year, we expect health underwriting margin to be flat and as a percent of premium to be around 27%. Administrative expenses were $88 million for the quarter. The increase is primarily due to higher information technology costs relating to maintaining IT software and services, employee-related costs, and legal expenses. For the full year, we expect administrative expenses to be approximately 7.3% of premium. I will now turn the call over to Matt for his comments on the third quarter marketing operations.

Thank you, Frank. First, at American Income Life. Here, the life premiums were up 7% over the year ago quarter to $428 million, and life underwriting margin was up 22% to $221 million. In the third quarter of 2024, net life sales were $97 million, up 19% from a year ago, primarily due to the strong growth in agent count. The average producing agent count for the third quarter was 12,031, and this is up 10% from a year ago. This growth is due to the ongoing recruiting efforts as well as improvement in new agent retention. This agency continues to generate positive momentum. At Liberty National, the life premiums were up 6% over the year ago quarter to $94 million, and life underwriting margin was up 63% to $45 million. Net life sales increased 1% to $24 million, and net health sales were $8 million, down 6% from the year ago quarter. The average producing agent count for the third quarter was 3,794, and this is up 14% from a year ago. Liberty National continues to generate strong agent count growth, which is driven by our investments in technology and the growth in middle management. Despite the flat sales for the quarter, I am very pleased and optimistic with the trends at Liberty. The strong middle management growth has resulted in an emphasis on recruiting and training and is reflected in the continued and meaningful agent count growth for this division. This bodes well for future sales growth. As I've discussed before, agent count growth is a leading indicator for future sales growth. We focus on year-over-year growth in sales and agent count and recognize that quarter-to-quarter results may fluctuate as the agency operations switch focus between recruiting and sales throughout the year. In addition, I'd also point out that we had a difficult comparable this quarter as Liberty had a 31% increase in life sales and a 19% increase in health sales in the year ago quarter. Now on to Family Heritage. Here, the health premiums increased 8% over the year-ago quarter to $108 million, and health underwriting margin declined 4% to $34 million. Net health sales were up 16% to $29 million due to an increase in agent count and agent productivity. The average producing agent count for the third quarter was 1,429, and this is up 8% from a year ago. I am pleased to see that this agency's efforts in recent quarters to emphasize recruiting and middle management development are now driving agent count growth, which bodes well for growth in 2025. In our direct-to-consumer division at Globe Life, the life premiums were down 1% over the year ago quarter to $246 million, while life underwriting margin increased 40% to $88 million. Net life sales were $24 million, down 9% from the year ago quarter. As we previously mentioned, the decline in sales is primarily due to lower customer inquiries as we reduced our marketing spend on certain campaigns that did not meet our profit objectives. Our focus in this area is having a positive impact on our overall margin as we continue to focus on maximizing the underwriting margin dollars on new sales by managing the rising advertising and distribution costs associated with acquiring new business. Now the value of our direct-to-consumer business is not only those sales directly attributable to this channel but the significant support that is provided to our agency business through brand impressions and sales leads. We continue to invest in our capability to generate significant lead volume that translates into sales for our agency business. During 2025, we anticipate we will generate over 750,000 leads, which will be provided to our three exclusive agencies from the direct-to-consumer division. The value contributed to the agencies by the direct-to-consumer division will continue to grow as we expect to see steady growth in our omnichannel marketing approach for the Globe Life brand. Now on to United American General Agency. Here, the health premiums increased 9% over the year ago quarter to $150 million, driven by strong prior year sales growth of 23%. Health underwriting margin was $14 million, down $1 million from the year ago quarter due to higher claim costs as a result of higher utilization. Net health sales were $16 million, down 1% over the year ago quarter. Now I'd like to move on to discuss projections. Now based on what we're seeing and the experience with our business, we expect that average producing agent count trends for the full year of 2024 to be as follows: at American Income, an increase of around 11%; at Liberty National, an increase of around 14%; and at Family Heritage, an increase of around 5%. Net life sales for 2024 are expected to be as follows: at American Income, an increase of around 16%; Liberty National, an increase of around 4%; and direct-to-consumer, a decrease of around 8%. Net health sales for 2024 are expected to be as follows: Liberty National, an increase of around 1%; Family Heritage, an increase of around 11%; and United American General Agency, an increase of around 10%. Now let's discuss 2025. At the midpoint of our 2025 guidance, we expect sales growth for the full year of 2025 to be as follows. For life sales, we expect American Income for high single-digit growth; Liberty National, low double-digit growth; and direct-to-consumer, low to mid-single-digit growth. And on the health sales side, we expect Liberty National, Family Heritage and United American General Agency to all have low double-digit growth. Now before I turn the call back over to Frank for investment operations, I'd like to make a few brief comments regarding the inquiries made by the SEC and the DOJ that we've previously discussed. There have been no material developments and while these inquiries are still open, we have responded to the requests received to date. Neither organization has asserted any claims or made any allegations against Globe Life for AIL, and we are not aware of any actions being contemplated by the SEC or the DOJ. To the extent there's further information to share, we will update you accordingly. As we previously disclosed regarding data privacy and the threat actor extortion attempt, we are working with federal law enforcement in an active investigation. As you can understand, out of respect for this process, we will not be getting into specifics and have nothing further to add beyond what was included in our 8-K filing last week. While these investigations are ongoing, there has been no material impact on the company's systems and business operations. I'll now turn the call back over to Frank.

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 $40 million, up $6 million from the year ago quarter. Net investment income was $285 million, up 7% or $18 million from the year ago quarter. The increase is largely due to the 5% growth in average invested assets over that period. In addition, higher interest rates also contributed to the higher growth rate. Required interest is up 5.3% over the year ago quarter, slightly higher than the 5% growth in average policy liability. For the full year, we expect net investment income to grow between 7.5% and 8% due to the combination of the favorable interest rate environment and steady growth in our invested assets, while required interest is anticipated to grow around 5%. This combination of our net investment income growing at a higher rate than our required interest results in the growth of excess investment income by approximately 25% to 27%. Now regarding our investment yield. In the third quarter, we invested $82 million in investment-grade fixed maturities, primarily in the financial and industrial sectors. These investments were at an average yield of 6.2%, an average rating of A- and an average life of 30 years. This amount is lower than normal this quarter as we invested approximately $120 million in commercial mortgage loans and limited partnerships with debt-like characteristics and an average expected cash return of approximately 9.6% and contributed $200 million into a new company-owned life insurance program, which is expected to provide enhanced risk-adjusted, capital-adjusted returns over time. None of our direct investments in commercial mortgage loans involve office properties. These non-fixed maturity investments are expected to produce additional cash yield over our fixed maturity investments while still being in line with our conservative investment philosophy. For the entire fixed maturity portfolio, the third quarter yield was 5.25%, up 6 basis points from the third quarter of 2023, but down 1 basis point from the second quarter. As of September 30, the portfolio yield was 5.24%, including the cash yield from our commercial mortgages and limited partnerships, the third quarter earned yield was 5.43%. Now regarding the investment portfolio. Invested assets are $21.5 billion, including $19.1 billion of fixed maturities and amortized cost. Of the fixed maturities, $18.5 billion are investment grade with an average rating of A-. Overall, the total fixed maturity portfolio is rated A-, same as a year ago. Our fixed maturity investment portfolio has a net unrealized loss position of approximately $743 million due to the current market rates being higher than the book yield on our holdings. As we have historically noted, we are not concerned by the unrealized loss position 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 48% from the year ago quarter. This percentage is now at its lowest level since 2007. The portion of our fixed maturity portfolio comprised of BBB security has declined in recent periods as we have been able to find better relative value and higher-rated securities given current spreads. While this ratio is still high relative to our peers, a reminder that we have little or no exposure to higher-risk assets held by many of our peers, such as derivatives, equities, residential mortgages, real estate equities, CLOs, and other asset-backed securities. We believe that the BBB securities we acquire generally provide the best risk-adjusted, capital-adjusted returns due in part to our ability to hold securities to maturity regardless of fluctuations. Below-investment-grade bonds remain at historical lows of $556 million compared to $493 million a year ago. The percentage of below-investment-grade bonds to total fixed maturities is 2.9%. At the midpoint of our guidance, for the full year 2024, we expect to invest approximately $1.1 billion to $1.3 billion in fixed maturities at an average yield of 5.8% to 5.9% and approximately $400 million to $500 million in commercial mortgage loans and limited partnership investments with debt-like characteristics at an average expected cash return of 8% to 10%. Also, at the midpoint of our guidance, we expect the average yield earned on the fixed maturity portfolio to be around 5.25% for the full year 2024 and slightly lower at approximately 5.24% for the full year 2025. With respect to our commercial loans, limited partnerships, and company-owned life insurance, we anticipate the yield impacting net investment income to be in the range of 8% to 9% for 2024 and 7% to 8% for 2025. Now I will the call over to Tom for his comments on capital and liquidity.

Thanks, Frank. First, let me spend a few minutes discussing our share repurchase program, available liquidity, and capital position. In the third quarter, the company repurchased approximately 5.8 million shares of Global Life Inc. common stock for a total cost of just over $580 million at an average share price of $100.34. To date, in the fourth quarter, we have purchased approximately 190,000 shares for a total cost of approximately $20 million at an average share price of $104.74 resulting in repurchases year-to-date of 9.9 million shares for a total cost of $930 million at an average share price of $93.57. For the quarter, share repurchases were higher than anticipated as we took the opportunity to accelerate and increase share repurchases given the favorable market conditions and the additional capital raised during the quarter as the net proceeds from refinancing the term loan and the issuance of the senior note were about $100 million higher than previously assumed. Including shared dividend payments of $22 million for the quarter, the company returned approximately $602 million to shareholders during the third quarter of 2024 and has returned approximately $995 million year-to-date for 2024. We anticipate distributing approximately $21 million to our shareholders in the form of dividend payments for the remainder of 2024. The company's excess cash flow, as we define it, results primarily from dividends received by the parent from its subsidiaries less the interest paid on debt and is available to return to shareholders in the form of dividends through share repurchases. At this time, given the acceleration of share repurchases during the year, we anticipate using our remaining excess cash flow to reduce our commercial paper balances to more normal levels. As such, at the midpoint of our guidance, we do not anticipate additional share repurchases. Now let me provide an update on a couple of initiatives to increase available capital. During the quarter, we executed two external reinsurance transactions. The first, amended an existing financial reinsurance agreement and the second is a reinsurance agreement to reinsure approximately $460 million of our in-force annuity reserves, which is anticipated to be effective on November 1. These transactions are expected to provide $100 million of additional excess cash flow at the parent by the end of the year. In addition, we continue to evaluate the opportunity to manage capital under an economic framework available in Bermuda, and we expect to conclude this work in 2025. In terms of parent liquidity, the parent began the quarter with liquid assets of approximately $35 million and ended the quarter with approximately $85 million of liquid assets. We anticipate ending the year with liquid assets within our targeted range of $50 million to $60 million. Our goal is to maintain our capital at levels necessary to support our current ratings. Globe Life targets a consolidated company action level RBC ratio in the range of 300% to 320%. As discussed on previous calls, our consolidated RBC ratio was 314 at the end of 2023. For 2024, we currently estimate that no additional capital is needed to maintain our consolidated RBC target of 300% to 320%. Now with regards to policy obligations for the current quarter. As we discussed in prior calls, we have included within our 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 each year, we update both our life and health reserve assumptions. The remeasurement exhibit provides detail on the overall impact of the assumption changes by distribution channel. For the quarter, the overall remeasurement gain of $61 million reflects a $46 million gain from life and health assumption changes and a $15 million gain from experience fluctuations in the quarter. For the quarter, the life remeasurement gain of $71 million resulted in lower life policy obligations. $57 million was related to the assumption changes. This is higher than what we had anticipated and reflects recent experience trends for mortality and lapses. Health remeasurement loss of $10 million resulted in higher health policy obligations and was primarily related to assumption changes. These updated health assumptions anticipated higher future claims as a result of product changes, primarily at Family Heritage Life and AIL designed to enhance the value of these policies to our policyholders. Now with respect to earnings guidance for 2024. For the full year 2024, we estimate net operating earnings per diluted share will be in the range of $12.20 to $12.40. The $12.30 midpoint is higher than our previous guidance and reflects the recent favorable underwriting income results and the higher share repurchases than previously anticipated for the year. With regards to 2025 guidance, for the full year 2025, we estimate net operating earnings per diluted share will be in the range of $13.20 to $13.90, representing 10% growth at the midpoint of the range. At the midpoint of our guidance, we anticipate premium revenue growing at 4.5% to 5% for life and 7.5% to 8.5% for health, the anticipated underwriting margins as a percent of premium to be in the range of 39% to 42% for life and 26% to 28% for health. In addition, we anticipate net investment income to experience flat to low single-digit growth next year and required interest to grow in the range of $0.03 to $0.035 due to a reduction in assets and policy reserves related to the annuity reinsurance transaction. Although 2024 actual results are not final for the year, at this time, we anticipate parent excess cash flows available to return to shareholders in 2025 will be approximately $575 to $625 million. This is higher than 2024 due to the anticipated increases in statutory earnings in 2024 over 2023 and reflects the favorable impact of statutory valuation changes. Those are my comments. I will now turn the call back to Matt.

Thank you, Tom. To sum up our comments, I am very encouraged with the company's overall operational performance and financial results this year, and I believe that we are well positioned for strong growth in 2025. With that, we'll now open up the call for questions.

Hi, good morning. So first, just a question on life margins. If we take out the remeasurement gain, the margin is still better than it's been in a while. And so wondering if it's just an aberration and normal volatility in claims experience? Or are you seeing anything that would suggest that claims are maybe declining, COVID or non-COVID claims?

Yes, Jimmy, thank you for the question. I think we're seeing claims improve. So I think we're seeing continued favorable claims. And so we'd like to see that continue for a few more quarters, but are pleased with kind of where it is right now.

Overall, your results were quite strong, although there were higher lapses in AIL and Direct Response. Can you provide any insight into what is happening there and your expectations for those businesses?

Lapses can vary from quarter to quarter. We are quite pleased with the resilience of the business despite the challenges we have faced. We are observing that general economic conditions are affecting our customers. At AIL, during times of economic stress, we tend to see an increase in lapses. The results from AIL align with the lapse rates we typically observe in such periods of economic challenge. That is our current perspective on the situation, Jimmy.

Okay. And lastly, regarding your guidance, you mentioned there would be no additional share buybacks. I assume you're referring to 2024, but what is the buyback assumption included in your 2025 EPS guidance?

We'll provide more details on the buyback assumption in our next call. However, we have indicated that the excess cash flows are around $200 million, suggesting that we expect some additional buybacks next year.

And the cash flow number you're referring $600 million is the number you're referring to, right?

Yes.

Yes, I want to clarify that Tom's comment was specifically about the remainder of 2024. We expect excess cash flow in the range of $575 to $625 million for 2025. Unless we find another use for those funds, we plan to allocate them for buybacks. We aim to return to our usual approach of evaluating the cash flow throughout the year and identifying better alternative uses for those funds, continuing to use them to support buybacks.

And then Jimmy, I was going to say you're correct. Q4, no more planned other than the $20 million that we've completed so far.

Hey, thanks good morning. On the unlocking related to the assumption review in life, can you just talk about what drove that in terms of the assumptions? I think you mentioned mortality and lapse. But is there also any impact to go forward run rate earnings?

I believe the unlocking of assumptions is connected to our updated views on mortality and lapse rates. This does lead to a slightly more favorable run rate from the perspective of policy obligations. As a result, this is incorporated into the guidance I provided regarding our underwriting margin ranges, which fully reflects these considerations.

And that makes sense. I guess I just think about, there's been a string of kind of favorable remeasurement gains. But like with the assumption unlocking, does that kind of reset that to where you wouldn't really expect any more favorable kind of remeasurement gains coming through the P&L?

Yes. It does reset that. The assumptions reflect our latest estimates for mortality, morbidity, and lapse. And they're based on our observable long-term trends and not just the last couple of quarters that have been favorable. So as we update and get additional experience, we'll continue to update those assumptions. So I think clearly, the mortality expectations have improved. And in the last couple of quarters, near-term results have been favorable, right? So if they continue, then we're likely to see those being more favorable than our long-term assumptions and would result in remeasurement gains. So I think if the near-term results continue, we could see some favorable remeasurement gains relative to the assumptions. And what I'd say is, again, the range of the guidance anticipates what we believe would be variations within that.

Yes. Wes, it's vital to consider that the assumptions being reset are fundamentally rooted in long-term projections and the modeling derived from our business portfolio. While recent results contribute to that model, we don't solely adjust our assumptions each year based on the latest few quarters' observations. Our perspective is much broader. We are currently experiencing some very positive results. Although we believe that long-term assumptions have improved since last year, as Tom mentioned, we continue to witness some mortality rates consistent with those of the past few quarters. This suggests that we may still have potential for remeasurement gains in the future.

Got it. That's all really helpful. And then my last question, I guess, I think you filed an 8-K in the quarter regarding the EEOC, and I think the issue perhaps relates to your agents and whether they should be classified as independent contractors and employees. But can you maybe just talk about where that issue stands and any other recent developments there?

Don't have any significant update from what we put in there. But just as a reminder, the EEOC's investigation findings are not binding on administrative processes that could lead to a resolution on that. And we do have a long history of successful outcomes where courts have previously agreed with our position and determined that American Income sales agents are independent contractors. And as we noted in the 8-K, three of the individual complainants that have asserted Title VI claims against us, in private litigation, each of those claims have been dismissed with prejudice.

Good morning. Thanks for the opportunity. Maybe on the actuarial assumption review, with recent headlines talking about obesity levels having peaked, are you now factoring impact from GLP-1 drugs into your forward assumptions on mortality? Thank you.

John, we are not considering the anticipated improvements in our mortality estimates from those drugs. Yes, we are closely examining that area and will see how it unfolds. As Tom mentioned, we won’t incorporate those factors into our future outlook until we observe their actual impact. One challenge we face with our insured population remains access to these types of drugs, along with their affordability and availability. Therefore, we want to ensure these drugs are affecting our insured base before we include them in our calculations.

That makes sense. And my follow-up question on 2025 guidance, does that include a view on freed-up capital from a Bermuda platform? And how do you view the total addressable market for that platform with Globe's liabilities? Thank you.

John, it does not include anything related to any final conclusions on Bermuda, we're still in the evaluation phase. We expect to conclude that in 2025. And then one of the benefits of Bermuda is it does take a little bit of time to get the benefits through reciprocal jurisdiction status that's required. So it will be over time that if we conclude the move liabilities to Bermuda that we see benefits to it.

Good morning. I'm looking at the quarterly average producing agent count: American Income is up 10, Liberty is up 14, and Family Heritage is up 8. Can you provide some context? I understand you've mentioned middle management, but how sustainable is this growth? Can you continue to add middle management and producers? Are these increases likely to be one-time occurrences, or are they expected to be sustainable over the coming years?

Well, what we like to see is that growth in the middle management count because that really is the sustainable growth going forward. It's those middle managers that are out in the field recruiting, training and onboarding new agents. And so that's one of the key metrics we generally look at. And so as we reflected more so on the sales guidance, kind of have to have strong growth on the agent count side to support that. But my guidance for 2025 on the sales growth in the agencies, I think it's all very robust. And you look at we've had quarter-over-quarter agent count growth that's been sustainable, particularly at American Income and Liberty. If I go back to the last quarter. In Q2, American Income had 13% growth in agent count, and Liberty had 16% count, agent count growth. And in Q1, American Income had 15% growth, and Liberty had 14% growth. So those are all, in my mind, very sustainable going forward because it's supported by double-digit management count growth underneath that. And so that's why we kind of look at that agent count growth as a leading indicator to our future sales growth. So we like the momentum that we're seeing on the agent count side that should translate well into 2025.

Very helpful. And then just shifting over to the health margins with Globe writing a lot of Medicare supplement, I imagine that's really what's getting hit on the margins. Could you talk about your ability to reprice that book? And what you would need to go through with regulators to change the pricing?

Yes. We evaluate rate increases and the medical trend annually, and we review our portfolio to file for rate increases with regulatory authorities if necessary. We've been successful in obtaining those rate increases. Currently, we are in the midst of this process and expect the increases to take effect in 2025. There can be some delay between when we observe the experience and when we receive the rate increases, so we are somewhat catching up right now. However, we anticipate appropriate rate increases for the upcoming year.

Yes. Andrew, the one thing I would just add to that is just a reminder that on that Medicare supplement business, it does have that 65% minimum loss ratio that we need to see over time. And then that's where our team is really, as Tom mentioned, very active in just trying to make sure that we're getting our annual reviews and rate increases put in. You can have a little bit of a lag. So if we had to have a little bit higher claims, let's just say in this year, you put in your rate increases, you should make it up next year and then just kind of depending on how the utilization and cost trends take place in the following year.

Thanks, good morning. My first question, I guess, goes back to the capital discussion. You guys were considering M&A earlier in the year before the stock pulled back. Is there a sort of level where you would consider transactions again? And then on the capital side of things, is the intention that you guys will start buying back your stock once at the start of the first quarter of next year?

Yes. Let me start with the M&A discussion. Historically, we focus and have been pretty selective on things that are properties in our target market area. We like properties that have exclusive distribution or distribution that we think that we have expertise in being able to grow as well as products in the market, that middle income market that we compete in. And so that's how we kind of think about it. Those opportunities come along, ever so often, and we evaluate those. And so we would continue to do that in the future to the extent that met those criteria around our strategy from an acquisition perspective. And then I think as we mentioned earlier related to the question on stock buyback, we would go through next year and more so our ratable process where we typically execute that throughout the year.

Yes. I expect that we will begin this in the first quarter. As part of our cash management strategy throughout the year, we plan to start receiving ordinary dividends from our subsidiaries in Q1. Then, as we assess the situation and in the absence of a better option, I envision us commencing our note again in Q1.

Thanks. And then have you guys said how much of your fixed income investments are in floating rate securities? And as we start to see interest rates perhaps move down a bit more, would you guys in 2025 expect to invest more in some of those other investments like commercial mortgage loans, limited partnerships, etcetera?

Yes. Most of our commercial mortgage loans and limited partnerships are in floating rate investments, totaling just over $1 billion. Currently, these assets account for about 7.3% of our investments, which we consider alternatives to fixed income securities. We anticipate that by 2025, 25% to 30% of our total investments will come from acquisitions made throughout the year, with plans to invest around $1.5 billion in that timeframe. Consequently, we expect approximately 25% to 30% of that amount to be allocated to commercial mortgage loans and limited partnerships, indicating that we will increase our exposure to these areas in 2025.

Yes. And just on the liability side, we do have floating rate debt as well. So our commercial paper and our term loan are both floating rate debts that kind of offsets with lower financing costs if rates were to come down a little bit Right.

Hey good morning. Could you guys just go a little bit more on what drove the negative health remeasurement gain? I thought you talked about something about product changes? Was it a little bit underpriced? Can you just kind of talk in more detail about that? Thanks.

Sure. So a couple of things here. We've had some pretty favorable health experience over the last couple of years, particularly during the pandemic. And so we want to make sure that our customers are receiving good value from their health products. And so we're making some product changes to enhance the value to the policyholders. The other piece of that is on Family Heritage, a large of those products have returned a premium benefit, and that return on premium benefit is net of claims paid. So given we've got favorable claims experience, the return of premium benefit is also a little bit more valuable. So we've updated our assumptions around that as well.

Yes. One thing I just probably want to clarify is that that adjustment really is on those supplemental health products underwritten by family heritage, a little bit from Liberty and then American Income doesn't impact any of the Medicare Supplement products that we have at United American.

Yes, thanks, good morning. I know you're still contemplating use of a Bermuda, I guess, subsidiary, Bermuda solution. But if you decide to sort of pull the trigger on that, should we think about that capital need as sort of being a potential use for some of that $575 million to $625 million cash flow to the holding company?

I would say no. I think our opportunity with Bermuda is to move towards an economic valuation framework, which is likely to reduce the need for capital, resulting in lower asset requirements compared to what we have in the states. Therefore, we view this as an opportunity to raise capital instead of using it.

Yes, I thought you had mentioned that it might take some time or there could be a delay before the benefits become apparent, which is why I was asking the question.

Yes. The lag is just as you move business to Bermuda, you need to make sure that you have appropriate collateral for reserve credit. And so Bermuda has what's called reciprocal jurisdiction status, but it takes a few accounting periods to be able to qualify for that status.

Yes. We do not expect that the range of $575 million to $625 million includes any potential benefits from a Bermuda transaction. Specifically addressing your question, you should consider that any actions we may take in Bermuda are not factored into that estimate.

I was just going to say and if we did move forward, as Tom mentioned, we'd be completing that analysis in 2025. And so the lag on the benefit is more likely in a 2026 timeframe.

Okay. And then I guess, I just want to come back to the guidance. Are you assuming that you get additional remeasurement gains embedded in that 2025 guidance? And if you are, is there a way to think about how much of that 10% growth midpoint to midpoint is from remeasurement?

Our results for underwriting margins reflect our expectations for obligation results, which we anticipate will fluctuate throughout the year. As I mentioned earlier, if our recent mortality results persist, we are likely to see gains from remeasurement. We have incorporated this perspective into the range of our underwriting margins in our guidance.

Got it. And is it sort of like bottom end of the range is no incremental remeasurement and the top end of the range has? Is that the right way to think about it?

I think that's a good way to think about it.

Good morning. First question, just on the Bermuda capital possibility potential. Are we talking about few hundred million dollars of capital that might get freed up? Or do you think it might be much larger than that? I just want to get a broad sense for how consequential that might be.

That's exactly the work that we're going through right now is just what is the opportunity there. Our liabilities are long and in an economic framework, sometimes the requirements with regards to long-duration liabilities and asset portfolios that's a little bit shorter. Those benefits aren't as big as what might be expected. So that's really where the evaluation is what is the potential there, and that's kind of the decision point as far as whether we move forward or not.

Got it. So you're not far enough along in the process to really get a sense of the range just yet. Is that fair?

Correct. Correct. Right in the valuation.

Okay. So as we think about what your new assumptions are after going through the actuarial review, are you still assuming some level of excess mortality persist here? Or have you pretty much eliminated that now? Are you assuming we're back to pre-pandemic global going forward?

Yes, we're not really back to pre-pandemic levels at this point. We see costs that continue to be higher than pre-pandemic levels. So we don't necessarily have a clear assumption for excess mortality. What we've done is incorporate our current best views on mortality and lapses based on our long-term experience, and we'll continue to revise these as near-term experience becomes available.

Got you. And then just two other quick ones, if I could. So if I heard you correctly, to answer Wilma's question, it sounds like we'll call it, the sustainable amount of free cash flow that you expect to emerge in 2025 would be in the high $400 million range, maybe like $480 million after you back out the benefit from the valuation changes. Is that about the right level to think about right now?

I believe we might be slightly above that figure due to the ongoing positive impact of valuation changes that are expected to continue benefiting us in 2025 and into 2026. While I anticipate these benefits will decrease over time, I still expect additional advantages in the future.

Got it. So there's a little bit of a tail on that, that persist. Okay. And then finally, just how much is the term loan paydown that you expect to do in Q4?

I don't think it's a term loan paydown just looking at reducing some of the commercial paper balances. So as you see that had popped up in Q3 as we were using that to I'm going to say, prefund some of the repurchases into Q3. So we would anticipate bringing that down in that $50 million to $100 million.

Hey, thanks good morning. On the admin expenses, it seems like they were pretty elevated in the quarter. I think it looks like they're going to be higher in the fourth quarter, too. Can you comment on what exactly is driving that? And what is your expectation for 2025?

Yes. So admin expenses were higher than what we had anticipated. We are seeing a little bit higher employee costs, including benefit costs, a little bit more technology costs as we move to Software as a Service as well as a little bit higher legal expenses that we've seen in the third quarter, and we'd expect to continue in the fourth quarter as well. So those are kind of some of the reasons why we're a little bit higher than what we had anticipated.

One thing I would add is that IT is a significant factor, and we've been making substantial investments over the past few years, particularly focused on enhancing our data analytics and data management capabilities, much of which is shifting to the cloud. Consequently, the costs associated with Software as a Service and cloud space are increasing. We are also dedicated to enhancing our customer experience and digital services, which has involved various software, applications, and hardware upgrades, particularly in our policy administration and customer service areas. Several of these improvements were implemented in 2024, contributing to the increase as we transition from 2023 to 2024. Looking ahead to 2025, we anticipate continued growth, maintaining admin expenses as a percentage of premium around 7.4, consistent with current levels, which aligns with our objectives to keep these expenses manageable and ensure we are realizing value from our investments.

Got it, thanks. Regarding the reinsurance you mentioned, should we be considering any costs associated with that? Also, do you see any additional opportunities for reinsurance?

I don't believe there are any clear costs that we need to account for. We will continue to assess our reinsurance strategy as we focus on capital management and overall risk management for the organization.

I have a couple of other questions. One is about the MedSup business. It appears that claims levels for many senior health products have increased for several of your competitors in the health insurance sector. Additionally, there may be a significant disenrollment from Med Advantage plans. Are you experiencing any of this, and if it occurs, will it likely boost sales of MedSup plans?

Well, to the extent, I think we've seen that in the past, to the extent there's some disruption on the Medicare Advantage side, there's typically benefit for the Medicare supplement market. As you continue to see some of that disruption currently we think that could be a tailwind for us over the coming period. So a little bit of wait and see that market, as you know, definitely volatile, but to the extent you see dis-enrollments there, it could benefit us on our Medicare supplement side.

And then just lastly, you've had elevated legal expenses, not as part of operating but in net income. Fair to assume that, that continues in the short term? And if it does, I'm assuming that that's not included in your free cash flow numbers.

Yes. I mean, I do think, Jimmy, that it probably will. We do anticipate that it's probably going to continue at some elevated levels here at least for the short term. There has really been kind of a change in just how some of the legal cases are being worked and they're becoming more complex in the system and just taking longer to resolve and adjudicate, which is driving up some of those costs as well. And so it is actually reflected in our overall thoughts around our excess cash flows here.

Alright. Thank you for joining us this morning. Those are our comments, and we will talk to you again next quarter.