Globe Life Inc (GL) — Q3 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 discussion of these terms and reconciliations to GAAP measures. I will now turn the call over to Frank.

Thank you, Stephen, and good morning, everyone. In the third quarter, net income was $388 million or $4.73 per share, compared to $303 million or $3.44 per share a year ago. Net operating income for the quarter was $394 million or $4.81 per share, an increase of 38% over the $3.49 per share from a year ago. On a GAAP-reported basis, return on equity through September 30 is 21.9% and book value per share of $69.52. Excluding Accumulated Other Comprehensive Income, or AOCI, return on equity at 16.6% and book value per share as of September 30 is $93.63, up 12% from a year ago. Before I discuss the third quarter insurance operations, I would like to revisit the nature of the market we serve. As most of you know, we serve the lower middle to middle-income market. This market is vastly underserved and has significant growth potential, providing us with a distinct competitive advantage. This advantage is protected due not only to our ability to efficiently reach this market through both exclusive and direct-to-consumer distribution channels, but also due to the tremendous amount of data and experience we possess as we have been in the same market for over 60 years with essentially the same products. The basic protection life and health insurance products we offer are specifically designed to help provide financial security to consumers in this market. We continue to be proud to serve this market and are grateful for the opportunity to help working families protect their financial future. In our insurance operations, total premium revenue in the third quarter grew 5% over the year-ago quarter. For the full year 2025, we expect total premium revenue to grow approximately 5% as well, which is slightly higher than in 2024 and consistent with our 10-year average growth rate. Life premium revenue for the third quarter increased 3% from the year-ago quarter to $844 million. Life underwriting margin was $482 million, up 24% from a year ago, driven by premium growth plus remeasurement gains due to good mortality experience, including the updating of both mortality and lapse assumptions. For the full year, we expect life premium revenue to grow between 3% and 3.5%. As a percentage of premium, we anticipate life underwriting margin to be between 44% and 46%. In health insurance, premium revenue grew 9% in the quarter to $387 million and health underwriting margin was up 25% to $108 million due primarily to premium growth and remeasurement gains. 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 $90 million for the quarter, an increase of 1% over the third quarter of 2024. As a percent of premium, administrative expenses were 7.3%. For the year, we expect administrative expenses to be approximately 7.3% of premium, the same as in 2024. I will now turn the call over to Matt for his comments on the third quarter marketing operations.

Thank you, Frank. I'd like to start with a few comments about our exclusive agency force. We currently have over 17,500 exclusive agents that sell only for us. These agents are the strength to grow Globe Life. While we frequently see short-term agent count fluctuations in a stair-step pattern, this agency force has consistently generated significant long-term growth. In fact, the average agent count has nearly doubled over the past 10 years. The ability to maintain and grow an exclusive agency force is a core competency of our company. As a reminder, we typically recruit individuals who haven't previously sold insurance and are looking for a better opportunity. This provides us with an enormous pool of potential recruits that provides a tremendous growth opportunity going forward. As we have mentioned in the past, there is a very close correlation between sales growth and agent count growth over the long term. And we are confident that our agent force will continue to grow, and our goal is to surpass 28,000 exclusive agents and $1.4 billion in annual sales by 2030. Now I'll discuss each distribution channel. First, let's start with our exclusive agencies, American Income, Liberty National, and Family Heritage. At American Income, the life premiums were up 5% over the year-ago quarter to $451 million. And the life underwriting margin was up 18% to $261 million. In the third quarter of 2025, net life sales were $97 million, flat compared to a year ago. But as a reminder, we had a difficult comparable this quarter as American Income had a 19% increase in life sales in the year-ago quarter. The average producing agent count for the third quarter was 12,230, up 2% from a year ago. We are currently focused on initiatives to enhance our recruiting as growth in agent count will lead to future sales growth. At Liberty National, the life premiums were up 5% over the year-ago quarter to $98 million, and the life underwriting margin was up 57% to $70 million. Net life sales were $24 million, flat from the year-ago quarter, and net health sales were $8 million, up 4% from the year-ago quarter. Average producing agent count for the third quarter was 3,847, up 1% from a year ago. We have a few initiatives underway that we expect to have a near-term positive impact. We have developed a new worksite enrollment platform designed to improve agent productivity and training. In addition, we are in the process of rolling out a new recruiting CRM, which will further enable the use of data and analytics to enhance the recruiting process. I continue to be optimistic about the future growth of this agency. At Family Heritage, the health premiums increased 10% over the year-ago quarter to $119 million, and the health underwriting margin increased 49% to $51 million. Net health sales were up 13% to $33 million, and this is due to an increase in agent count and productivity. The average producing agent count for the third quarter was 1,553, up 9% from a year ago. And this is 5 consecutive quarters of strong agent count growth for Family Heritage. The continued focus of the past few years on recruiting and growing agency middle management has produced significant momentum and results. Now let's move on to our direct-to-consumer channel. In our DTC division of Globe Life, the life premiums were down 1% over the year-ago quarter to $245 million while the life underwriting margin increased 29% to $114 million. While the life premiums were down slightly this quarter, net life sales were $27 million, up 13% from the year-ago quarter. I'm very pleased to see this continued sales turnaround from the declining trend of recent years. As we mentioned on our last call, we have implemented new technology to enhance our underwriting process. This technology is helping improve the conversion of customer inquiries into sales. 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 3 exclusive agencies. Improved conversion of our direct-to-consumer leads across the enterprise allows us to increase our marketing spend and increase direct-to-consumer lead volume and marketing campaigns, which leads to sales growth in both our DTC and agency channels. United American is our General Agency division, and here, the health premiums increased 14% over the year-ago quarter to $170 million, driven by the sales growth and Medicare supplement rate increases we have discussed previously. Health underwriting margin was $16 million, up $2 million from the year-ago quarter. Strong activity across the entire agency resulted in net health sales of $25 million, an increase of approximately $9 million over the year-ago quarter. Now I'd like to discuss projections. And based on the trends we are seeing, we expect the average producing agent count trends for the full year 2025 to be as follows: at American Income, an increase of around 2%, at Liberty National, an increase of around 4% and Family Heritage, an increase of around 8%. Net life sales for the full year 2025 are expected to be as follows: American Income, an increase of around 3%, Liberty National, an increase of around 1%, and direct-to-consumer, an increase of around 4%. Net health sales for the full year 2025 are expected to be as follows: Liberty National, flat; Family Heritage, an increase of around 13%; United American, an increase of around 50%. Now let's move on to projections for 2026. And at the midpoint of our guidance, we expect sales growth for the full year to be as follows. For net life sales, we expect American Income to have mid-single-digit growth, Liberty National high single-digit growth; direct-to-consumer, low single-digit growth. For net health sales, we expect Liberty National to have high single-digit growth; Family Heritage, low double-digit growth; and United American mid-single-digit growth. I'll now turn the call back to Frank.

Thanks, Matt. We will now turn to investment operations. Excess investment income, which we define as net investment income less only required interest was $37 million, down approximately $3 million from the year-ago quarter. Net investment income was $286 million in the quarter, slightly above last year's third quarter. The low growth of net investment income is consistent with the low growth in average invested assets. Required interest is up approximately 1% over the year-ago quarter, relatively consistent with the growth in average policy liabilities. As a reminder, the growth in average invested assets and average policy liabilities is lower than normal, primarily due to the impact of the annuity reinsurance transaction in the fourth quarter of 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 in the current quarter by lower average earned yield as compared to a year ago. For the full year 2025, we expect net investment income to be flat and required interest to grow around 2%, resulting in a decline in excess investment income of around 10% to 15% for the year. The growth in average invested assets for the full year is lower than normal due to the impact of the previously mentioned annuity reinsurance transaction as well as higher dividend distributions from the insurance companies to the parent. Now regarding our investment yield. In the third quarter, we invested $279 million in fixed maturities, primarily in the municipal and industrial sectors. These investments were at an average yield of 6.33%, an average rating of A+ and an average life of 29 years. We also invested approximately $86 million in commercial mortgage loans and limited partnerships with debt-like characteristics and an average expected cash return of approximately 9%. None of our direct investments in commercial mortgage loans involve office properties. These non-fixed maturity investments are expected to produce additional cash yield over our fixed maturity investments while still being in line with our conservative investment philosophy. For the entire fixed maturity portfolio, the third quarter yield was 5.26%, up 1 basis point from the third quarter of 2024. As of September 30, the fixed maturity portfolio yield was 5.28%. Including the investment income from our commercial mortgage loans, limited partnerships, and corporate-owned life insurance investments, the third quarter earned yield was 5.46%. While we do own some floating-rate investments, they are well matched with floating-rate liabilities on the balance sheet. Now regarding the investment portfolio. Invested assets are $21.5 billion, including $18.9 billion of fixed maturities and amortized cost. Of the fixed maturities, $18.5 billion are investment grade with an average rating of A-. Overall, the total fixed maturity portfolio is rated A-, same as a year ago. Our fixed maturity investment portfolio has a net unrealized loss position of $1.1 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, internally related 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 43% of the fixed maturity portfolio compared to 46% from the year-ago quarter. This percentage is at its lowest level since 2003. 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 high-risk assets such as derivatives, equities, residential mortgages, CLOs, and other asset-backed securities. Below investment-grade bonds remain at historical lows at $455 million compared to $556 million a year ago. The percentage of below investment-grade bonds to total fixed maturities is just 2.4%, with below investment-grade bonds as a percent of equity, excluding AOCI, at their lowest level in over 30 years. While there is uncertainty as to where the U.S. economy is headed, we are well positioned to withstand a significant economic downturn due to holding historically low percentages of invested assets in BBB and below investment-grade bonds. In addition, 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 bonds in order to pay claims. With respect to our anticipated investment acquisitions for the full year 2025, at the midpoint of our full-year guidance, we assume investment of approximately $800 million to $850 million in fixed maturities at an average yield of around 6.4%. And approximately $300 million to $400 million in commercial mortgage loans and limited partnership investments with debt-like characteristics and an average expected cash return of 7% to 9%. Also at the midpoint of our guidance, we expect the average yield earned on the fixed maturity portfolio to be around 5.27% for the full year 2025 and approximately 5.29% for the full year 2026. With respect to our commercial loans, limited partnerships, and corporate-owned life insurance, we anticipate the yield impacting net investment income to be in the range of 7% to 8% for 2025 and 2026. In total, including these additional investments, we anticipate the blended earned yield to be approximately 5.45% in 2025 and in the range of 5.4% to 5.5% in 2026. Now I'll turn the call over to Tom for his comments on capital and liquidity.

Thank you, Frank. I'll take a moment to talk about our liquidity, share repurchase program, and capital position. We started and ended the quarter with liquid assets of about $105 million. We expect to finish the year with liquid assets between $50 million and $60 million. In the third quarter, we repurchased around 840,000 shares of Globe Life Inc. common stock, spending about $113 million at an average price of $134.17 per share. Including dividend payments of $22 million this quarter, we returned about $135 million to shareholders in Q3 and approximately $580 million year-to-date. We project that share repurchases will reach around $170 million and plan to distribute roughly $20 million in dividends in the fourth quarter. Share repurchases are now higher than we initially expected, as we recently received approval for an extraordinary dividend from one of our subsidiaries, which we believe will assist with additional share repurchases by the parent company. We anticipate total share repurchases of $685 million in 2025 and intend to distribute about $85 million to our shareholders in dividends. We will continue to utilize our cash efficiently, as we think share repurchases offer the best return for our shareholders compared to other options. We believe that share repurchases will remain the primary use of excess cash flow after paying dividends. The excess cash flow, as we define it, comes from dividends received by the parent company from its subsidiaries minus interest on debt and is available for returning to shareholders through dividends and share repurchases. We also continue to invest in our growth through expenditures in sales, technology, and insurance operations. It’s important to note that the cash received by the parent company from our insurance operations comes after significant investments made by our subsidiaries to issue new insurance policies, implement new technologies, enhance operations, and acquire new assets for future needs. Financial strength is crucial for our success, and we believe the $500 million contingent capital funding arrangement established earlier this quarter will enhance our strong capital generation abilities within our insurance companies. Regarding capital levels at our insurance subsidiaries, our goal is to maintain adequate capital to uphold our current ratings, targeting a consolidated company action level RBC ratio of 300% to 320%. While this target range is lower than many peers, it’s suitable given our stable premium revenue from a large number of in-force policies, the characteristics of our protection products, our conservative investment portfolio, and our consistent strong underwriting margins, which lead to steady statutory earnings. As we do every quarter, we conducted stress tests on our investment portfolio under various economic scenarios. If all estimated losses from these tests were to happen before year-end—though we view this as unlikely—we have determined that the capital resources available in our subsidiaries and the parent would be sufficient to maintain our targeted RBC range and proceed with planned share repurchases. For 2025, we aim to keep our consolidated RBC within the 300% to 320% target range. We are also moving forward with establishing a Bermuda reinsurance affiliate to reinsure a portion of new business and in-force life insurance policies issued by Globe Life affiliates. We currently predict that excess cash flow from the parent will grow from additional earnings from our U.S. and Bermuda subsidiaries as the reinsurance block expands. This additional cash flow will strengthen the company's financial position and provide greater flexibility to meet capital and liquidity needs. We are advancing with the necessary regulatory filings and expect to complete the first reinsurance transaction by the end of 2025, and we will update you on this in our next call. Regarding policy obligations this quarter, GAAP accounting requires an annual review and update of actuarial assumptions for mortality, morbidity, and lapses. We’ve decided to reassess and update our life and health reserve assumptions this third quarter. The remeasurement exhibit in our supplemental financial information on our website reflects the effects of these assumption changes along with experience-related gains and losses by distribution channel. When changes to assumptions are made, GAAP standards require a cumulative catch-up adjustment from January 1, 2021, the transition date for LDTI. This cumulative catch-up represents the assumption-related gain or loss. A gain reduces reserve balances, indicating a better outlook as less premium is necessary to fund reserves for future obligations. Conversely, a loss would mean the opposite. For this quarter, the overall effect of life and health assumption changes lowered policy obligations by $134 million, with life obligations down by $131 million and health obligations down by about $3 million, suggesting an improved outlook for future obligations. To provide perspective, total GAAP life and health reserves on our balance sheet are around $19 billion, so this reserve adjustment is less than 1%. To understand our business performance better, we consider normalized underwriting margins, which exclude the effects of assumption changes. For the third quarter, the normalized life underwriting margin as a percentage of premium was 41.5%, compared to 40.4% in the same quarter last year, indicating a notable improvement due to favorable mortality experiences. The normalized health margin as a percentage of premium was 27.2%, slightly down from 27.5% a year ago but showing improvement in the Health segment, mainly driven by better margins from the Medicare supplement business as 2025 premium rate changes took effect. Moving on to our guidance for 2025. We estimate net operating earnings per diluted share to fall between $14.40 and $14.60, reflecting a 17% growth at the midpoint and 11% growth excluding the impact of assumption updates in both 2024 and 2025. The midpoint is an increase over our previous guidance, thanks to ongoing favorable mortality experiences. As for our guidance for 2026, we estimate net operating earnings per diluted share to be between $14.60 and $15.30, signifying a growth rate of 3% at the midpoint. This growth rate is lower than historical averages due to the significant effects of assumption updates in 2025. At the midpoint of our guidance, we expect total premium revenue growth of 6% to 7%, with life premium revenue increasing by 4% to 5% and health premium revenue rising by 9% to 11%. We predict underwriting margins to be between 40% to 43% for life and 24% to 27% for health. Net investment income growth is anticipated to be around 3%. While we don’t have final statutory results for 2025 yet, we expect that excess cash flows available for returning to shareholders through dividends and share repurchases in 2026 will be around $600 million to $700 million, which is higher than 2025 amounts, not accounting for extraordinary dividends. In our next call, I will provide an update once we have finalized the 2025 statutory results and completed the initial reinsurance transactions for the new Bermuda subsidiary. These are my comments, and now I will turn it back to Matt.

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

First question was just on the life sales growth of the exclusive agencies. I'm just wondering, is there anything you're seeing or hearing from customers that's driving more muted sales growth in recent quarters? Or is the challenge really around agent productivity given that you currently have a higher mix of newer agents? And I guess looking forward, what gives you confidence that life sales growth can reaccelerate in the coming quarters?

Yes. Thanks, Jack, for the question. It's not anything we're hearing from a consumer perspective as we talk with our agency owners. We're actually seeing an improvement in the premium on a per sale basis. And so we're not seeing any demand weakening from a consumer perspective. It really does get back to that agent count growth. And what I'd point to is usually followed years that follow significant growth years, we do temper the growth a little bit as we get those new agents onboarded. Start producing, and then they start moving into the middle management ranks. And then the middle managers out there in the field are responsible for a lot of the recruiting, training, and onboarding. And so as I've mentioned before, one of the things we look at is just our whole recruiting pipeline. What we're talking about on the call on our agent count is those agents that are actually up and producing for us. But we look at what the agents are in the pipeline coming in as they get onboarded and licensed and trained, et cetera. And so our hires for AIL are actually up this quarter by 17%. And so this is individuals that have started into the process. They're in the process of taking exams, getting their licenses, and then they move forward into training and selling their first policy. And so it's a good leading indicator for us. And so some of those trends are what we're seeing that gives us the confidence that 2026 will have a higher agent count growth, which bodes well for sales growth for 2026 as well as we've looked at some of our incentive programs and just getting our middle management focused on growing the agent count by recruiting activities and onboarding also plays into our consideration for our sales growth guide.

I would like to follow up on excess cash flow. You mentioned that the guidance for next year is between $600 million and $700 million. Does this include any assumptions or benefits from the Bermuda entity? Additionally, you highlighted an extraordinary dividend this quarter. Can you provide any further updates or insights on that? It appears you've adjusted the buyback guidance for the full year by $50 million or $60 million, so I want to confirm that I have those figures correct.

Thank you, Jack. The expected range of $600 million to $700 million does not account for any benefits from the Bermuda affiliate. It requires at least two accounting periods for reciprocal jurisdictions. Therefore, we believe the earliest we could see this would be 2027. As I mentioned in previous calls, we will work towards achieving reciprocal jurisdiction sooner, but ultimately, it is up to the regulators to grant that status.

First question, following up on Jack's inquiry about the sales growth outlook and recruiting outlook. You mentioned, Matt, earlier that you have a new worksite enrollment platform and a new recruiting CRM with various types of data and analytics. Those two things sound very interesting. Could you elaborate a little more on how they function, what makes them different, and how they will have an impact?

Sure. Liberty's business focuses about 75% on work sites for smaller employers. We are currently implementing a new enrollment platform that incorporates lessons learned from our individual sales processes. This allows agents to work directly with clients to perform a needs-based analysis. For the worksite segment, we're providing our agents with enhanced tools to help them customize a coverage package tailored to each client's needs. Although we are in the early stages of this rollout, initial feedback from the first few agencies shows a significant increase in premium production, exceeding 20% on a per worksite and per sale basis. We expect that as this is introduced across all agencies, it will significantly boost our worksite sales growth, especially into the beginning of next year. In addition, our recruiting CRM system is designed to replace the current manual tracking methods many agencies use, such as spreadsheets. Similar to a sales CRM, this system will centralize data, allowing agency owners and managers to monitor their recruiting pipeline in real-time. They will be able to track candidates as they progress through interviews, testing, licensing, and ultimately production. Agencies that have adopted their own systems have reported improvements in managing activities, and we aim to create a comprehensive system that provides an up-to-date view of the recruiting process and manages conversion points for new hires effectively.

Sounds very impactful. My follow-up is still regarding the sales area, specifically direct-to-consumer. I recall you mentioned that while sales in direct-to-consumer increased by 13%, premiums decreased by 1%. I'm curious about the policy retention ratio in direct-to-consumer. Additionally, you indicated low single-digit sales in direct-to-consumer for next year. Is that mainly because you're anticipating a strong second half of 2025 and prefer not to be overly aggressive?

Yes. Let me address your first part of that question. We've got a substantial in-force block, and we've been discussing sales declines for a couple of years. These declines impact our premium growth rate. Recently, we've experienced two quarters of positive sales growth, which has been robust, and we expect this trend to continue. Consequently, premium earnings are expected to improve as we maintain this positive sales growth. This is the dynamic we're seeing from this quarter's perspective, and we're pleased with the results. The technology and processes we have been developing are coming to market in Q2 and Q3, and we're observing positive outcomes. We are cautiously optimistic as we await the fourth quarter to assess what next year may look like. This is a reasonable estimate based on our current early observations, and we will adjust it as we gain more experience in Q4. However, we have seen a considerable improvement in the latter half of this year, so we want to remain cautious in our expectations for the early stage of 2026.

One thing I would like to add is that the decline in the premium growth rate we're noticing for 2025 is primarily linked to the decreasing sales we've experienced recently. Overall, the lapse rates for DTC remain consistent with our long-term averages. In fact, we've observed very favorable lapse rates in our renewals. Once policies have been in effect for several years, we've seen a slight increase in renewal premiums, particularly in some of the earlier months over the last few quarters. Overall, this trend has stabilized and aligns with our historical rates. As we begin to reinvest some of the dollars, as Matt mentioned, and improve sales, we expect to see growth in overall premium income in 2026. If this trend continues with sales growth in the low to mid-single digits, it will also contribute to an increase in premium growth.

I have a couple of questions. First, regarding your 2025 guidance, it seems that for EPS in the fourth quarter, you're implying a range of $3.25 to $3.45. This number is lower than what you reported in the most recent quarter, even at the high end when excluding the remeasurement gain. I'm curious if you're noticing anything in the business that might lead you to take a conservative approach or if you could provide some insight into the implied guidance for the fourth quarter.

Thank you for the question. The $0.05 increase is a result of our positive third quarter performance and expected results for the fourth quarter. I should mention that we experienced some favorable timing with a research and development tax credit that we had initially planned for the full year, which was recognized in the third quarter. Additionally, we had very favorable mortality experience during the third quarter, as evidenced by an $18 million remeasurement gain for life, not including assumption updates, which indicates a strong quarter. While we hope to see this trend continue into 2024, it's not fully factored into our fourth quarter guidance. If it materializes, it could bring us towards the upper end of our guidance range. Furthermore, the health experience was also quite favorable in the third quarter, but we don't expect that to carry on into the fourth quarter for both life and health. Typically, we see a slight increase in claims during the fourth quarter due to seasonal factors, like the onset of flu season and an uptick in doctor visits as the year ends. These factors will influence our fourth quarter EPS expectations, but I'm pleased that we've raised the guidance midpoint by $0.05.

Could you provide insight into your expectations for claims trends and sales in the health business? There has been notable concern about margin compression among major medical companies across different products. While your margins have decreased, they appear to be recovering. Should we expect this trend to continue into 2026 as you implement price increases? Additionally, with many companies planning to raise prices on Medicare Advantage plans, are you witnessing this change? How is it influencing the demand for your Medicare products?

I'll start first, Jimmy, on the health trends. We're really pleased with the third quarter performance related to Medicare Supplement and group retiree health. They are exceeding our expectations, which is fantastic. We have also seen that medical trend and claim cost trends have flattened, which is a positive sign for us. We have incorporated the experience from late in the third and fourth quarters of 2024, as well as the first half of 2025, into our rate increase requests to regulators. We believe these rate increases will help us return to our target profitability. These increases will be implemented throughout 2026. I think the first quarter will resemble 2025, but in the second, third, and fourth quarters of 2026, we expect to see an increase in margins as the rate increases take effect.

And then, Tom, it's fair to say that recent experiences, we're just kind of seeing trend moderate a little bit. We had some acceleration of that in Q3 and Q4 of last year. And then, Jimmy, to answer your second part of your question, yes, we're seeing that related to the Med Advantage, which we don't write. As you know, the market that is providing a tailwind as price increases happen or carriers pull out of the market. It's definitely been a tailwind for us. It's hard to say now what 2026 will look like. That's when we kind of have a moderate growth, considering the significant sales growth that we've had for 2025. And so really, we need to see what happens here over the next quarter or 2. But right now, I do believe it will be a tailwind for us to continue to grow those sales in a profitable way, as Tom mentioned, related to our price actions. But there's a lot of dynamics, as you know, going on in that market. And so things change quite a bit. But currently, I think we're getting some benefit from a lot of that disruption that's going on in the Medicare Advantage space.

So my question is around health. The performance and production in the third quarter wasn't really that far off from the level you produced in the fourth quarter of a year ago. And I know there's some seasonality that would typically occur on the fourth quarter, and I understand you updated your sales assumptions. But this is more of a broader question. What are you seeing in the distribution environment, and we all have parents and the baby boomer generation is aging? Is there a portion of this cohort that more and more is in need of your products that will be secular in nature and more extended beyond just what we've seen in recent years?

Medicare Advantage has been growing for quite some time, largely due to its appealing low premiums or nearly free options. Recently, because of profitability shifts, carriers are raising their rates. In the Medicare supplement space, we see a different customer who values choice and is willing to pay to keep their providers or choose who they want to see. This will always be a segment of the market. There are also customers who fluctuate between options based on their preferences at the time of sign-up. However, I believe there will always be a place for Medicare Advantage in our product portfolio.

I believe there will always be opportunities for us in the Medicare Supplement market. Over a long period, we have remained in this business, which tends to fluctuate slightly with the overall market conditions. We feel optimistic about our long-term outlook, but we recognize that there will be short-term disruptions due to pricing and competitive pressures in this marketplace.

My follow-up question. Shortly after the last call, the DOJ and SEC investigations have concluded. Is the EEOC investigation still ongoing? And what's your visibility into that?

As a reminder, the EEOC findings are not binding. The litigation has to actually be initiated, and there is no pending litigation. So we don't have anything to update from that perspective. It's just the status quo.

Yes. I would like to remind you that the courts have previously addressed the independent contractor versus employee issue concerning AIL sales agents and have consistently found that they are properly classified. Therefore, if any lawsuits arise, we will defend ourselves vigorously.

Tom, on excess cash flow generation, the $600 million to $700 million is above the $500 million to $600 million run rate you mentioned a few quarters ago. I guess, what's the driver of the increase there? And is that level sustainable going forward before factoring in Bermuda benefits?

Yes. Thanks. I really do believe that it is sustainable. I think it's indicative of the improving trends that we've seen in mortality. To the extent that health margins continue to improve, that will be a tailwind for future years. And I also think the investment income environment or the investment yield environment on '25 was more favorable than 2024. So as long as that stays consistent, I think we'll also benefit from higher yields going forward.

Yes. Then I would just remind you that the $500 million to $600 million range that I think Tom has talked about on prior calls was the amounts available for shareholder repurchase or share repurchases after dividends. And when Tom is talking about the $600 million to $700 million, that is the total excess cash flow. And so if you assume around $80 million, $85 million of dividends, shareholder dividends being paid out of that, that brings you back into the mid-$500 million consistent with what Tom had talked about before.

Just wanted to circle back to Bermuda real quick. Just curious, has there been any progress with the BMA or other regulators? And should we expect any change to your expectations on uplift to free cash flow or the timing there? I think you had previously mentioned $200 million and maybe that's in 2027, but I just wanted to see if that still stands?

Yes. Previous comments indicated a $200 million benefit over time. Bermuda has approved our business plan, and we have established the company. We are currently going through the licensing process and seeking U.S. regulatory approvals for the reinsurance transactions and the transfer of assets to the new entity. We are in the middle of the approval process, and once we receive that, we can execute on the first reinsurance transaction.

And John, I would think that we haven't seen anything at this point in time that would really change what we said with respect to amount of timing at this point. I think as we kind of get the final approvals, I think we should be pretty close to being able to really give a little bit more guidance early next year on what that kind of looks like and maybe a little bit more sense of what that timing might be too.

And second question, I just wanted to come back to your comments on floating rate exposure. I think you mentioned that assets and liabilities are well matched. But how should we think about the sensitivity of your NII, if we get additional Fed cuts from here?

Yes, I think it's around $1 million for a 1% change in the short-term rates.

But I also think that the geography of the change happens in a few places, which means required interest would also decrease a little bit if short-term rates went down. We also have floating rate debt, which would decrease as well. Therefore, we would see a slight reduction in financing costs, which contributes to one of the offsets. So Frank, your $1 million is really a combination of the two.

I just had a couple of quick ones. Can you give us a couple more details on your 2026 guidance in terms of admin expenses and excess NII growth?

Yes, Ryan. I think admin expenses, we still expect to be around 7.3% of premium, so very stable with 2025. So we're pleased with respect to that. And then with respect to net investment income, we probably see being up around 3% and required interest probably being a little bit higher than that, closer to maybe a little bit closer to 4%.

Yes, I think that's a reasonable way of looking at it. Yes.

I think that's correct. The buybacks are fairly well distributed throughout the year at this stage. One additional point to consider, Ryan, is regarding the floating rates. We expect that interest or financing costs will decrease slightly next year compared to 2025, due to some of the floating rate exposure related to our CD balances and term loan. We simply align with the economists' forecasts regarding the anticipated changes in short-term rates.

I guess my first question, given, I guess, your comments around share repurchase as well as, I guess, the plan outlined for next year. It feels like, I guess, M&A is still less likely, but I was just hoping to get some updated thoughts there.

Yes, I would say that mergers and acquisitions are always on our minds, but they are not a top priority for us. We feel confident in our ability to grow organically. When we consider our guidance, we expect our excess cash flows to be directed towards share repurchases. However, if a better opportunity arises that offers greater returns to our shareholders than share repurchases, we would certainly consider reallocating some funds for a beneficial acquisition. Our focus in M&A remains on opportunities that enhance our core mission of providing protection-oriented products in the middle and lower middle-income markets, along with the distribution channels that support that mission. We believe we can contribute to growth, similar to our experience with Family Heritage over a decade ago, which has been thriving. We will also seek opportunities to improve our operations and enhance efficiency, but any potential acquisition would need to demonstrate strong value for us.

And then I guess my second question, just given the focus right on agent recruitment, would you expect, I guess, the sales guidance in life to be more back-end weighted? Or I guess, maybe there's some easier comps to start the year. Just if you could kind of help us think about the cadence there?

Sure. As we've mentioned before, the number of agents is a key indicator of sales growth, and early in Q4 looks promising for us. During the holiday season, we typically see a slight slowdown, but activity picks up again around mid-January. The first quarter of the year significantly influences the overall performance for the year. We are seeing positive momentum from our new hires, which is a good sign for bringing in new agents. Currently, our hires are up 15% at Liberty and 17% at AIL compared to last year, which looks favorable for Q4 and into Q1 of next year. However, there is usually a gap of a quarter or two before an increase in agent count translates into sales growth, as new agents need time to get onboarded and gain experience. It’s also important to consider previous year results when analyzing quarter-over-quarter data. Overall, I believe Liberty is positioned for high single-digit growth next year, while AIL is likely to see mid-single-digit growth.

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