Globe Life Inc (GL) — Q1 2025 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 provided for general guidance purposes only. Accordingly, please refer to our earnings release, 2024 10-K 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 first quarter, net income was $255 million or $3.01 per share compared to $254 million or $2.67 per share a year ago. Net operating income for the quarter was $259 million or $3.07 per share, an increase of 10% from a year ago and slightly higher than our internal projections. On a GAAP reported basis, return on equity through March 31st is 19%, and book value per share is $64.5. Excluding accumulated other comprehensive income or AOCI, return on equity is 14.1% and book value per share as of March 31st is $87.92, up 11% from a year ago. In our life insurance operations, premium revenue for the first quarter increased 3% from the year-ago quarter to $830 million. Life underwriting margin was $337 million, up 9% from a year ago, driven by premium growth and lower overall policy obligations. For the year, we expect life premium revenue to grow around 4%. As a percent of premium, we anticipate life underwriting margin to be between 42% and 44%. In health insurance, premium revenue grew 8% to $370 million, while health underwriting margin was down 10% to $85 million, due primarily to higher claim costs at United American resulting from higher utilization. For the year, we expect health premium revenue to grow in the range of 7.5% to 8.5% and anticipate health underwriting margin as a percent of premium to be between 24% and 26%. Administrative expenses were $88 million for the quarter. The increase over the year-ago quarter is primarily due to higher information technology, employee, and legal costs. For the year, we expect administrative expenses to be approximately 7.4% of premium. I will now turn the call over to Matt for his comments on the first quarter marketing operations.

Thank you, Frank. At American Income Life, life premiums were up 6% over the year-ago quarter to $438 million, and the life underwriting margin was up 5% to $196 million. In the first quarter of 2025, net life sales were $99 million, up 1% from a year ago. And as a reminder, we had a difficult comparable this quarter as American Income had a 17% increase in life sales in the year-ago quarter. The average producing agent count for the first quarter was 11,510, up 3% from a year ago. The average agent count declined from the fourth quarter, but I would attribute this to the tremendous agency growth produced over the last couple of years. From the fourth quarter of 2022 to the fourth quarter of 2024, average agent count grew 29%. And it is typical for our agencies to see some contraction after periods of significant recruiting success. We are pleased to see productivity has increased as more agents are submitting weekly, and I'm confident we will see continued growth in this agency going forward. Now at Liberty National, here the life premiums grew 6% over the year-ago quarter to $96 million, and life underwriting margin was up 3% to $32 million. Net life sales increased 4% to $22 million, while net health sales were $7 million, down 5% from the year-ago quarter. The average producing agent count for the first quarter was 3,688, and this is up 8% from a year ago. I continue to be excited by the agent count growth at Liberty National, which is primarily driven by recruiting activity and growth in agency middle management, and is a good leading indicator for continued sales growth at this division. At Family Heritage, health premiums increased 9% over the year-ago quarter to $112 million and health underwriting margin increased 10% to $39 million. Net health sales were up 7% to $27 million, and this is due primarily to an increase in agent count. The average producing agent count for the first quarter was 1,417, up 9% from a year ago. And this is three consecutive quarters of strong agent count growth for this division and is driven by this agency's focus on recruiting and middle management development. In our direct-to-consumer division, the life premiums were down 1% over the year-ago quarter to $246 million, while life underwriting margin increased 10% to $64 million. Net life sales were $25 million, down 12% from the year-ago quarter. And as we have previously mentioned, the continued decline in sales is primarily due to lower customer inquiries, as we have reduced marketing spend on certain campaigns that did not meet our profit objectives, as a result of higher distribution costs. Our focus in this área is having a positive impact on our overall margin, as we will 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. And 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. And as we mentioned last year, we expect this division to generate over 750,000 leads during 2025, which will be provided to our exclusive agencies. Now on to United American General Agency. Here, the health premiums increased 13% over the year-ago quarter to $160 million, driven by strong prior year sales growth. Health underwriting margin was $2 million, down approximately $10 million from the year-ago quarter due to higher claim costs resulting primarily from higher utilization. For the year, we anticipate mid-single-digit growth in underwriting margin due to strong sales and premium rate actions. And as a reminder, the majority of the premium rate increases for 2025 on individual Medicare supplement business will take effect starting in the second quarter. Net health sales were $28 million, and this is up $11 million from the year ago quarter. Now, I'd like to discuss projections. Based on recent trends we are seeing in our experience with our business, we expect the average producing agent count trends for the full year 2025 to be as follows: at American Income, mid-single-digit growth; at Liberty National, high single-digit growth; and at Family Heritage, low double-digit growth. And we are reaffirming the life and health sales guidance we gave on the last earnings call. And as a reminder, net life sales for 2025 are expected to be as follows: American Income, high single-digit growth; Liberty National, low double-digit growth; direct-to-consumer, low to mid-single-digit growth; and for health sales, 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 want to note that, with respect to the inquiries made by the SEC and the DOJ discussed on previous calls, there have been no material developments to disclose at this time. To the extent, there is further information to share on any of these items, we will update you accordingly. I'll now turn the call back to Frank.

Thanks, Matt. Now turning to the investment operations. Excess investment income, which we define as net investment income, less only required interest, was $36 million, down approximately $8 million from the year-ago quarter. Net investment income was $281 million, down 1% from the year-ago quarter as compared to a 1.3% growth in invested assets. Required interest is up a little more than 2% over the year-ago quarter, consistent with the growth in average policy liabilities. The growth in average invested assets and average policy liabilities are lower-than-normal due to the impact of the annuity reinsurance transaction in the fourth quarter, which involved approximately $460 million of annuity reserves being transferred to a third-party along with supporting assets. Net investment income was also negatively impacted by lower short-term interest rates. For the full year 2025, we expect net investment income to be fairly flat and required interest to grow around 2.5%, resulting in excess investment income to be down 7% to 15% for the year. With regard to investment yield, in the first quarter, we invested $245 million in investment-grade fixed maturities, primarily in the industrial and financial sectors. These investments were at an average yield of 6.4% at an average rating of A- and an average life of 43 years. We also invested approximately $51 million in commercial mortgage loans and limited partnerships with debt-like characteristics and an average expected cash return of approximately 8.5%. 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 first-quarter yield was 5.25%, up one basis point from the first quarter of 2024. As of March 31st, the portfolio yield was 5.26%. Including the investment income from our commercial mortgage loans and limited partnerships, the first-quarter earned yield was 5.4%. Now regarding the investment portfolio. Invested assets are $21.4 billion, including $19 billion of fixed maturities at 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 $1.5 billion due to the current market rates being higher than the book yield on our holdings. As we have historically noted, we are not concerned by the unrealized loss position, 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 45% of the fixed maturity portfolio, compared to 47% from the year-ago quarter. This percentage is at its lowest level since 2007. As we have discussed on prior calls, we believe 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 in interest rate or equity markets. While the percentage of our invested assets comprised of BBB bonds might be a little higher than some of our peers, remember that we have little or no exposure to other higher risk assets such as derivatives, equities, residential mortgages, CLOs, and other asset-backed securities. Below investment-grade bonds remain at historical lows at $506 million, compared to $542 million a year ago. The percentage of below investment-grade bonds to total fixed maturities is just 2.7%. Our below investment-grade bonds as a percent of equity, excluding AOCI, are at their lowest level in over 30 years. While there are clearly uncertainties as to where the U.S. economy is headed in the upcoming months, we are well positioned to withstand a significant economic downturn. Due to the long duration of our fixed policy liabilities, we invest in long-dated assets. As such, a critical and foundational part of our investment philosophy is to invest in entities that can survive through multiple economic cycles. In addition, we have very strong underwriting profits and long-dated liabilities, so we will not be forced to sell any of our bonds in order to pay claims. With respect to our anticipated investment acquisitions for the year, at the midpoint of our full-year guidance, we assume investment of approximately $600 million to $700 million in fixed maturities at an average yield of 6% to 6.2%, and approximately $300 million to $500 million in commercial mortgage loans and limited partnership investments with debt-like characteristics at an average expected cash return of 7% to 9%. Now I will turn the call over to Tom for his comments on capital and liquidity.

I'll spend a few more minutes discussing our available liquidity, share repurchase program, and capital position. The parent began the year and ended the quarter with liquid assets of approximately $90 million. We anticipate concluding the year with liquid assets at the higher end of our targeted range of $50 million to $60 million. During the first quarter, the company repurchased approximately 1.5 million shares of Globe Life common stock for a total cost of approximately $177 million at an average share price of $121.70, thus including shareholder dividend payments of $20 million. For the quarter, the company returned approximately $197 million to shareholders. The parent's liquid asset at the end of the quarter, along with the excess cash flows expected to be generated over the last three quarters of the year, will provide the parent with $375 million to $725 million to meet the needs of the parent or that can be returned to shareholders in the form of dividends or share repurchases. In April, we used approximately $47 million to repurchase Globe Life common stock. And for the remainder of 2025, we anticipate using approximately $65 million for shareholder dividends. The total amount of excess cash flows in 2025 is higher than in 2024 primarily because of higher statutory earnings in 2024 than in 2023 and due to the inclusion of an extraordinary dividend of approximately $190 million approved late in 2024. The parent company's excess cash flow, as we define it, primarily results from the dividends received by the parent permits subsidiaries, less the interest paid on debt, and is available to return to its shareholders in the form of dividends and through share repurchases. We will continue to use our cash as efficiently as possible. We still believe that share repurchases provide the best return 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. However, we also intend to reduce outstanding commercial paper balances over the course of the year to be more in line with historical levels. It should be noted that the cash received by the parent company from our insurance operations is after our subsidiaries have made substantial investments during the year to issue new insurance policies, implement new technologies, enhance operational capabilities, modernize existing information technology, and acquire new long-duration assets to fund their future cash needs. The remaining amount is sufficient to support our targeted capital levels at our insurance operations and maintain the share repurchase program in 2025. In our earnings guidance, we anticipate between $600 million to $650 million of share repurchases will occur over the full year. Our goal is to maintain 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 of year-end 2024, our consolidated RBC ratio was 316%, which provides approximately $100 million of capital in excess of that needed to meet our minimum target capital of 300%. As we do every quarter, we have performed stress tests in our investment portfolio under multiple economic scenarios, anticipating various levels of downgrades and defaults. If the estimated losses under our stress tests were to occur before year-end, we have concluded that we have sufficient capital to meet our target RBC ratios, given the current excess capital at our subsidiaries and capital resources of the parent while maintaining our share repurchases as planned. For 2025, we intend to maintain our consolidated RBC within the targeted range of 300% to 320%. In addition, as mentioned on previous calls, we continue to evaluate the opportunity to manage capital under an economic framework available in Bermuda. We expect to conclude this work in 2025 and intend to provide an update on the strategic decisions made on the next call. Now, with regards to policy obligations for the current quarter. As we discussed in prior calls, we have included within the supplemental financial information available on our website an exhibit that details the remeasurement gain or loss by distribution channel. For the quarter, life remeasurement gain was $8.5 million. This was favorable to management's estimates and resulted in lower life policy obligations than anticipated. The health remeasurement gain was about $400,000. In other life distribution, during the quarter, we completed the recapture of a reinsurance agreement that involved a small block of business associated with our military life business. This resulted in a one-time favorable impact to life margins of approximately $14 million. There have been no changes to our long-term assumptions this quarter as we will update life and health assumptions in the third quarter of 2025. Due to the continued favorable mortality we are experiencing, we anticipate a favorable margin impact in the third quarter for life assumption updates as recent mortality and lapse experience are incorporated into these new assumptions. At this time, our guidance anticipates a remeasurement gain in the third quarter related to life assumption updates in the range of $60 million to $100 million similar to last year's third quarter life remeasurement gain. As Frank mentioned, we anticipate life margins as a percent of premium to be in the range of 42% to 44% for the full year. However, for the first half of the year, we expect life margins as a percent of premium to be in the range of 40% to 41% and 43% to 46% in the second half of the year, given the anticipated favorable impact from third quarter life assumption updates. For the Health segment, we anticipate health obligations will continue to be elevated given recent claim trends outpacing premium rate increases on individual and group Medicare supplement business. This appears to be largely impacted by an increase in a select set of procedures taking place in doctors' offices. In addition, although a portion of the premium rate increases for '25 were effective late in the first quarter, the majority are effective in April, and we will reflect recent claim trends in our 2025 premium rate filings, which will be effective in 2026. So finally, with respect to earnings guidance in 2025. For the full year 2025, we reaffirm our previous guidance and estimated net operating earnings per diluted share will be in the range of $13.45 to $14.05, representing 11% growth at the midpoint of our range. Those are my comments. I will now turn the call back to Matt.

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

Just a question for Tom for health margins. How much of a lag usually between kind of the rate actions you've taken and when do you usually see the benefit flow into your results? I think you mentioned some of the rate increases took effect on April 1. So should we see significant step up in March starting in the second quarter? Or is there a bit of a timing impact that we should be thinking about?

Yes. No, almost all the rate increases will be effective or in place in the beginning of the second quarter. So we'll see the full benefit of those rate increases. We'd expect margins for UAGA to be in the 5% to 7% range. So, about 6% overall for the year.

Got it. Okay. And then, I mean, in the health business, you recorded a smaller measurement gain even though, I guess, reported margins for the segment were a little bit weaker year-over-year basis. So I'm just curious what was driving like an outcome in the quarter?

In the current accounting framework under LDTI, there is a bit of volatility associated with how the Medicare supplement business operates, particularly since rate increases are applied as an aggregate for the entire block. This means that there are some segments of the business where the rate increase is insufficient, and others where it exceeds what is needed, leading to some variability on a quarter-to-quarter basis.

Yes. I would just add that if you look at United American, they had a slight negative remeasurement gain, whereas with respect to Liberty, American Income, and Family Heritage, they all had small remeasurement gains, and the net of those was about the $400 million or $1,000 that Tom had mentioned.

I had a question first on your EPS guidance for the year. And you grew sort of in line with your guidance this quarter, but the third quarter is obviously very tough comps. So just wondering what gives you the confidence that you can achieve maybe the middle end of the range? Or should we assume, given the results this quarter that you're much more comfortable with the lower end, but decided not to change the range as a result of that?

We are very comfortable with the range. One of the key factors we've been looking for is the continued improvement in mortality trends, which would lead to an adjustment in our life mortality assumptions. We've observed strong mortality results in the third quarter, fourth quarter, and now the first quarter, which boosts our confidence. As we incorporate this experience into our updated assumptions, we anticipate some positive remeasurement gains from these updates.

Yes. Then I would just say just to that, Jimmy, that I mean we are reflecting some of the negative utilization trends that we're seeing from the UAGA side. So we are expecting that to be a little lower over the course of the year, and you kind of see the range of underwriting margin percentage coming down on that a little bit. And that's being offset—the negatives of that are being offset with some of the positive views that we have with respect to the underwriting margins. Maybe I'll let Matt talk just a little bit about, I think, some of the views on sales and why there's some confidence there.

Sure. In response to your point, I want to highlight that in the third quarter, we expect the remeasurement gain to be similar in magnitude to what we experienced last year. This, along with the positive mortality experience we've had over the past three quarters, reinforces our decision to reaffirm our guidance at the midpoint rather than the lower end of the range. On the sales front, we are observing encouraging trends. Although we typically don't discuss current performance since we are just a month into the second quarter, we are seeing strong recruitment and an increase in agent count, with sales aligning with our expectations. We are confident in our sales guidance for the year based on our observations from the first quarter and the early indicators from April in the second quarter. Notably, our average agent count for April has risen by 3% compared to the end of March and exceeds last year's closing figure. Some seasonal variations are normal at the beginning of the year, and we did notice slight weakness in January, but that improved in the latter part of Q1, and this positive trend is continuing into April.

Yes. And Jimmy, one last thing I'll add on to that. I think with some of the better trends that we anticipate for sales for the remainder of the year, some of the— I may call it, the drag in life premium growth around 3% here for the first quarter, a little lower than we would like to see. But so we see that really the effects of some of the new sales. And as I— we think we anticipated the last is at least stabilizing here over the course of the year. And so as we kind of get to the latter half of the year, still able to—seeing that premium growth pick up a little bit in the second half of the year being more in that 4.5% to 5% range and getting that premium life premium growth for the full year to be closer to that 4%.

Okay. And then on your life business, if we look at the non-deferrable commissions and policy acquisition spend for the Life division. It's been running up over the past in 1Q than it's been in the previous several quarters. So wondering how much of that is economic in terms of you having to spend more money to originate sales versus maybe the result of LDTI or accounting-related items.

A lot of that, Jimmy, is really just due to some of the higher investments that we've been making in information technology. And as those systems come on, the depreciation from those as well as the software from the service and what we're paying for that and the data and analytics is being allocated to the investor to the acquisition side. So that's deferrable. So we're just seeing a little bit of that tick up just because of some of that higher largely because of some of the higher technology spend.

Okay. And just the last one on your health margin. It seems like for the product for you guys and many of the other companies, usage has gone up, so you guys have been raising prices, but it's sort of a constant catch-up where usage continues and claims continue to go up, and you're having to catch up to that. Do you feel that with the higher prices earning in 2Q and beyond, did margins are going to be at normal levels? Or is it more you're probably going to need to raise prices more as you get into 2026 season given just claims usage and inflation?

I think today we need to see exactly what happens. But I think one of the things that gives me confidence is, I think this is a very manageable issue when we see short-term increases in health trends that we can, in fact, manage that through rate increases. It may take us a year or two to effectively get those caught up. So it may be a little bit longer than a year. But we've been very successful in the past, getting those rate increases approved by regulators. And so I'd expect improvement in 2026, and if we continue to see trends that might be a little—we always have a little bit of a timing delay. So we may actually see a little bit of a delay in actually getting back to kind of normal margins. But I think the other thing to think about is this is largely around Medicare Supplement business, right? And so for our other health lines, we're not seeing the same level of claim costs. And Medicare supplement really from a total underwriting margin perspective is really in that 3% to 4% range of total underwriting margin. So it's a fairly small set of just the core underwriting margins that we see from the business.

My first question is about the capital management. The Q1 buyback seems to be higher than what the annual guide would suggest for a quarterly basis. I understand that you also mentioned plans to pay down some commercial paper. How should we view capital return in the last three quarters? Are you aiming to meet the guide, or might you consider starting some of the buyback earlier in Q2 or Q3, depending on your stock price?

Generally, we think normally ratable throughout the year, but we will take advantage of kind of market opportunities. So I could see us buying a little bit more in the first half of the year relative to the second half of the year.

And then my follow-up, you guys were talking about, I guess, Bermuda, which you're also talking about a bit last quarter. Just any updates there relative to what's going on this quarter? And I know you guys have been talking about that more being something that's beneficial in '26 and into 2027?

Yes, we're still working through it. And so we will plan to update you on the next call.

So going back to the health margins, you had been guiding to you're guiding now to '24 to '26 versus '25 to '27. And I'm thinking you kind of gave a timeframe where you start to see improvement in '26, but you really don't get to where you need to be or would like to normally be until '27, if I understand it correctly. Could you give us a sense of what historically have been normal margins and maybe work through the timeline, when you're actually going to get the price increases, it's going to be gradual. Maybe just walk through the timeline a little more granularly where a normal historic ratio has been?

Yes, Andrew, I'll begin with that and then let Tom or Matt supplement. Looking at the post-LDTI situation, the margins for the UAGA business have been between 10% and 11%. Overall health margins are in the upper 20s as a percentage of premium income. Regarding UAGA, specifically in the mid-up area, we are considering how to address the costs and increased utilization we've experienced in recent quarters, particularly early in '25. This will inform our third quarter premium rate adjustments, which we plan to file for implementation in 2026. The direction of utilization trends for the rest of the year will determine whether we can capture the necessary increases in the third quarter or if some will extend into 2027. We expect the UAGA margins to eventually align closer to the 5% to 7% range, with the second half of the year exceeding that level due to utilization that has outpaced the effects of prior premium increases. With a significant portion of our premium increases kicking in during the second quarter, we anticipate positive outcomes throughout the rest of the year.

That was very helpful. Maybe shifting over to the life insurance premium. You've been guiding to that, and you mentioned it on this call, you've been guiding to 4.5%, 5%, and now you're looking at 4% through the year. Could you give a little more color on lapsation, why you're maybe seeing a little higher, more elevated lapsation and how to think about that going forward?

From a lapse perspective at American Income, we have noticed slightly higher lapses in the first year. The question we have is whether this indicates a trend or if it's just fluctuations, especially as virtual sales may be contributing to a more typical higher lapse rate in the first year. However, I can say that renewal rates for AIL have remained fairly stable over the past four quarters. DTC lapse rates are consistent with previous quarters and might have slightly improved in the first year, which is a positive sign. Renewal lapse rates also align well with historical levels. Overall, these indicators look promising. This reflects the resilience of our customers, as our lapse rates have varied only slightly depending on the economic climate. For Liberty, first-year metrics have also remained relatively stable. We feel comfortable with the current lapse situation and will monitor it closely. Moreover, I believe sales in the second half of the year will boost premium growth beyond the sales growth we saw in the first quarter. Therefore, we are projecting around 4% growth in life premiums for the year.

Yes. Andrew, the one thing I'll add to that is that we did start seeing some of the lapse especially in the first year at AIL and maybe a little bit on DTC tick up towards the latter half. So obviously, that just kind of look at it period-over-period as those increases in lapse rates year-over-year take effect that has a drag on premium growth on the same year-over-year period. As we kind of look out over the latter half of the year, we kind of see some of this stabilizing even though they're maybe running a little bit higher than long-term averages, just because of some of the economic uncertainty. But when we look back at other periods of some economic stress where the rates that we're seeing even at—especially at American Income on their first year are not out of line at all. But as we think—look at the comparables in the latter half of the year, we see that as really being stabilizing. And so that will help with the period-over-period premium growth as well. Yes. Maybe just one other comment is we don't see dramatic changes in lapse rates even in periods of economic stress. They're relatively narrow changes. And kind of as we've looked at this for AIL and DTC under where there's been more economic stress, the lapse rates of renewal years have moved less than 1% to a little bit over 1% depending upon the policy duration. So again, I think really a testament of the resiliency of our in-force book business.

And then just—and that was very helpful. One last quick one. I saw a line item for legal proceedings, $4.8 million. Maybe this is not an answerable question, but would that be an indication that maybe you're coming towards the tail end of the back and forth with the regulators? Is this an indication that we can be more of these types of expenses? I don't know. I was just kind of throwing it out there to see if there's some kind of read through on that number, which I hadn't seen before.

Yes, I don't know if there's anything to read through that, Andrew. I think from time to time, we're subject to litigation, and it's common in the insurance industry. The uptick in litigation claims expenses over the past several quarters, they've really been stemming from a made by resort seller. So some of that hopefully subsides. And this quarter, the legal proceedings include an estimate for settlements related to an outstanding litigation, not related to the DOJ-SEC matters as well as certain other legal expenses. So there are a number of items that can come through there, but they're usually not related to the normal operations of the business and not indicative of past performance or future operations, and that's why we put them below the line.

Does the higher life margin in the second half of 2025 imply a more favorable run rate in 2026 and beyond? Or how should we think about that?

Yes. I think after you end up making the assumption changes, I think from a policy obligations perspective, you would expect it to be a little bit higher of a run rate going forward. Then keep in mind, we are continuing to still see over the next couple of years, at least probably into '26. Some of the increases in amortization expense just because of the transition to LDTI that we talked about in the prior calls as well as kind of the renewal commissions. So there's probably a little bit of a tick up in the amortization that we're still going to see over the next couple of years. So I think looking forward, it's probably somewhat in the range.

So probably similar range to what we see in the first half of '25.

Okay. And then life sales were below a full year, '25 guides in the first quarter, but you maintained the full year outlook. Could you just talk about some of the dynamics in the quarter and what you're seeing over the balance of the year?

Sure. Really, January was softer than we anticipated. And as we've talked before, a little bit of recruiting and sales on the agency side is kind of a momentum game, as they would say. And so with both Christmas and New Year's falling in the middle of 2 weeks running, really started all of our agencies off to a little bit of a slow start in January that ticked up through the remainder of the quarter. And so as I mentioned to an answer of an earlier question, we also looked at what was going on in April. April sales are consistent with our expectations, as well as our agent count growth in April, as compared to March or as compared to the prior year-end, is higher. It's about a 3% higher just in the month of April, our agent count across all 3 agencies. And so that trend that we were seeing in the last half of is continuing now here in the first part of Q2. Now I'll have the caveat that one quarter—I mean, one month does not a quarter make, but the trends continue to be positive. And so that gave us the confidence to reaffirm our sales guidance for the year for all of our various distributions because we're really not seeing anything significantly different than what our expectations were.

You talked about intention to have an opportunity to reduce commercial paper this year. Where do you intend to get it to?

Yes, our commercial paper balance is historically have been in that $300 million range. And so we're kind of looking to bring it down from where we are today, right around $410 million closer to that $300 million, $325 million range.

Yes. And John, if you kind of look back at a few years back 2022, '23, we were probably in about 3% of our total capitalization, including the short-term debt, it's about 3%. Last year, it got—we ran that up a little bit more, and it's closer to 4%. So probably we're going to bring it back closer to that level, that 3% level.

And John, we're looking at a debt to capital ratio at the end of the year, right around 25%, which is kind of in the midpoint of kind of our operating range for our normal operating range for debt to capital ratios.

That's helpful. My follow-up question. Is the increase in health usage more frequency or severity-driven, I was reading about some human bandage fraud article reasons. So.

It's a great question, John. It is utilization is the big driver. But one of the causes of utilization increase is related to claims related to bandages, these specialty bandages, which does have a higher claim cost to it. So it's adding a little bit to the average claim cost as well. And that's something that we are taking action on to mitigate the impact of any fraud that's apparent that—from those billings. So, we're taking actions there to help manage those costs.

Yes. I think one of the challenges on that, John, is that given that some of those new procedures, and I think the article that was out there, kind of talked about that is that they can be higher cost until they really get work through and then they become kind of more of a standard Medicare reimbursement rates, and then that would tend to bring the rates down. But at least, that is at least one of the drivers, and we're seeing a few other procedures that are being done in the doctor's office that are also giving rise at least to some higher cost.

Yes. I was going to say, I think that's some of the things that give us confidence that we can manage through this like we've done for the decades that we've been writing this business is that a lot of our trend is associated with a few specific procedures in the office. And so as we work through that, as Frank mentioned, the adjustments that most likely it will happen on the allowables as these new procedures get into the CMS allowables. Then going forward, coupled with continued right action, I think we'll be able to improve those margins.

My first question is just in your guidance for '25 on health margins, are you assuming that this claims frequency issue stabilizes at current level, gets better, gets worse? What is the trend assumption you're using? It sounds like you got your arms around the rate increase earn in. But what about the—on the claims side? What are you assuming?

Yes. We are assuming that stays elevated but expected to moderate just a little bit in the second half of the year, which it tends to moderate generally as deductibles are used up that we're able to—the trend will tend to moderate a little bit in the second half of the year.

So when you say it remains elevated, so at a comparable level to Q1?

Yes.

Yes.

Understood. My follow-up is how we interpret what all of this means for the 2025 statutory earnings. I assume the reserve release you mentioned, between $60 million and $100 million, is only for GAAP. Does it have any statutory impact? I expect that the statutory earnings on the health side will align with GAAP, which means they will be weaker. However, I'm uncertain whether the same applies to life. Will there be any benefit there, or is it solely a GAAP consideration? Essentially, I'm asking if the 2025 statutory earnings are likely to be weaker than those of 2024.

That's a great question. The $60 million to $100 million is a GAAP assumption of locking. So it's GAAP only. But when we see favorable claims trends, 100% of those benefits come through on the statutory side. Generally, there's a smoothing mechanism that spreads good claims or bad claims over the future. So we should—favorable mortality will impact statutory results in a favorable way as well.

Yes. The one...

So, sorry, go ahead.

Well, to say as we think about '25 statutory earnings versus '24 statutory earnings, I think I just wanted to make clear while I agree with Tom that the favorable experience that we're seeing will work its way through to income as well. Remember that we did have the reserve revaluation adjustment in 2024, and as Tom has talked about on the last call, while we still anticipate some continuing benefits from that in 2025, we don't anticipate seeing them at the same level that we had in 2024. So there will be a little less statutory generated from that reserve valuation adjustment probably to the tune of roughly $75 million or so.

I had a follow-up question related to free cash flow expectations. I believe you provided the guidance for the rest of the year. I was trying to estimate the first quarter, but I wanted to confirm the full year free cash flow expectation for this year.

Yes, excess cash flow is expected to be $785 million to $835 million for the full year, unchanged from where it was.

And then I guess, just kind of coming back to what you were just talking about, so that when thinking about the moving pieces next year, you're—you won't have the reinsurance benefit and then you'll have less of the valuation manual benefit. Are those the two key moving pieces we should think about?

Yes. The reinsurance benefit we won't have, and then less of an impact on the valuation manual changes, but also a favorable impact to just growth in the business and the favorable mortality trends that we're seeing. Kind of in my estimation, run rates for excess cash flows would be in the $500 to $600 range kind of going forward, I think more midpoint of that range.

On the remeasurement gains and assuming $60 million to $100 million with the 3Q review, are those pretty much baked in your view? Or could there be some deviation? And I guess it's not that small of a range at $40 million. So maybe what might drive that higher or lower in the next couple of quarters? And really, what—is that the determinant of where you come in, in your EPS guide, do you think?

It's definitely included in our guidance range, right? So that is part of what's incorporated in there. On the pluses and minuses, it really is—it's a very detailed process to go through setting the assumptions. And so we—the assumptions are very, I'm going to say, detailed with regards to issue years, issue ages, attained ages, genders, so there's a lot of pluses and minuses that go across. And so until we actually put those into our valuation systems that will kind of determine exactly what that result is. So I think until we do that, that's why we have a bit of a wider range as far as where we think that estimate will be. So it's really kind of the implementation of changes and the final determination and judgment around what changes are made.

Yes. The one thing I would just add to that is that, I mean, that's kind of what we've seen here through the first quarter, as Tom kind of mentioned before, we really like to see, again, how does mortality and lapses really prove out in the second quarter because that will have some influence on it. It's not a final determination on it. But it's the ability to kind of test those final assumptions and where they kind of land. So just—and because the reserves are as big as they are, minor changes on some of those assumptions can move that number around a little bit. So while there's some pretty good confidence range, it definitely comes just a little bit of what we see here in the second quarter and how that kind of influences those final decisions.

Great. That's helpful. And I guess just a quick follow-up. But the rate increases that you're going to have in Health and MedSup, do you expect some elevated as policyholders receive those rate increases?

We definitely see a bit of drop off when we do rate increases. But in general, I think they value the coverage that they have. And they're fairly existent.

I think it goes back to the comment that was made earlier that what we're seeing really is not unusual as far as—I don't think it's limited just to United American. And so it's an industry situation, so we would anticipate that other carriers would be raising rates as well. And then that's where maybe the Medicare Advantage dynamic comes into play a little bit. There are still some issues out there. We are seeing with acceptance with Medicare Advantage and where that coverage is going and dropping doctors in networks and things like that. So where that's been or have a little bit of a tailwind this past year, and we'll have to see where that kind of—it's a little bit of a wild card where that goes. But that's why we don't really anticipate that there would be a large scale drop off or lapse if, in fact, we were to—as we put in our rate increases.

I think the industry is seeing a trend and everybody's pricing for it accordingly.

It sounds like some of the confidence you have in terms of maintaining the guidance for sales and such is April results. But I'm just wondering, just given how quickly things sort of changed in April. Normally, when you see these shocks, is there a little bit of a lag between kind of the environment changing and then when it impacts your customer behavior? Or does it sort of catch up? Or does it kind of show through pretty quickly?

Yes. Let me start with—it's not just April. It was the trend that we were seeing throughout Q1. As I mentioned, January was softer than we anticipated, but looked at how February and particularly March performed and then you're seeing that trend continue through April. So it's really the results of multiple months in how we think about that as we look at the momentum in our agent count with recruiting and growing our overall agents that are producing and submitting business. And so that is really a precursor, a leading indicator to ultimate sales growth. So we're also seeing—our average agent count just in the month of April is up 3% over where we were ending March, and it's also higher than where we ended at the end of last year. So it's not uncommon for us to see a little bit of seasonality at the beginning of the year. And that's what we saw a little bit of weakness, frankly, in January and then that ramped up toward the latter half of Q1, and that trend is continuing through the month of April. So, yes, and I’d just say from our perspective, in looking at its scores back into all the indicators there on our recruiting side, we're seeing has pretty positive momentum, which is what fuels our sales growth.

Thank you for joining us this morning. As there are comments, and we'll talk to you again next quarter.