Globe Life Inc (GL) — Q2 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 are provided for general guidance purposes only. Accordingly, please refer to our earnings release, 2024 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 $253 million or $3.05 per share compared to $258 million or $2.83 per share a year ago. Net operating income for the quarter was $271 million or $3.27 per share, an increase of 10% over the $2.97 per share from a year ago. On a GAAP reported basis, return on equity through June 30 is 18.8%, and book value per share is $66.07, excluding accumulated other comprehensive income, or AOCI, return on equity is 14.4%, and book value per share as of June 30 is $90.26, up 10% from a year ago. In our Life Insurance operations, premium revenue for the second quarter increased 3% from the year-ago quarter to $840 million. Life underwriting margin was $340 million, up 6% from a year ago, driven by premium growth and lower overall policy obligations. For the year, we expect life premium revenue to grow around 3.5%. As a percent of premium, we anticipate life underwriting margin to be between 43% and 45%, which is higher than our previous estimate due to continued favorable mortality. In our health insurance, premium revenue grew 8% to $378 million, while health underwriting margin was down 2% to $98 million due primarily to higher obligations than the year-ago period at United American. Tom will talk more about the Medicare Supplement business in his comments, but I would like to point out here that we saw a slight reduction in utilization from the first quarter to the second quarter, resulting in an underwriting margin at United American as a percent of premium at the high end of our expectations. For the year, we expect health premium revenue to grow in the range of 8% to 9% and anticipate health underwriting margin as a percent of premium to be between 25% and 27%. Administrative expenses were $86 million for the quarter, an increase of approximately 5% over the second quarter of 2024. As a percent of premium, administrative expenses were 7.1%. For the year, we expect administrative expenses to increase by about 4% over 2024 and be approximately 7.3% of premium, lower than noted on the last call. I will now turn the call over to Matt for his comments on the second quarter marketing operations.

Thank you, Frank. I'd like to start by addressing recent agent count trends. Each of the exclusive agencies increased average agent count from the first quarter to the second quarter, for a combined sequential growth rate of 6%, resulting in an average total agent count of 17,621 for the second quarter. We've seen strong results over the past several months in agent recruiting and onboarding. While rapid increases in new agents can have an impact on productivity in the short term, this bodes well for sustainable future growth. The exclusive agencies are the strength of Globe Life, and the ability to maintain and grow an exclusive agency force is a core competency of our company. While we frequently see short-term fluctuations, there is a very close correlation between sales and agent count over the long term. Now I'll discuss each of the distribution channels. At American Income Life, life premiums were up 5% over the year-ago quarter to $446 million, and the life underwriting margin was up 6% to $205. In the second quarter of 2025, net life sales were $96 million, up 2% from a year ago. And as a reminder, we had a difficult comparable this quarter as American Income had a 16% increase in life sales in the year-ago quarter. The average producing agent count for the second quarter was 12,241, up 3% from a year ago. I am confident we will continue to see growth in this agency as we move forward. At Liberty National, the life premiums were up 5% over the year-ago quarter to $97 million. And the life underwriting margin was up 8% to $33 million. Net life sales decreased 5% to $25 million, and net health sales were $8 million, down 2% from the year-ago quarter. The decreases were primarily due to lower agent productivity. Additionally, we had a higher comparable this quarter as Liberty National had an 11% increase in life sales in the year-ago quarter. The average producing agent count for the second quarter was 3,882, up 5% from a year ago. Liberty National continues to have positive agent count growth, which is a good leading indicator for continued sales growth. At Family Heritage, the health premiums increased 9% over the year-ago quarter to $116 million, and the health underwriting margin increased 12% to $41 million. Net health sales were up 20% to $30 million due to an increase in agent count and productivity. The average producing agent count for the second quarter was 1,498 and up 10% from a year ago. And I'm excited to see this continued growth, as this is four consecutive quarters of strong agent count growth for Family Heritage. Now in our Direct to Consumer Division, here, the life premiums were down 1% over the year-ago quarter to $246 million, while life underwriting margin increased 8% to $69 million. Net life sales were $31 million, and this is up 2% from the year-ago quarter and up 24% from the first quarter. I'm very pleased to see these results as this is a turnaround of a declining trend in recent years. As we mentioned on the last call, we have been working on implementing new technology to enhance our underwriting automation. This technology is helping improve the conversion of inquiries into sales. The resulting improvement in return on marketing investment could allow us to reinstate some of the marketing campaigns that were discontinued in the past due to high marketing costs. Now as a reminder, 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 expect this division to generate approximately 1 million leads during 2025, which will be provided to our three exclusive agencies. Improved conversion of our Direct to Consumer leads across the enterprise will allow us to increase our marketing spend and increase future lead volume and marketing campaigns. Now on to United American General Agency. Here, the health premiums increased 10% over the year-ago quarter to $164 million, and this is driven by strong prior year sales growth and premium rate increases. Health underwriting margin was $12 million, down $4 million from the year-ago quarter due to higher claim costs. Net health sales were $25 million, up approximately $7 million over the year-ago quarter. We continue to see strong individual Medicare Supplement sales activity. Now I'd like to discuss projections based on these recent trends in our experience with our business. We expect the average producing agent count trends for the full year 2025 to be as follows: at both American Income and Liberty National mid-single-digit growth, at Family Heritage, high single to low double-digit growth. Net life sales for 2025 are expected to be as follows: at American Income and Liberty National, both mid-single-digit growth, Direct to Consumer low single-digit growth. Net health sales for 2025 are expected to be as follows: Liberty National mid-single-digit growth; Family Heritage, low double to mid-teens growth and United American double-digit growth. I'll now turn the call back to Frank.

Thanks, Matt. We'll now turn to the investment operations. Excess investment income, which we define as net investment income less only required interest was $35 million, down approximately $8 million from the year-ago quarter. Net investment income was $282 million, down 1% and average invested assets were relatively flat. Required interest is up approximately 2% over the year-ago quarter, consistent with growth in average policy liabilities. The growth in average invested assets and average policy liabilities are lower than normal, primarily due to the impact of the annuity reinsurance transaction in the fourth quarter last year, which involved approximately $460 million of annuity reserves being transferred to a third party along with supporting invested assets. Net investment income was also negatively impacted by lower average earnings rates on our commercial mortgage loans and limited partnership investments in the current quarter as compared to a year ago. For the full year 2025, we expect net investment income to be up about 1% and required interest to grow around 2.5%, resulting in a decline in excess investment income of around 10% to 15% for the year. While the growth in average invested assets will be lower than normal for the full year due to the impact of the annuity reinsurance transaction last year, as well as higher dividend distribution from the insurance companies, we do anticipate sequential growth in the third and fourth quarters, which should set us up well for more normalized growth in 2026. Now regarding our investment yields. In the second quarter, we invested $263 million in investment-grade fixed maturities, primarily in the industrial and financial sectors. These investments were at an average yield of 6.44%, an average rating of A and an average life of 34 years. We also invested $68 million in commercial mortgage loans and limited partnerships with debt-like characteristics at an average expected cash return of approximately 9.7%. 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 second quarter yield was 5.29%, up 3 basis points from the second quarter of 2024. As of June 30, the portfolio yield was 5.26%. Including the investment income from our commercial mortgage loans and limited partnerships, the second quarter earned yield was 5.38%. Now regarding the investment portfolio. Invested assets are $21.5 billion, including $18.9 billion of fixed maturities at amortized cost. Of the fixed maturities, $18.4 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 investment portfolio has a net unrealized loss position of approximately $1.6 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, and 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 44% of the fixed maturity portfolio compared to 46% from the year-ago quarter. This percentage is at its lowest level since 2006. 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 rates or equity markets. While the percent 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. The low investment grade bonds remain at historical lows at $503 million compared to $564 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, 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 full year, at the midpoint of our full year guidance, we assume investment of approximately $900 million to $1 billion in fixed maturities at an average yield of around 6.2%, and approximately $200 million to $300 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.

Thanks, Mike. I'll spend a few minutes discussing our available liquidity, share repurchase program and capital position. The parent began the quarter with liquid assets of approximately $90 million and ended the quarter with approximately $105 million of liquid assets. We anticipate concluding the year with liquid assets in the range of $50 million to $60 million. For the second quarter, the company repurchased approximately 1.9 million shares of Globe Life common stock for a total cost of approximately $226 million at an average share price of $121.13. Thus, including shareholder dividend payments of $22 million for the quarter, the company returned almost $250 million to shareholders during the second quarter of 2025. This amount is greater than what we indicated on the prior call, as we took advantage of declines in the price of our stock, which created market conditions more favorable for repurchases during the quarter. The parent's liquid assets at the end of the quarter, along with excess cash flow expected to be generated for the second half of the year will provide the parent with $240 million to $290 million that we expect to return to shareholders in the form of dividends or share repurchases after meeting the anticipated needs of the parent. We will continue to use our cash as efficiently as possible. We still believe that share repurchases provide the best return on 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 flow after the payment of shareholder dividends. We also intend to reduce the outstanding commercial paper balances over the course of the year to be more in line with historical levels. For the full year, we anticipate share repurchases will total $600 million to $650 million and we intend to distribute $80 million to $90 million to our shareholders in the form of dividends. Remaining share repurchases will be spread over the remainder of the year with approximately $100 million to $125 million expected in the third quarter. 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, and modernize existing information technology as well as to acquire new long-duration assets to fund their future cash needs. At the beginning of the third quarter, we strengthened our financial preparedness through the issuance of a 30-year $500 million contingent capital funding arrangement. This arrangement complements our existing capital resources and enhances our financial flexibility by providing an additional source of committed long-term capital regardless of capital market and economic conditions. This transaction has no impact on the company's debt and has financing costs of just under $9 million pretax per full year. Overall, we believe that financial strength is paramount to our company's success, and this arrangement will simply add to our already strong capital generation capabilities that exist within our insurance companies. With regards to the capital levels at our insurance subsidiaries, our goal is to maintain capital within our insurance operations 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 more than what is needed to meet our minimum target capital of 300%. As we do every quarter, we performed stress tests in our investment portfolio under multiple economic scenarios, anticipating various levels of downgrades and defaults. If all of the estimated losses under our stress tests were to occur before year-end, which we believe is highly unlikely, we have concluded sufficient capital resources exist within our subsidiaries and the parent to maintain our target RBC ratios and our share repurchases as planned. For 2025, we intend to maintain our consolidated RBC within the targeted range of 300% to 320%. As I said on prior calls, I would like to share an update with our progress towards establishing a Bermuda reinsurance affiliate. During the quarter, we submitted a preliminary business plan to the Bermuda Monetary Authority or the BMA to establish an affiliate reinsurer in Bermuda for the purpose of reinsuring a portion of new business and in-force life insurance policies issued by Globe Life affiliates. An updated business plan, along with the formal licensing application will be submitted in the third quarter, and we anticipate establishing our Bermuda reinsurance entity and executing the first reinsurance transaction by the end of the year. During the finalization of the application and licensing process, we will continue to have dialogue with regulators as well as rating agencies, and we will continue to provide additional information as warranted on future calls. This initial reinsurance transaction is currently intended to reinsure a relatively small block of life reserves to get the company up and running. However, we anticipate that over time, approximately 1/4 of total statutory life reserves may be ceded to our Bermuda subsidiary as a portion of new business and additional in-force business is reinsured. Of course, we have not completed our evaluation, and our final business plan has not been approved, so this may change over time. At this time, we are not contemplating any changes to our overall investment strategy will be needed. Our decision to pursue this new Bermuda captive reinsurer is for the following strategic reasons. First, Bermuda's economic capital framework will better support Globe Life's continued sales and premium growth rates, which are generally above industry average. We are also very comfortable with Bermuda's statutory framework as it is consistent with U.S. GAAP and capital is determined under an economic framework. This supports earnings emergence consistent with GAAP earnings, which, over time, will provide additional dividend capacity to the parent, enhancing the parent's overall financial strength and flexibility. In addition, Bermuda is an established and stable regulatory environment with international insurance industry experience. Bermuda regulators have been actively engaged in discussions with us and have developed a good understanding of our business and the insurance products we intend to reinsure with the new entity. Following approval of reciprocal jurisdiction, which we will seek to obtain as soon as possible, we currently estimate parent excess cash flow will increase from incremental earnings from our U.S. and Bermuda subsidiaries over time as the reinsurance block grows. This additional excess cash flow will enhance the financial strength of the company and provide additional flexibility for the company to meet various capital and liquidity needs of the parent. There is still a lot of work in front of us as we work with regulators and rating agencies to finalize plans. While we don't anticipate any additional parent excess cash flows until 2027, we do see the potential for additional distributable earnings from our subsidiaries to the parent trending over time towards $200 million annually as earnings emerge from reinsuring additional in-force and new business. This will provide additional financial flexibility for the parent to support our growth. Now with regards to policy obligations for the current quarter. As we discussed on prior calls, we have included within our supplemental financial information available on our website an exhibit that details remeasurement gains and losses by distribution channel. For the quarter, we continue to experience favorable mortality results resulting in life remeasurement gains. The life remeasurement gain was $16.7 million, reflecting mortality and lapse experience for the quarter. This was favorable to management's estimates and resulted in lower life policy obligations than anticipated. The health remeasurement gain was about $3.9 million, favorable to management's estimates and contributed to favorable obligation trends at Family Heritage and experience fluctuations for other health lines, including Medicare Supplement. 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 are increasing our estimate on the margin impact for the third-quarter life assumption updates as recent mortality and lapse experiences are incorporated into these assumptions. Although we have not finalized our assumption updates, we have updated and revised our estimates for the anticipated impacts. At this time, our guidance anticipates a total remeasurement gain in the third quarter related to both life and health assumption updates to be in the range of $110 million to $160 million. Our current estimates for life assumption updates reflect future mortality levels generally in line with pre-pandemic levels. It should be noted that recent mortality experience is favorable to prepandemic levels overall and to the extent this continues, we would expect continued quarterly remeasurement gains even after updating long-term assumptions. For the health segment, as expected, health margins as a percent of premium increased from the first quarter. This was largely driven by anticipated margin increases from the Medicare Supplement business as 2025 premium rate changes became fully effective. In addition, we saw some improvement in Medicare Supplement claims, which were favorable to our expectations. The claim cost trends continue to run higher than those reflected in our recent rate filings. We intend to reflect these higher trends in our 2026 rate filings to improve long-term profitability consistent with those needed to achieve historical margins as a percent of premium. Our estimate for total remeasurement gains related to assumption updates include an estimate of $5 million to $15 million related to the health segment. Finally, with respect to our earnings guidance for 2025. For the full year 2025, we estimate net operating earnings per diluted share will be in the range of $14.25 to $14.65, representing 17% growth at the midpoint of our range and 10% growth when excluding the impact of remeasurement gains from assumption updates in both 2024 and 2025. The midpoint is higher than our previous guidance due to the anticipation of continued favorable mortality experience and the updated anticipated impact of third-quarter assumption updates. In addition, we anticipate health margins will improve slightly relative to our prior expectations. Those are my comments. I will now turn it back to Matt.

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

The first one, the higher earnings guidance for this year. I guess how should we think about that translating to stat earnings and cash flows looking ahead to next year. I guess there's a significant portion that's related to the actual experience issue that we would see come through immediately. Or is more of that benefit kind of lagged through over time, since it seems like there's a big remeasurement gain you're expecting in the life business that includes some favorable assumptions on a forward-looking basis?

What I would say is that the mortality experience we are observing, which has generally been favorable, continues to show positive trends. This will translate into additional statutory income that we expect to see reflected in our statutory income. The assumption changes, which pertain solely to GAAP, do not affect statutory income levels overall. Additionally, considering the slightly favorable trends from the second quarter and the positive experience we anticipate for the health segment in the remainder of the year, we also expect this to contribute to statutory earnings.

That's helpful. And then a follow-up on Bermuda, on the affiliate, I appreciate the details you gave. On the $200 million, I think, potential incremental benefits to your cash flows over time. I guess just any thoughts on like the timeline towards getting to that run rate. And I guess, does that assume you move, I think mentioned like a quarter of your life reserves over to that entity? And then I guess just lastly then, just curious how you got to the 25% target, and I guess, how you're thinking about that? And could it be revised over time?

Yes. We still have a lot to do. We are in discussions with our regulators and rating agencies regarding the Bermuda subsidiary and its implications. It's too early to discuss timing, but we will provide updates once we have more clarity later this year.

As Tom mentioned, in the latter half of this year and the third quarter, we will be finalizing an updated business plan with the regulators, and as a result of that work, we'll be able to update you here on the next one or two calls as we get more of those plans finalized and approved.

My first question is around the sales. It appears you've got a bit lower guidance on the life insurance sales. And Matt, I think you mentioned 8% agent count growth. So I guess two things. Given that you've lowered the guidance, what gives you that confidence that the back half of the year will bump up from what we saw in the first half of the year? And should we use that 6% agent count close as an indication? I know you're not giving guidance yet, but that would be a ballpark expectation for next year.

Yes. I was commenting on the 6% was an overall growth rate of Q2 compared sequentially to Q1. I'd mentioned on the last call just kind of what we were seeing early stages as we moved into the second quarter. So just wanted to comment overall that was very positive growth from our perspective for just one quarter. You're correct. We're revising down slightly on the sales side, still in that mid-single-digit growth. As we've talked about before, the agent count growth, which has been very strong, if you look at over the last 6, 12 months, that is a leading indicator in sales. And so we're still having that strong agent count growth, which does, as I had mentioned, impact productivity sometimes in the near term is our more experienced agents are spending their time training and onboarding new agents. But we know over the long term, that bodes well for sales growth. And so the revision of the guidance is just really reflective of what actually happened in Q2 and recognizing that increase in sales from the increase in agent count may be delayed a little bit more toward the latter half of this year and into the beginning of next year. So it's really nothing other than reflecting just some timing considerations of those new agents coming on and getting more productive there. And so then as you'd mentioned, just our overall, I would look at just kind of our overall agent count growth this year and our guidance there would be reflective of what we would think as we get into 2026 guidance, but that would be a leading indicator of what we think sales would look like for 2026 based on what we know today.

That's really encouraging. On the Med Sup side, your sales have been exceptionally strong. This seems to be partly due to the Medicare Advantage being under significant regulatory scrutiny. If we look a year ahead and that situation stabilizes, do you expect there might be some downward pressure on Med Sup sales, or do you believe you can continue achieving growth?

I would say it this way, you're correct. There is a lot of noise in the system around Medicare Advantage, as we've talked about in the past, we have been the beneficiary of some of that dislocation on the Med Sup sales side. What we see over time is there are some ebbs and flows to this business, but there continues to be a segment of the population that values what the benefits are from a Med Sup policy versus Medicare Advantage as it relates to being able to have more choice and some of the benefits that come along with those type of policies. So I think there will always be a strong market for that, but it will ebb and flow based on some things that we see in the Medicare Advantage side. Also, to the extent we look at the significant size of our in-force block there and the premium growth that happens as a result of the rate filings that Tom had mentioned. And so I think that bodes well for earnings growth here over the next coming periods, including into 2026. And so as we mentioned, within Medicare Supplement and in the United American group there, we do have some group business, and so that does come through a little bit lumpy. And so we'll get higher sales growth sometimes associated with as those new groups come on, particularly as compared to the same quarter in the prior year.

So first, I just wanted to discuss your comments around guidance. I think the midpoint is up about $0.70 and you implied that a lot of it is because of a reserve release, but I think you said that some of it might also be because of higher assumed earnings on an ongoing basis because of ongoing reserve remeasurement gains. So is that true? And to what extent are you able to quantify how much of the $0.70 is just a onetime 3Q impact versus maybe assuming normal earnings outside of the annual actuarial review.

Jimmy, you're right, is that we expect mortality results to continue to run favorably, and we'd expect those to continue throughout the year, which is not impacted by the assumption change. We'd expect like the fourth-quarter life underwriting margins to be more in the 41% range. So that's kind of indicative of some of those mortality results coming through. And then also some continued small benefits from the health segment.

The one thing I would add to that, Jimmy, is that we also, I think, are seeing some favorable reductions, if you will, in our admin expenses. So our guidance, we reduced that just a little bit, see that as being closer to 7.3% for the full year, and we're really seeing some moderation in our IT expenses that's kind of helping with that. So I think that will be something that will carry forward for us, and then we did have a little bit of pickup in the overall guidance just from the additional repurchases that we had in the second year as well, which, of course, will continue to benefit us not only from the remainder of this year but going forward as well.

And then on direct sales, I think you had been down 16 quarters ago on sales and direct on the life side. And this quarter, there was a slight improvement, is that channel close to bottoming? Or was this just a blip given that the comps are easy? And just trying to get an idea on whether you're seeing some stability or signs of recovery there.

Yes, we believe this is an initial step towards recovery. As I've noted, we've implemented some fundamental changes that began at the start of the year. We will continue to see benefits from underwriting activities, resulting in better conversion rates of inquiries into issued policies. We expect this trend to persist throughout the year. Additionally, it's important to highlight that we are now more effectively converting leads from our Direct to Consumer channel, and when we analyze conversion rates across the organization, the agent channel shows a higher success rate compared to Direct to Consumer. This analysis allows us to allocate more resources to re-engage and expand some marketing campaigns we had previously reduced. Therefore, the Direct to Consumer sales will benefit from ongoing marketing efforts alongside the sales generated through the agency channel. These two factors represent significant changes that inform our guidance for the remainder of the year, indicating a general upward trend in sales. We are very pleased to see these developments come to fruition.

Regarding Bermuda, I understand that the structure isn't finalized and it's a few years away. I also know that you have some flexibility in deciding how much business to allocate to it. However, if you achieve a $200 million increase in annual free cash flow, assuming you use it for buybacks, that suggests a 2 percentage point increase in your expected growth. Is this the correct way to look at it, or are there other factors that might offset this benefit?

No, I think that's the right way to think about it, Jimmy.

I guess my first question is just on some of the recent headlines we've seen from just Centene and some others just on the medical trends that have been making the news it doesn't seem like there has been any impact on you guys, but I was just hoping that you could address that.

Yes. I'll address that and then if Matt or Frank want to add anything, they can. The comment regarding Centene was mainly about their experience with Medicaid, which involves major medical coverage. The Medicare Supplement market is considerably different, both in demographics and overall experience compared to Medicaid. They also mentioned some positive trends in their Medicare Supplement segment.

And then my second question, like, if we just kind of look at the health business in general, kind of excluding the noise, right, from the medical Sup business versus pre-COVID, right, the margins seem pretty good. And we're just trying to get a sense like is this kind of a good kind of run rate level to think about going forward? Or is there anything else to consider?

No, I think the supplemental health business, which is based upon the incidence of certain medical events and not really medical reimbursement overall. I think those trends have been fairly stable and consistent. And so I think we're in a pretty good place there.

Yes, I agree. We really appreciate the supplemental health business we have. The limited benefit in non-supplemental health has been strong and stable for us. We're particularly pleased with the return of premium product offered by Family Heritage, which has proven to be very successful and is experiencing good growth. This product tends to stay on the books longer due to its return of premium feature, and it also maintains stable margins. Therefore, we expect it to continue growing and to positively contribute in the future.

And then one last one. Is there any kind of update on just like relative to the DOJ and just the ongoing investigation?

There have been no developments regarding the DOJ and SEC investigations. We have not received any requests from either organization since the start of the year. To reiterate, neither the DOJ nor the SEC has made any claims or allegations against Globe Life or AIL, and we are not aware of any intentions to do so. As I mentioned previously, if there are significant developments, we will keep you informed.

I had another Bermuda question. It looks like the $200 million would be about 15% of your GAAP operating income. I guess, trying to think about what your free cash flow conversion could look like following Bermuda. It seems like maybe it could be about 60% or so but hoping to get some color from you guys on what you would expect.

Yes. Ryan, we haven't really finalized that at this point in time, but I think your math is good and in line with kind of what would happen if we were to get that earlier. Like we obviously expect to have earnings growth over the coming years. So it really is dependent upon kind of the timing of the earnings emergence from the Bermuda subs and the U.S. subs as it relates to the Bermuda affiliate.

Ryan, we have discussed the importance of improving our conversion rate. We are considering whether it makes sense to aim for a conversion rate around 60%. This presents an opportunity that could help us reach that target. Additionally, this approach would provide more flexibility for our holding company regarding liquidity and capital management, as dividends would be received on a different schedule compared to regular U.S. statutory timelines. This flexibility allows us to manage our capital more effectively, and if there are any excess funds, we plan to return them to our shareholders.

My question is a follow-up on Bermuda. I know you talked about getting to 25% of the in-force. Do you anticipate once that initial transaction establishes the infrastructure on the island, it will be a series of transactions that follow or one large one?

Yes, John, we probably do a series of transactions as kind of that operation is up and running, including evaluating in-force as well as some portion of new business being ceded to Bermuda as well.

Yes. And I was going to say, for clarity, the 25% of statutory reserves is more of a longer-term view as we do in-force blocks as well as the new business and we start ceding new business into there as the reserves on that new business grow over time. And so that's just our preliminary view. Somebody asked a question earlier, could that change over time? And the answer is yes, that could change over time as we get more of our plans finalized and we're focused on getting it up and running this year and then developing out what that looks like from a long-term perspective.

And because of the free cash flow that frees up and the leverage it creates on an operating perspective. At the same time, with some of these operational efficiencies that have been brought for automation sounds like on applications that could lead to higher close rates. Do you think this will allow you to accelerate agent growth? Or maybe pursue opportunistic inorganic of other distribution channels?

I don't believe it actually speeds up agent count growth because currently we don't limit sales in any way given that we aren't constrained by capital. As we've pointed out, part of our cash flow conversion stems from the significant investments we make in new sales each year. If we start applying some of those new sales under a GAAP framework that defers acquisition costs, then the timing of revenue recognition under GAAP will differ from statutory accounting. This would continue to enhance our cash flow conversion ratio, but we won’t alter our investment levels in new sales since we are already investing as much as we can where there's a reasonable return. However, it would give us more flexibility. In terms of potential mergers and acquisitions in the future, this could generate additional cash flows at the parent company that are strategic, allowing us to fund a range of initiatives and return excess capital to shareholders.

After the massive amount of buybacks you guys have done and then you've got a lot more capital you're freeing up as well. Is M&A more interesting? I know there's something you guys were looking at a couple of 18 months ago. Maybe just give us an update there.

Our approach to mergers and acquisitions is always opportunistic, ensuring they align with our overall strategy. We seek to grow our distribution through organic means, particularly if it brings in expertise that can enhance our growth. We will keep an eye out for these rare opportunities. Currently, considering our stock price and its historical trading levels, using our funds for stock buybacks remains a compelling option. However, we will still explore M&A opportunities if they align strategically with our goals.

Okay. I know a lot of people have asked about mortality. But given the reserve releases you guys anticipate in 3Q from the life side, the mortality remeasurement continue to accumulate. Can you just talk about how that would flow through future years? How do you guys think about it in the future?

Yes. We currently expect our life mortality assumption to align closely with levels seen before the pandemic. However, the recent data suggests it's slightly lower than that. If this trend in our recent experience persists, we could see continued gains from remeasurement relative to this new baseline mortality assumption rolling into next year. We'll need to wait and see if the current mortality trend continues.

Wilma, I want to add that our long-term assumptions reflect what we expect mortality rates to be over time. Although we're currently experiencing some favorable mortality rates, we anticipate that these will eventually return to long-term averages. If actual experiences align with these long-term expectations, as Tom pointed out, the margin percentage you're looking at is similar to our projections for the fourth quarter, which falls within the range of 40.5% to around 41%. We've previously indicated that there may be a slight decline in this margin over the next few years as we transition to LDTI and adjust the DAC amortization. However, if we continue to see favorable mortality compared to our long-term assumptions, we expect these margins to be somewhat higher.

How about lapse experience in the life business, you talked about that perhaps contributing to the remeasurement gain, but any observations there?

Yes. Overall, our lapse experience in the life business has been fairly consistent with recent quarters. There are a couple of positive points, particularly that lapses at AIL were favorable this quarter, which could indicate some fluctuation. We are pleased to see this. Additionally, first year lapses in the Direct to Consumer channel have been in line with previous quarters, although they remain slightly higher than historical averages. We will continue to monitor this to determine if it represents a new normal or if it will return to previous levels over time.

Overall, we are pleased with the resilience of the business, especially considering the current economic uncertainties. Aside from DTC, our first year lapses in the second quarter showed improvement compared to Q2, largely due to typical seasonal patterns. Generally, our lapse rates remain consistent with our long-term averages, especially when viewed in the context of pre-pandemic levels, given that we experienced very favorable lapses during the pandemic. There has been a recovery in our lapse rates to pre-pandemic levels, and we feel good about our position in light of the economic conditions. We believe that the lapse rates have stabilized and are satisfied with where we currently stand.

Understood. On the health business, the rate increase and then the slight reduction in utilization. Was that fully reflected in the P&L, would you say in 2Q? Or is there some marginal improvement yet to come in 3Q?

I would say it's fully reflected in the second quarter results. I mean there's a trickle that will come in later, but it's really very, very small. And I think one of the important pieces is that in that UAGA line, it includes individual Med Supplements as well as group coverages. And so the rate increases are really a function, really coming into play on the individual Medicare Supplement business. But they're fully reflected.

So I guess I wanted to talk about the Direct to Consumer channel. It's the first time, I think, in recent memory, you guys are talking pretty positively about that. So I just wanted to get a little more color on what was the technology that you guys put into place. I think if I think back, it was a lot of mailings and now it seems like that's changed. So maybe just the evolution there? And is there any associated increase in corporate or admin expenses from marketing in that channel? Or how should we think about that?

Sure. You're right. History was a significant amount of the marketing campaigns and inquiries came through more of a paper medium, whether it was mail or inserts. But over the last recent years, up to about 75% or 80% of that business really comes through a digital channel now, and some of that is fulfilled through call center that we have. But essentially, what's happening is, is that the technology investments are associated with kind of the throughput of taking those leads and ultimately issuing those policies. We're able to utilize the data in a better way than we have in the past from an underwriting perspective. And so historically, part of the process was based on how people filled out applications, we had to have follow-up and understand some of those health situations better. Well, there's a falloff because we can't contact everybody that submitted an application. And so there's a little bit of friction in the system from that perspective. Now with the use of data, we can go ahead and issue certain policies that meet our risk criteria and without even contacting an individual. And so a lot of that is just from a technology throughput perspective. We're still issuing policies from a same risk profile perspective. We're just able to do it much more efficiently. And so to the extent that our conversion rate goes up overall, for that marketing spend because we're spending money upfront for an estimate of what policies get issued at the end. The combination of Direct to Consumer channels, conversion rate going up as well as being able to utilize that marketing spend in our agencies and the conversion of that marketing spend through sales in those agency channels, changes the dynamic of evaluating the marketing spend for the policies and the profit, estimated future profits that we're ultimately issuing. So it enables us to spend more money on marketing as well as certain campaigns that were kind of on the bubble related to whether they were profitable or not, it makes them now more profitable. So to the extent that we spend more on marketing, we get more inquiries, and the conversion goes across the organization. So we're very pleased to see both of those factors coming into play that are going to benefit the sales on both sides of the equation, meaning Direct to Consumer and our agency channels.

Yes, and you raised the question on whether any of those expenses go through the corporate or admin expenses and they do not, so as we look at increasing spend on there, that's all acquisition cost that's supported by the profits and the sales of DTC.

I know we're going long, so I'll just leave it at one. On the reviews, I appreciate your comment about not being contacted by anybody since the beginning of the year. But I think there still is a bit of an overhang on the stock from this issue. And I know you want to be probably careful about how much noise you make on it, but is there an objective here to just put this to bed maybe by the end of the year? And if the government is being slow, maybe just try to see if there's anything that you can do to just put it behind you because it's been going on for a while. And like I said, I think there still is a bit of an overhang on the stock. So just curious about your thoughts. Or is the strategy just sit back and wait and let them come to you when they have time to do that?

No. We have proactive outreach. Of course, we're not in control of the agency's timing. I was just pointing out that we received no new inquiries or requests from either agency for this calendar year. So that's what we know to date. We're still active in trying to bring that to fruition and resolution, and we'd like to be able to communicate that. But as I've mentioned before, these are informal processes, and so being able to bring that to a conclusion that we can discuss publicly is definitely our goal.

First, question just on the $200 million of additional annual free cash flow from Bermuda that you're thinking, I know you said the initial benefits will start in 2027. Just curious, how long do you think it would take to get up to that run rate? That's a very big percentage increase of your current free cash flow. So I mean, is this 5 years down the road? Or is it sooner than that? Can you give a little bit of color for how long you think that might take to get up to that level?

Yes. As I said earlier, it's a little bit early to give you timing on that. And we still need to work through putting together that final business plan and getting regulatory approval and rating agency discussions solidified. So I think that's an update for a future call.

It's safe to say that not all of this will occur in the first year, but we will have a better discussion about timing in the next couple of calls. However, it's also not a lengthy timeframe. If I had to estimate, it’s probably around 3 to 5 years. We want to finalize all the discussions that Tom mentioned, and then we'll provide more clarity on timing.

Got you. I have a question about the free cash flow. Does most of the $200 million annual improvement come from acquisition expenses, or are there other factors like the discount rate? Do you anticipate any benefits from the mortality improvement you've observed? I'm curious if you could outline the main drivers of the improvement.

Yes. I think it's generally a difference between how statutory earnings emerge versus how GAAP earnings emerge is really the key difference.

And the two big components of that, of course, are your deferred acquisition costs and how those are treated between GAAP and statutory as well just differences in reserving.

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