Operator:

(Abrupt Start) Globe Life Second Quarter 2024 Earnings Release Conference Call. [Operator Instructions]. And now I'd like to hand the call over to Stephen Mota. Please go ahead.

Frank Svoboda:

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

Frank Svoboda:

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

Frank Svoboda:

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

Matt Darden:

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

Jimmy Bhullar:

I'm assuming that's me. So good morning. So first, I had a question just on lapses. And if you look at first year lapses across the various divisions, they seem like they increased a little bit in all of them. So I'm wondering if that's just -- you consider that normal elaboration. Or is there -- is it something related to the economy and just inflation or any changes in sales or service practices on your end that's driving them?

Jimmy Bhullar:

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

Frank Svoboda:

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

Thomas Kalmbach:

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

Jimmy Bhullar:

Okay, thank you.

Wesley Carmichael:

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

Wesley Carmichael:

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

Frank Svoboda:

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

John Barnidge:

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

John Barnidge:

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

Frank Svoboda:

I think the one thing I'll add is that, it's still preliminary and we'll talk about it more on the next call as far as our expectations of excess cash flows for, what would kind of normally that we would expect for 2025. And right now, just kind of preliminarily, we do see them being at a higher level than what we have here available in 2024. So we do think there's some additional capacity there. Again, we'll talk about that more on the next call. And I think the only thing I'd point out is that it was clear that the authorization, it's not a mandate. So we're not -- we'll take a look at what's there and seek to buy back as many shares as long as it's prudent for us to do so.

Operator:

Thank you. We will now move to our next question from Suneet Kamath from Jefferies. Please go ahead.

Matt Darden:

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

Matt Darden:

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

Thomas Kalmbach:

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

Thomas Kalmbach:

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

Operator:

Thank you. Our next question comes from Elyse Greenspan from Wells Fargo. Please go ahead.

Thomas Kalmbach:

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

Elyse Greenspan:

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

Elyse Greenspan:

Thank you.

Ryan Krueger:

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

Frank Svoboda:

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

Ryan Krueger:

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

Ryan Krueger:

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

Frank Svoboda:

Yes. And some of those -- as we've taken a look into it, I think there are some near-term items that -- I do think some of our optimism with respect to 2025 free cash flows stems from strong sales, which is following converting into strong premium growth in 2024 and then the favorable, some of the favorable claims experience that we're seeing, especially on the life side will help with the statutory income in 2024 as well. So that gives us some optimism that we may have some expanded excess cash flows in 2025. And Tom's right, some of those where it's changing the nature of the conversion ratio. Some of that dovetailed into 2025, which may not end up materializing until 2026 as far as additional dividends and some of that, even though we'll take a look, obviously, and see what it is, what we can do from a timing perspective.

Operator:

Thank you. We will now take our next question from Wilma Burdis from Raymond James. Please go ahead.

Thomas Kalmbach:

Some of that will be -- the remeasurement gains or losses are GAAP. So what drives the free cash flow is statutory earnings. However, as we kind of -- as we've mentioned in the past or I've mentioned in the past is when we see a remeasurement gain relative to our assumptions in GAAP, that's about 25% of what the delta is from our assumptions comes through. And so the full impact of assumption, the differences between assumptions, a good majority of that is going to be coming through in statutory. So that's one of the reasons why we think that we'll have improved statutory earnings in 2024 that will then lead to increased dividends from the subsidiary to the parent in 2025 and higher excess cash flows. So that's part of it. The other thing that I mentioned is the change in the valuation manual that has been implemented in 2024, I think will also result in higher statutory earnings and actually could also increase excess cash flows or dividends to the parent in 2025 from the subs and resulting in a higher excess cash flow.

Thomas Kalmbach:

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

Matt Darden:

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

Operator:

We will now take our next question from Tom Gallagher from Evercore. Please go ahead.

Matt Darden:

So you had several questions there. Let me see if I can address them. Regarding the scope being narrow, the narrowness was related to the DOJ investigation focused on specific agents within the Arias Organization. As far as evaluation of the assertions and allegations in the short selling report, that covered very broad from all of our financial items that were pointed out as well as just our overall processes and systems for controls. And I think as we've noted in the past is some of the agents that have shown up in some of the articles are terminated agents. They are not here any longer, and that happened long before investigation that the Audit Committee started. So I'll just go back to my statement earlier is that we do take an appropriate action related to misconduct as well as I think I'd mentioned on our last call is that some of the assertions by the short sellers were based on an executive on the sales management side within American Income that we had terminated for costs. And so we do take appropriate action. We take these things seriously and we are confident in our processes and controls. And as I'd mentioned, we always continue to enhance that, but it was a pretty broad and wide range in review and the results of that, that we've discussed today.

Matt Darden:

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

Thomas Kalmbach:

Yes. We still see -- first of all, mortality has been fairly consistent over the last few quarters, which has been good. We are seeing, as you said, some improvements from where they were at the peak. But we also -- causes that continue to be higher than where they were pre-COVID. And I would say heart disease and cancer although improved, are still a little bit higher than where we were prior to 2019. And one that remains elevated causing the death is neurological disorders, which would be stroke and Alzheimer's. So we're keeping an eye on that. And then I think another like a positive is nonmedical deaths have improved. And those have improved, those are actually, I'd say, more in line with historical, maybe just a little bit elevated from where they were. So I think the trends are good, but we're not quite there yet.

Operator:

Thank you. And we have a follow-up question from Jimmy Bhullar from JPMorgan. Please go ahead, Jimmy.

Thomas Kalmbach:

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

Thomas Kalmbach:

That's fair, Jimmy. Yes.

Operator:

Thank you. And that's all questions we have today. With this, I'd like to hand the call back over to Stephen Mota for any additional or closing remarks.

Operator:

Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

Operator:

Hello, and welcome to the Globe Life Incorporated First Quarter Earnings Release Call. My name is George. I will be coordinating at today's event. Please note, this conference is being recorded. And for the duration of the call, your lines will be in a listen-only mode. However, you will have the opportunity to ask questions towards the end of presentation. [Operator Instructions] I'd now like to turn the call over to your host today, Mr. Stephen Mota, Senior Director of Investor Relations. Please go ahead, sir.

Frank Svoboda:

Thank you, Stephen, and good morning, everyone. In the first quarter, net income was $254 million or $2.67 per share, compared to $224 million or $2.28 per share a year ago. Net operating income for the quarter was $264 million or $2.78 per share, an increase of 10% from a year ago. On a GAAP reported basis, return on equity through March 31 is 21.3%, and book value per share is $53.3. Excluding accumulated other comprehensive income or AOCI, return on equity is 14.3% and book value per share as of March 31 is $79, up 12% from a year ago. Before we continue, we'd like to take a moment to address ahead of time, questions many of you may have regarding dismissed litigation against the company, the DOJ inquiry, and the recent attack on the company by a short seller. For over 70 years, our business model has stood the test of time. And as we will further discuss today, we continue to generate sustainable earnings growth that provide long-term value for our shareholders. With over 17 million policies in force, our millions of customers value the protection of the company's products, and we strive to be there when our customers need us most. We want to assure you that Globe Life, its management and our Board of Directors strive to act in accordance with the highest level of ethics and integrity at all levels of the organization. While we believe the short seller's claims present a false and misleading overall picture of the company and its subsidiaries, as a demonstration of our commitment to operating ethically, the company's Audit Committee has retained the international law firm, WilmerHale, to conduct an independent review of the assertions in the short seller's report. As you can appreciate, given the ongoing nature of the DOJ's investigation and out of respect for the integrity of the independent review initiated by the Audit Committee, we are limited in what we can say. For this reason, we will not be taking any additional questions on these issues today, although our intent is to address questions we understand you may have to the extent possible. We will provide updates as and when appropriate. First, we want to provide a brief update on the status of the lawsuit filed by claimant Renee Zinsky, a former independent contractor sales agent, which, as many of you know, included allegations of sexual harassment and purported fraudulent business practices, neither of which we tolerate, and the claim that she was misclassified as an independent contractor. On September 27, 2022, the claimant filed the demand for arbitration and participated in the selection of the three arbitrator panel. After a year and a half of years of litigation, the arbitration hearing was scheduled to begin on March 4, 2024. The night before the hearing, the claimant sought to dismiss her claims without obtaining any relief or payment. After a lengthy discussion on the record, the panel dismissed the case with prejudice, and on April 3, 2024 of the United States District Court for the Western District of Pennsylvania affirmed the dismissal with prejudice. On March 14, 2024, Global Life filed an 8-K addressing this matter in more detail, and the court filings are publicly available for those interested. Also noted in our Form 8-K, Global Life and American Income received subpoenas from the U.S. Attorney's Office for the Western District of Pennsylvania. These subpoena sought documents related to sales practices by certain licensed insurance agents in the areas of organization who are contracted to sell American Income policies. The company and American Income is in the process of responding to these subpoenas, which were received in late 2023, and have been fully cooperating with the DOJ. The DOJ has not asserted any claims or made allegations against the company and American Income with respect to the foregoing investigation. And the company currently is not aware that any legal proceedings are contemplated by governmental authorities. While no assurances can be made and we are still evaluating the matter, management did not believe when the subpoenas were received, and does not believe now, that it is either reasonably possible or probable this investigation will result in material liability to the company. As such, the company did not disclose the existence of the request from the DOJ in its Form 10-K. We are providing additional information regarding this matter to you now in light of recent questions that have been raised. Matt?

Frank Svoboda:

Thanks, Matt. In our life insurance operations, Premium revenue for the first quarter increased 4% from the year-ago quarter to $804 million. Life underwriting margin was $309 million, up 6% from a year ago. For the year, driven by strong premium growth in both our American Income and Liberty National divisions, we expect life premium revenue to grow between 4.5% and 5% at the midpoint of our guidance, and life underwriting margin to grow between 7% and 7.5%. As a percent of premium, we anticipate life underwriting margin to be in the range of 38% to 40%. In health insurance, premium grew 6% to $341 million, and health underwriting margin was up 3% to $94 million. For the year, we expect health premium revenue to grow around 7%. At the midpoint of our guidance for the full year, we expect health underwriting margin to grow between 5% and 6%, and as a percent of premium, to be around 27% to 29%. The final tri-agency rule regarding various health plans was finalized with minimal impact to the supplemental health products we sell and, therefore, to our business. The final rule requires an additional consumer disclosure, which we will implement as required. Administrative expenses were $80 million for the quarter, up 9% from a year ago. As a percent of premium, administrative expenses were 7%, consistent with our expectations and compared to 6.7% a year ago. For the year, we expect administrative expenses to be approximately 7% of premium, higher than 2023, due primarily to continuing investments in technology as we modernize and transform how we operate. I will now turn the call over to Matt for his comments on the first quarter marketing operations.

Frank Svoboda:

Thanks, Matt. We will now turn to the investment operations. Excess investment income, which we define as net investment income less only required interest was $44 million, up $15 million from the year ago quarter. Net investment income was $283 million, up 10% or $25 million from the year ago quarter. The increase is due to the continued strong growth in average invested assets. Higher interest rates across fixed maturities, commercial mortgage loans, limited partnerships and short-term investments also contributed to the higher growth rate. Required interest is up 4.8% over the year ago quarter, same as the increase in average policy liability. For the full year, we expect net investment income to grow between 7% and 9% due to the combination of the favorable interest rate environment and steady growth in our invested assets, especially related to our CMLs and limited partnership investments. In addition, at the midpoint of our guidance, we anticipate required interest will grow between 5% and 5.5% for the year, resulting in growth in excess investment income of approximately 25% to 30%. Now regarding our investment yield. In the first quarter, we invested $682 million in investment-grade fixed maturities, primarily in the industrial and financial sectors. This amount was higher than expected to take advantage of opportunities in the market. We invested at an average yield of 5.86%, an average rating of A-, and an average life of 32 years. We also invested approximately $126 million in commercial mortgage loans and limited partnerships that have debt-like characteristics at an average expected return of 10%. None of our direct investments in commercial mortgage loans involve office properties. These investments are expected to produce additional cash yield over our fixed maturity investments and they are in line with our conservative investment philosophy. For the entire fixed maturity portfolio, the first quarter yield was 5.24%, up 6 basis points from the first quarter of 2023 and up 1 basis point from the fourth quarter. As of March 31st, the tax equivalent effective yield rate on the fixed maturity portfolio was 5.25%, including the cash yield from our commercial mortgage loans and limited partnership, the first quarter earned yield was 5.46%. Invested assets are $21.4 billion, including $19.5 billion of fixed maturities at amortized cost. Of the fixed maturities, $19 billion are investment grade with an average rating of A-. Overall, the total fixed maturity portfolio is rated A-, same as a year ago. On fixed maturity – investment portfolio had a net unrealized loss position of approximately $1.4 billion due to the current market rates being higher than the book yield of our holdings. As we have historically noted, we are not concerned by the unrealized loss position as this 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 47% of the fixed maturity portfolio, compared to 51% from the year ago quarter. While this ratio is high relative to our peers, we have little or no exposure to higher-risk assets such as derivatives, equities, residential mortgages, real estate equities, CLOs and other asset-backed securities held by our peers. We believe that the BBB securities we acquired 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. Below investment grade bonds remained low at $542 million, compared to $596 million a year ago. The percentage of below investment-grade bonds to total fixed maturities is 2.8%. At the midpoint of our guidance, for the full year, we expect to invest approximately $1 billion to $1.2 billion in fixed maturities at an average yield of 5.6% to 5.8%, and approximately $400 million to $500 million in commercial mortgage loans and limited partnership investments with debt-like characteristics, at an average expected cash return of 8% to 10%. As we said before, we are pleased to see higher interest rates as this has a positive impact on operating income by driving up net investment income with no impact to our future policy benefits since they are not intra-sensitive. Now I will turn the call over to Tom for his comments on capital and liquidity.

Matt Darden:

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

Jim Bhullar:

Hey, good morning. So first, I just had a question on what’s your rough idea on the timing of the WilmerHale investigation? And then what’s your process going to be going forward in terms of giving investors updates? Should we assume that, once something is completed or if you get a request from a regulator, you’d actually put out a filing? Or is it going to be more around scheduled earnings calls or other events?

Jim Bhullar:

And near term, is it like one – a quarter or so? Or is it even faster or slower? Just trying to get some sense.

Jim Bhullar:

Okay. And then in terms of the impact on your business thus far, I realize two weeks is too short of a period, but – and you're implying that sales thus far have not been affected. But are there other parts of your business that are affected where you've seen an impact either on persistency of policies or retention of agents? Or any other aspects of the business where you're – you've seen an impact short term or longer term from what's gone on over the past couple of weeks?

Jim Bhullar:

And the blackout on your buybacks, is that expiring or that goes away tomorrow? Or is it later on today or next week?

Jim Bhullar:

Okay. Thank you.

Ryan Krueger:

Hi, thanks, good morning. My first question is, can you help us – can you quantify the typical amount of capital strain on your free cash flow from new business in a given year? I guess what I'm trying to understand is, I'm trying to separate the amount of in-force free cash flow you generate versus the typical new business strain. Anything you can do to help quantify that, please?

Ryan Krueger:

Got it. That's for the change in sales. But what about if you had no new sales at all? Can you give any sense of what – how much higher your free cash flow would be?

Ryan Krueger:

Got it. Thanks. And then maybe it will be temporary, but given where your stock is currently trading and the depressed valuation multiple, would you consider looking into an in-force reinsurance transaction to monetize some portion of your existing in-force value to then lead to additional buyback capacity to take advantage of the differential in the price you may be able to get on a transaction like that versus where your stock is currently trading?

Ryan Krueger:

Okay. Great. And then just one last quick one. Can you give any sense of the mix between first year commissions versus renewal commissions that you pay on business? Just trying to size kind of how meaningful or renewal commissions or the vast majority paid in the first year.

Tom Kalmbach:

Yes, I'd agree. I mean I think we could look at the renewal commissions and our statutory filings to get some insight there. But I would think renewal commissions are less than 10% of renewal premiums. So that might be a good frame of reference.

Operator:

We'll now move to Wes Carmichael from Autonomous Research. Please go ahead.

Frank Svoboda:

No. I mean for the – what we know today, we're looking at just are the timing of resources to be able to accomplish in that buyback. And obviously, we're looking at market conditions as well. And so if we have an opportunity to be buying back shares, clearly less than our book value. We believe that that's a very good answer for our shareholders and a very good return for that money. Now typically, as you know, our historic buyback methodology has been pro rata over the years. We receive our dividends from our subsidiaries. We kind of – when we get that over the course of the year, and we kind of use our CP balances to kind of help even that out, some of the timing of that, over the course of time. And so all things else being equal, we would be kind of doing that ratably throughout the remainder of 2024 as the liquidity becomes available. And so we'll be looking at just opportunities to accelerate that and depending on the timing of just being able to fund some of those.

Frank Svoboda:

Yes. No, we were looking at an opportunity where we were going to be the acquirer, early in January we reached a decision where the transaction would be material enough and it's probable enough to actually happen, that we thought that we should put ourselves into a blackout period with respect to the repurchasing of our shares. As Tom noted in his comments, we're no longer considering that opportunity. Of course, during the month of April, here – during the time period prior to our call where we're not – we're in a normal blackout anyway because of knowledge – material knowledge that we have around earnings and such. So as – and then as I've mentioned to Jim, we'll be coming out of that tomorrow.

Operator:

Thank you, sir. We'll move now to John Barnidge calling from Piper Sandler. Please go ahead.

Frank Svoboda:

I would say that the overall estimate of everything that we know today would be included in our overall guidance of what we have given.

Tom Kalmbach:

Yes, it did. It was just a shorter period of time.

Operator:

Thank you, sir. Our next question will come from Elyse Greenspan coming from Wells Fargo. Please go ahead.

Frank Svoboda:

Yes. We did end up walking away primarily as a result of the stock price of where we're at today. As we got to looking at what would be the best utilization of our funds for our shareholders and being able to give the highest and best risk-adjusted returns to our shareholders. We did make the decision that repurposing any acquisition funds, if you will, toward the purchase of our own shares would be in the best interest.

Matt Darden:

Yes. As far as M&A goes, we typically look at opportunities that are in our markets. We like the middle income market. We also like the products that we distribute in the form of the risk profile, the profitability profile of those. So basic protection life or supplemental health products. We also like an exclusive distribution or opportunities from a Direct to Consumer perspective. And so our current business model, as that's framed up, is that's the lens we look through as we think about M&A opportunities.

Operator:

Thank you, ma’am. We'll now go to Wilma Burdis calling from Raymond James. Please go ahead.

Tom Kalmbach:

Yes. Wilma, it really was just a little bit higher statutory earnings as we finalize the earnings from 2023. We're seeing a little bit higher subsidiary dividends to the parent.

Tom Kalmbach:

And what I'd add is I think that's consistent with the favorable mortality results that we saw in the third and fourth quarter of 2023 as well.

Frank Svoboda:

Right now, Wilma, there really isn't. We'll take a look at the situation, as we think about where the share price changes over time and just in our availability of cash flows, and we'll just have to look at that over time. And we should be able to give more update on that clearly on our next call.

Operator:

Thank you very much. Our next question will be coming from Tom Gallagher calling from Evercore ISI. Please go ahead.

Matt Darden:

As I've mentioned earlier, that's the subject of an ongoing matter. I'd just refer you back to what we said earlier in our prepared remarks related to our assessment of the DOJ activity and the impact thereof.

Frank Svoboda:

Yes, Tom, I don't think you should make that assumption necessarily. We would be looking at just a matter of regardless of how we were looking at financing it, not necessarily with equity, it was a better use of those funds.

Operator:

Thank you, Mr. Gallagher. We'll now move to Bob Huang calling from Morgan Stanley. Please go ahead.

Tom Kalmbach:

Yes. The AIL first year lapse rates, they were higher for the quarter. At this point, we don't see the uptick as anything other than fluctuations. We've had quarters in the past that have been – had lapse rates in – that were similar. In addition, kind of as you mentioned, there is some seasonality in lapse rates, in the first quarter tends to be a little higher than other quarters. On the renewal lapse rates, I think that's really a function of a change in the mix of business. As sales – as we generated more sales over the recent years, there's more business in that second, third and fourth durations, which tend to have a little bit higher lapse rates than we'd have in place for those that have been on the books for a long period of time. So I think those are the things that are impacting AIL lapse rates at this point.

Matt Darden:

As we have said, we take unethical agent conduct very seriously. We have measures that we detect and deter these actions. We also continually evaluate our controls and update those as necessary, and we're comfortable that our processes continue to function as intended. So for now, we're pleased with the processes that we have in place, the identification of issues in the field. And as I've mentioned, we have dedicated teams that research and evaluate and conduct investigations on issues as they become known.

Operator:

Thank you, Mr. Huang. We'll now move to Suneet Kamath coming from Jefferies. Please go ahead

Matt Darden:

Sure. maybe first for areas, it's about 6% or so of our new production. One of the things I think is important to keep in mind is that's an organization of several hundred agents. And all of those agents are individual contractors that are contracted with us. And we have agency owners that come and go on a routine basis as just part of our normal business practices. As you might imagine, we have agency owners that retire, they pursue other interests. And as I mentioned earlier, on occasion, it's necessary for us to terminate one. So we have long business practices over our ability to transition those agents and who keep producing business for us and they're contracted with us. And so sometimes, we look at just overall the larger agencies in our larger organizations in our different agencies. Sometimes that kind of falls along the 80-20 rule. But again, those are really – sometimes they're partnerships, there's multiple agency owners involved, et cetera. And so I feel like we've got great processes in place to deal with transitions as they're necessary.

Tom Kalmbach:

I was going to say, Matt, to add to that, that 6% is part of American Income Life sales, at about 3% overall.

Suneet Kamath:

And when you think about that 6%, is that a big number relative to kind of the overall organization like the other distributors that you have in there? Or is that – I just want to get a sense of what that 6% feels like to you guys.

Suneet Kamath:

Got it. And then, I guess, I'm still a little confused on the whole remeasurement gains. It sounds like there wasn't anything here in the quarter. But are you guiding – it sounds like also you're guiding to some sort of impact with the third quarter assumption review that should be positive. If that's true, I don't know if there's any way that you could kind of size that. And is that embedded in your guidance yet or not?

Suneet Kamath:

Okay. Thanks.

Jim Bhullar:

Hey, so just wanted to follow up on a couple of things related to your guidance. Are you assuming the lower share price for buybacks in your updated guidance as well?

Jim Bhullar:

And then the remeasurement gains, it seems clear that that's in your assumption as well. Any sort of big changes in your assumptions, the underlying assumptions as part of the annual actuarial review, are those in guidance as well or are they not?

Frank Svoboda:

Yes, Jimmy, it's still too early to know whether or not, of course, whether there would be any assumption change coming up in the third quarter. We're obviously, as a range, we're looking at various possibilities. I mean if we continue to have remeasurement gains and whether or not that could lead to an assumption change or not, or if we end up having some worse experience, which goes the other way, right? So all of that's embedded in the overall range.

Tom Kalmbach:

Yes. I'd say it's still running a little bit higher, particularly for some causes and drug-related deaths are – continue to be elevated. Even we've seen some improvements off the peak for, say, heart disease, but it's still not back to pre-pandemic levels. Where we are seeing some significant improvements in motor vehicles and homicides seem to have come down quite a bit.

Frank Svoboda:

Yes, Jimmy, you can't really comment about any kind of specifics. I mean, obviously, it was material enough. It was – I would just say, a little bit bigger than some of them that we've done recently.

Matt Darden:

Yes. It's getting more muted over time as more of our sales come through the digital channel, but it does have an impact. And we do watch closely what the postage increases are planned to be and adjust accordingly. As I've mentioned, our guidance is probably slightly down for the year from a sales growth perspective. But also just keep in mind, it's very important the activity the Direct to Consumer is doing to support all of our agency sales. That would not be reflected directly in the sales attributed to the Direct to Consumer channel.

Operator:

Thank you very much sir. We have another follow-up question, this time from Wilma Burdis of Raymond James. Please go ahead

Matt Darden:

Yes. As we mentioned in our prepared remarks, is the subpoena sought documents related to sales practices by certain licensed insurance agents in the areas organization who were contracted to sell American Income policies.

Frank Svoboda:

Really been pretty stable. I mean you look at the data, and I would point your attention to the data that we did put on the supplemental financial information on the website. And so we've got 10 years' worth of data out there for both Globe Life’s and then – as a whole, and then American Income, and it's a 10 years breakdown between renewal and first year premium on those as well. So and I just think that really shows the stable nature of our business. As I continue to go through and look and I think about our business, if you go back three, five, 10 years and look at our in-force business, it has grown over 5% in each of those periods. And I think if you look at 15 years – this is on our life business. And if you go back 15 years, it's probably just a little bit under 5%. And our earned premiums are growing basically at that same rate as well. And you kind of look at that schedule and you look at the renewal premium versus the first year premium and it's pretty consistent. So it is – it's just really showing a very stable, consistent growth. And that, as Matt mentioned in his comments, turns into stable, consistent growth of cash premium collections, of which, at least at American Income, over 95% of those are collected on a monthly basis. And it's a little bit less than that on a total Globe Life basis. But again, that's consistent cash flow that we've talked about over the years, many years on, is the strong, stable support for our operations and our statutory operations where we generate over $1 billion of operating cash flows year in and year out. So the trends on those are pretty consistent over time.

Operator:

Thank you very much. We'll now go back to Tom Gallagher of Evercore ISI. Please go ahead

Frank Svoboda:

Yes. That's about $400 million to $500 million is what we would anticipate in spending in non-fixed maturities investments during the year. And what that is, is really it's a three year commercial – transitional commercial mortgage loans. And then there's LP strategies, about half of which are in commercial – some of those are in commercial mortgage loans as well as other – that have more – they have underlying debt-like characteristics, whether it be infrastructure or other types of debt strategies within them. So it's probably not quite, relatively close to half and half with respect to those.

Frank Svoboda:

Yes.

Frank Svoboda:

Yes. So on the commercial mortgage loans, that's not the case. Now if they are in the LP structure, you do end up with a little higher RBC. Obviously, we're taking that into account as we look – we talk a lot about having a risk-adjusted and capital-adjusted returns. So when we look at these investments that are getting put on schedule BA and having a little RBC charge, we make – we look at that and make sure that we're getting that as an appropriate lift, if you will, to pay for that additional capital.

Frank Svoboda:

And I will just clarify, there's some piece of that. Infrastructure is one of them, there's also just straight credit LPs, we're looking just at some private credit strategies. And keep in mind, all of these are managed by outside, and we're partnering with JPMorgan, Goldman, PIMCO, Ares, MetLife. So we have had several different partners that are helping to – we're investing these through.

Operator:

Thanks very much Mr. Gallagher. We have another follow-up question, this time from Wes Carmichael of Autonomous Research. Please go ahead

Matt Darden:

Like I mentioned earlier, we're really not seeing it in our recruiting pipeline, which I think is where it'd show up first. So we just revised down slightly to low single-digit growth on the agent count side and mid-single-digit growth on the sales side. And just again, it's too early to tell, but we're really not hearing much from the field related to any sort of disruption or concerns. So just trying to be cognizant of what's out there and it's early days.

Operator:

Thank you, sir. Ladies and gentlemen, that will conclude today's question-answer session. I turn the call back over to Stephen Mota for any additional or closing remarks. Thank you.

Operator:

Ladies and gentlemen, that concludes today's call. We thank you for your attendance. You may now disconnect. Have a good day, and goodbye.

Operator:

Hello, and welcome to Globe Life Inc’s Fourth Quarter 2023 Earnings Release. My name is Melissa, and I will be your operator for today’s call. Please note, this conference is being recorded. And for the duration of the call, your lines will be in a listen-only mode. However, you will have the opportunity to ask questions at the end of the presentation. [Operator Instructions] I’ll now turn the call over to Stephen Mota, Senior Director of Investor Relations. Please go ahead.

Frank Svoboda:

Thank you, Stephen, and good morning, everyone. In the fourth quarter, net income was $275 million, or $2.88 per share, compared to $242 million, or $2.46 per share a year ago. Net operating income for the quarter was $267 million, or $2.80 per share, an increase of 10% from a year ago. On a GAAP reported basis, return on equity through December 31st is 23.2%, and book value per share is $47.10. Excluding accumulated other comprehensive income, or AOCI, return on equity is 14.7%, and book value per share as of December 31st is $76.21, up 11% from a year ago. In our life insurance operations, premium revenue for the fourth quarter increased 4% from the year ago quarter to $795 million. Life underwriting margin was $305 million, also up 4% from a year ago. In 2024, driven by strong premium growth in both our American Income and Liberty National divisions, we expect life premium revenue to grow between 4.5% and 5% at the midpoint of our guidance and life underwriting margin to grow between 7% and 7.5%. As a percent of premium, we anticipate life underwriting margin to be in the range of 38% to 40%. In health insurance, premium grew 3% to $336 million, and health underwriting margin was up 1% to $97 million. In 2024, we expect health premium revenue to grow 7% to 8%. At the midpoint of our guidance for the full year 2024, we expect health underwriting margin to grow between 5% and 6%, and as a percent of premium to be around 27% to 29%. Administrative expenses were $77 million for the quarter, down 1% from a year ago, primarily due to a decline in pension and other employee-related costs. As a percentage of premium, administrative expenses were 6.8% compared to 7.2% from the year ago quarter. For the year, administrative expenses were 6.8% of premium compared to 6.9% a year ago. In 2024, we expect administrative expenses to be approximately 7% of premium, higher than 2023 due primarily to continuing investments in technology as we modernize and transform how we operate. I will now turn the call over to Matt for his comments on the fourth quarter marketing operations.

Frank Svoboda:

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 $36 million, up $5 million from the year ago quarter. Net investment income was $272 million, up 6% or $16 million from the year ago quarter. The increase is due primarily to growth in average invested assets, but also supplemented by the impact from higher interest rates across fixed maturities, commercial mortgage loans, limited partnerships and short-term investments. Required interest is up nearly 5% over the year ago quarter, slightly higher than the 4.5% growth in average policy liabilities. For the full year 2024, we expect net investment income to grow between 5% and 6% due to the combination of the favorable interest rate environment and steady growth in our invested assets. In addition, at the midpoint of our guidance, we anticipate required interest will grow around 5% for the year, resulting in growth in excess investment income of approximately 10% to 12%. Now regarding our investment yield. In the fourth quarter, we invested $443 million in investment-grade fixed maturities, primarily in the industrial and financial sectors. We invested at an average yield of 6.61%, an average rating of BBB+ and an average life of 23 years. We also invested approximately $114 million in commercial mortgage loans and limited partnerships that have debt-like characteristics at an average expected cash return of 8%. None of our direct investments in commercial mortgage loans involved office properties. These investments are expected to produce additional cash yield over our fixed maturity investments, and they are in line with our conservative investment philosophy. For the entire fixed maturity portfolio, the fourth quarter yield was 5.23%, up 5 basis points from the fourth quarter of 2022 and up 4 basis points from the third quarter. As of December 31, the portfolio yield was also 5.23%. Now regarding our investment portfolio. Invested assets are $20.7 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-, same as a year ago. Our fixed maturity investment portfolio has a net unrealized loss position of approximately $1 billion due to current market rates being higher than the average book yield on our holdings. As we have historically noted, we are not concerned by the unrealized loss position and 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 48% of the fixed maturity portfolio, compared to 51% from the year ago quarter. While this ratio is high relative to our peers, we have little or no exposure to higher risk assets such as derivatives, common equities, residential mortgages, CLOs and other asset-backed securities held by our peers. Additionally, unlike many other insurance companies, we do not have any exposure to direct real estate equity investments or private equities. We believe that the BBB securities we acquire generally provide the best risk-adjusted, capital-adjusted returns due in part to our ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets. Below investment-grade bonds remained low at $530 million compared to $542 million a year ago. The percentage of below investment-grade bonds to total fixed maturities is 2.8%. At the midpoint of our guidance, for the full year 2024, we expect to invest approximately $1.1 billion in fixed maturities at an average yield of 5.5% and approximately $440 million in commercial mortgage loans and limited partnership investments with debt-like characteristics and an average estimated cash yield of approximately 8.2%. As we said before, we are pleased to see higher interest rates as this has a positive impact on operating income by driving up net investment income with no impact to our future policy benefits since they are not interest sensitive. Now I will turn the call over to Tom for his comments on capital and liquidity.

Matt Darden:

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

Jimmy Bhullar:

Hi, good morning. So, first, just on the remeasurement gains, what’s your policy in terms of when you see actual experience? Are you reflecting the entire variance in remeasurement gains in the given quarter or only a portion of it in any given quarter on the experience related gains and losses.

Jimmy Bhullar:

Okay, but then you’re not unlocking any assumptions. That just happens when you do your annual review.

Jimmy Bhullar:

Okay. And then on the health business, a few health insurers have seen significant uptick in claims and med advantage plans, and they’re raising prices as a result. Doesn’t seem like you’ve seen at least not as much of an uptick in med sup claims, but what is it that you’ve seen and do you expect any impact on med sup sales because of potential disenrollments from med advantage plans?

Tom Kalmbach:

And then, Jimmy, I think your second question was related to sales, as we’ve mentioned in the past, as the Medicare Advantage plans, and you saw people moving into that had a little bit of impact on us. So from a 2024 sales perspective, to the extent that there is more disenrollment or as you’d mentioned, you’re seeing some trends out there from the cost side is costs might be increased by competitors offering those plans. I think that could be a tailwind for us for our supplemental product. Our goal is really to keep steady in that market, and we see competitive pressures coming and going over a long period of time. So our goal is really to keep steady in price for what we ultimately want to achieve and kind of ride out some of the short-term fluctuations from market dislocation.

Tom Kalmbach:

Well, the Tri-Agency rule, the primary target was short duration health plans, right? So we don’t have any of those products in our portfolio. It did also bring in some supplemental health plans that we do sell. But there’s been quite a bit of reaction to that Tri-Agency rule, and it’s been comments from a broad spectrum of constituents, whether that be unions, employers, companies themselves. So we’re really waiting to see what actually happens within that ruling. We’re expecting something to come out in April. And at the end of the day, we’ll make the changes that we need to make depending upon what comes out in that rule. But we don’t see it as having a very significant impact overall to our marketing efforts.

Operator:

Thank you. Our next question comes from John Barnidge with Piper Sandler. Please go ahead.

Tom Kalmbach:

Yes. For 2024, we have about $70 million of our total direct commercial mortgage loans. Maturing of that is about $4 million of office buildings, and then we have about $35 million of mixed use, of which about $12 million is office. So if you kind of think the hotspot, of course, right now is what kind of office exposure is maturing here this next year. And so in total, between those two, we do have about $16 million of what’s maturing on average, it’s below a 50% LTV and then have over a 90% LTV on any that we’ve looked at. And about – about $47 million, $50 million of those do have some continuing optional extensions. So it’s a good portion of those could get extended on into 2025 or beyond.

Frank Svoboda:

Yes. Sensitivity on the rates of this particular asset class?

Frank Svoboda:

Okay. Yes, we’re taking – over the course of 2024, we kind of see basically the benchmark, we kind of rely mostly on 30 year. It’s kind of our benchmark. And so I see that being relatively stable, but probably drifting downward over the course of the year. But right now, as you know, the spreads are extremely tight. Currently, we do expect that to expand a little bit over the course of the year as well. And so built into our guidance, we’re expecting for our fixed maturities to be around 5.5%. It’s a little bit lower than we had in 2023. It’s largely due to the declines in the spread. If you look at 2023, our benchmark was just a little bit over on average over the course of the year, a little over 4%, but we were getting nearly 200 basis point spreads on those investments. It’s really tightened up here during the fourth quarter. So, we don’t expect that higher spread continuing at this point in time, at least into 2024.

Operator:

Thank you. Our next question comes from Ryan Krueger with KBW. Please go ahead.

Matt Darden:

Yes. And I think 1 of the things to look at is just really the agent count growth accelerated in the last half of the year. So if you just kind of look at that over a sequential basis, Q1 was 3.5%. Q2 is 8.5% and then Q3 was 15% [ph] 16% and 20% in Q4 from a growth perspective. So the agent count growth really accelerated in the last half of the year, which bodes very well from a 2024 perspective. So usually, as we’ve talked about in the past, there will be a little bit of a lag from those new agents getting onboarded, trained and productive. Our more experienced agents are more productive than newer agents. And so that should carry forward into 2024 as we thought about our sales guidance. So we generally look at that as a little bit of a timing lag. One of the things, if you look over a long period of time, if you look at agent count is directly related to sales count growth when you start looking at it on a – or a year or a multiyear basis. Our – as an example, generally across all our agencies, our five-year CAGR is within 1% of each other, our agent count growth and our sales growth. So we really think about it on a long-term basis. Of course, we talk about it on a quarterly basis here on the calls, but I’m very bullish on where I think 2024 is going to come out for American Income.

Tom Kalmbach:

Yes. So in the first half of the year, mortality was quite a bit higher. The remeasurement gains were quite a bit lower than we saw in the second half of the year. So there really does seem to be kind of a change that’s happened in the third and fourth quarter. And kind of looking at the third quarter, it’s coming much closer to pre-pandemic mortality levels. And similarly with the fourth quarter, we would want to see the fourth quarter develop more fully to – takes a little bit of time for all the claims to get adjudicated and paid from that period. So we’d like to see those claims develop and continue, actually into Q1 and Q2 to make sure that it’s sustainable. But at this point, I’d say it’s getting fairly close to pre pandemic levels, so that excess mortality seems to have dropped much more quickly than what our assumptions had anticipated.

Ryan Krueger:

Thank you.

Suneet Kamath:

Yes, thanks. You talked about an acceleration in recruiting in the second half of 2023. I guess as we think about 2024, is the plan to kind of keep the foot on the gas pedal there or maybe shift and focus a little bit more on productivity?

Suneet Kamath:

Got it. And then it looks like, I think based on your comments, the RBC ratio is going to be in your range, maybe slightly above the midpoint. Is there a level of liquid assets at the holding company that you just want to keep as sort of a buffer, just as we think about excess capital?

Suneet Kamath:

Okay. Got it. May if I could just sneak one more in. It looks like you took up your 2024 EPS outlook a little bit. Can you just unpack some of the drivers? It doesn’t seem like it’s investment income, but just curious, what caused that bump up?

Suneet Kamath:

Got it. That’s embedded in your outlook already.

Suneet Kamath:

Perfect. Thank you.

Wilma Burdis:

Hey, good morning. Could you talk a little bit more about what’s driving the high sales guides in the Health segment? I know you’ve had very strong agent count growth, but is there any tailwind in the market or anything that’s attractive about the market right now?

Wilma Burdis:

Thank you. And then a follow-up on Suneet’s question. You mentioned that the higher guide includes some of the life mortality coming through. Should we think about that being weighted towards the back end because you’ll review it in 3Q? Or how should we think about that coming through throughout the year? Thank you.

Wilma Burdis:

Thank you.

Tom Gallagher:

Thanks. Just a follow-up on Wilma’s question on the remeasurement gains. So if I heard you correctly, 38% to 40% margin guide on life and in 4Q when you had big remeasurement gains that was at 38%. So it looks like it’s a little bit above that at least midpoint in terms of where it’s been trending. Is that – is that because you’ve deferred part of them and you’re going to be getting the benefit through the amortization of those gains through earnings in 2024? Or at least some piece of that? So is it really just the deferred profitability that’s emerging here that you’re guiding to? Or are you assuming the remeasurement gains themselves actually get a little better or underlying experience gets a little better?

Tom Gallagher:

That’s helpful. So a little bit of less expense drag when you think – which has maybe obscured the level of favorability due to the underwriting?

Tom Gallagher:

Now I just want to make sure I’m thinking about it correctly, though. In a year like 2023, where you had – particularly the back half where you had significant favorability of remeasurement gains, there’s some piece of that – of the experience that is getting deferred and then amortized back through earnings, I believe. Is that meaningful? And will that like meaningfully improve future earnings at all? Or is that not that meaningful because it gets amortized over such a long period of time?

Tom Gallagher:

Thanks. And then just one more, if I could. The – so when I look at the dividends and share repo guidance for 2024, $440 million at the midpoint. That – if I just solve for a free cash flow conversion ratio, it’s only about 40% to 45% of your updated GAAP EPS guidance. And I recognize a company like Globe that’s growing faster than average in the industry is going to have a good amount of capital consumed on writing new business. But the 40% to 45% is just way below the industry average. And curious if you’ve thought about exploring ways to improve that conversion ratio at all? Or is that just something because of the intensity of the commission and the life insurance business, you’re just willing to live with?

Tom Gallagher:

Okay. Thanks. Appreciate it.

Stephen Mota:

All right. Thank you for joining us this morning. Those were our comments. We will talk to you again next quarter.

Operator:

Hello, and welcome to the Globe Life Incorporated Third Quarter 2023 Earnings Release Conference Call. Please note this conference is being recorded and for duration of the call your lines will be on listen-only. However, you have the opportunity to ask questions [Operator Instructions] I will now hand you over to your host, Stephen Mota, Senior Director, Investor Relations, to begin today’s conference. Thank you.

Frank Svoboda:

Thank you Stephen and good morning everyone. In the third quarter, net income was $257 million, or $2.68 per share, compared to $191 million, or $1.94 per share a year ago. Net operating income for the quarter was $260 million, or $2.71 per share, an increase of 24% from a year ago. The strong growth in net income and net operating income is due in part to the re-measurement loss taken in the year-ago quarter due to the unlocking of assumptions under LDTI. Tom will discuss this further in his comments. On a GAAP-reported basis, return on equity through September 30th is 22.6% and book value per share is $48.51. Excluding accumulated other comprehensive income, or AOCI, return on equity is 14.7% and book value per share as of September 30th is $74.31, up 11% from a year ago. In our life insurance operations, premium revenue for the third quarter increased 4% from the year-ago quarter to $788 million. For the year, we expect life premium revenue to grow between 3.5% to 4%. Life underwriting margin was $300 million, up 21% from a year ago. The increase in life underwriting margin was due in part to a re-measurement gain recognized this quarter due to improved claims experience versus a re-measurement loss taken in the year-ago quarter. At the midpoint of our guidance, we expect life underwriting margin for the full year to grow a little over 5% and as a percent of premium to be approximately 38%. In health insurance, premium grew 3% to $331 million and health underwriting margin was down 4% to $97 million due in part to a re-measurement gain recognized in the third quarter of 2022 that was greater than what was recognized in the current quarter. For the year, we expect health premium revenue to grow around 3%. At the midpoint of our guidance, we expect health underwriting margin to be relatively flat and as a percent of premium to be around 29%. Administrative expenses were $75 million for the quarter, down 1% from a year ago, primarily due to a decrease in pension and other employee related costs. As a percentage of premium, administrative expenses were 6.7% compared to 7% a year ago. For the full year 2023, we expect administrative expenses to be approximately 6.8% of premium in line with our previous expectations. I will now turn the call over to Matt for his comments on the third quarter of marketing operations.

Frank Svoboda:

Thanks, Matt. We will now turn to the investment operations. Excess investment income, which we define as net investment income less required interest, was $34 million, up from $10 million from the year-ago quarter. Net investment income was $267 million, up 8%, or $20 million from the year-ago quarter due to higher yields on fixed maturities and short-term investments, and an increase in floating interest rates on our commercial mortgage loans, including those held in limited partnerships. Required interest is up 5% over the year-ago quarter, in line with the increase in net policy liabilities. For the full year, we expect net investment income to grow approximately 7% due to the combination of the favorable rate environment and steady growth in our invested assets, and expect excess investment income to grow approximately $25 million. Now regarding our investment yield. In the third quarter, we invested $427 million in investment-grade maturities, primarily in the municipal and financial sectors. We invested at an average yield of 6.15%, an average rating of A+, and an average life of 27 years, taking advantage of opportunities in the municipal sector to obtain higher yield, as well as higher quality. We also invested approximately $100 million in commercial mortgage loans and limited partnerships that have debt-like characteristics. These investments are expected to produce additional yield and are in line with our conservative investment philosophy. For the entire fixed maturity portfolio, the third quarter yield was 5.19%, up 2 basis points from the third quarter of 2022, and up 1 basis point from the second quarter. As of September 30th, the portfolio yield was 5.23%. Now regarding the investment portfolio. Invested assets are $20.7 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 minus. Overall, the total portfolio is rated A minus, same as a year ago. As a reminder, we have information on our website regarding our banking and commercial loan investments. Our fixed maturity investment portfolio has a net unrealized loss position of approximately $2.6 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 is mostly interest-rate driven. We have the intent and, more importantly, the ability to hold our investments to maturity. Bonds rated BBB are 48% of the fixed maturity portfolio, compared to 52% from the year-ago quarter. While this ratio is the lowest it has been in over 10 years, it is high relative to our peers. However, keep in mind that we have little or no exposure to higher risk assets, such as derivatives, common equities, residential mortgages, CLOs, and other asset-backed securities held by our peers. Additionally, unlike many other insurance companies, we do not have any exposure to direct real estate investments or private equities. We believe that BBB securities that 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. Below-investment grade bonds are $493 million compared to $543 million a year ago. The percentage of below-investment grade bonds to total fixed maturities is only 2.6%. At the midpoint of our guidance for the full year 2023, we expect to invest approximately $1.1 billion in fixed maturities at an average yield of 5.9% and approximately $310 million in commercial mortgage loans and limited partnership investments with debt-like characteristics, at an average yield of approximately 8.3%. Also at the midpoint of our guidance, we expect the average yield earned on the fixed maturity portfolio to be around 5.19% for the full year 2023 and slightly higher at approximately 5.23% for the full year 2024. With respect to our commercial mortgage loans and limited partnerships, we anticipate the yield impacting net investment income to be in the range of 7.1% to 7.2% for both 2023 and 2024. As we said before, we are pleased to see higher interest rates as this has a positive impact on operating income by driving up net investment income with no impact to our future policy benefits, since they are not interest sensitive. Now I will turn the call over to Tom for his comments on capital and liquidity.

Stephen Mota:

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

Wes Carmichael:

Hey, good morning. I just had a question on mortality trends and what you’re seeing. So, for 2024, it sounded like the life underwriting margin is expected to be kind of the same as 2023. But I think when 2023 guidance came out, you had some expectation for COVID-related mortality. So, just wondering what you’re seeing in terms of your expectation for [indiscernible]

Operator:

Please stay connected while we try to reach out to our speakers. Please go ahead with your question and answer.

Operator:

The next question comes from the line of Jimmy Bhullar from JPMorgan. Please go ahead.

Frank Svoboda:

Yes. That’s correct. I mean, we still expect some excess mortality in 2024, and that’s all reflected in our assumptions that are included in guidance.

Matt Darden:

Yes. I would say one of the things you’d have to look at is we had significant increases in sales during the pandemic year, so in 2020 – last half of 2020 and 2021, and so part of the sales declines in the last year or so have been really getting back to pre-pandemic levels off of those unusual highs during the pandemic. So our sales are really anticipated to be relatively flat to where we were from a pre-pandemic perspective. And as I had mentioned in the prepared remarks, we’re reducing that marketing spend to make sure that it meets our profit targets and margin objectives on the new business that we’re selling. And we just as we’ve talked about on the prior calls, have that inflationary pressure, particularly related to postage and paper costs. We’ve had significant increases in postage. We had over 10% increase in postage costs during 2023. That was following 2022. In the summer, there was a 7% increase. And so just really trying to pare back to make sure that those sales are consistent with what our profit expectations are. And then as I mentioned, from a 2024 perspective, we’re anticipating essentially flat sales and focused on profit margins. So we anticipate that leveling out here over the next year or so.

Tom Kalmbach:

Jimmy, at DTC, I think we just feel like lapse rates for the quarter there are really just fluctuations. We do have some seasonality. There’s generally enough taking lapses in the third quarter. But at this point, nothing to indicate anything else. So really, we just believe it’s fluctuations at this point.

Tom Kalmbach:

I think the good thing about DTC renewal lapses is they’re very stable, right? And so we’re pleased to see that stability in those lapse rates.

Operator:

The next question comes from a line of Wilma Burdis from Raymond James. Please go ahead. Wilma Burdis from Raymond James, please go ahead with your question.

Matt Darden:

Sure. At American income year-to-date, our middle management count is up 20%. That’s accelerated here over the last half of the year. We anticipate ending around 10% to 15% in middle management count growth for the full year 2023. Liberty National also had strong middle management count growth. It’s up 9% on a year-to-date basis and anticipate ending the year around 9% or 10% as well. Family Heritage is about flat from a middle management count growth, but they had acceleration in that middle management growth in 2022 with 9% growth. We anticipate ending the year around a 2% to 4% middle management count growth. And we take those assumptions and really the trends that we’re seeing as a reminder, strong recruiting is that first level agent and then it takes a period of time to get into the middle management. So that’s in our assumptions for the sales guidance that we issued for 2024 of just looking at that agent count growth and how that translates into middle management count growth over a period of time.

Ryan Krueger:

Hey, thanks. Good morning. I had a couple of questions on the 2024 guidance. Just I think a couple items you kind of provided were admin expense expectations as well as the buyback expectation in your 2024 guidance.

Ryan Krueger:

Thanks. And then just how much is the $400 million of free cash flow, how much is that being depressed by things like credit losses and excess mortality that has occurred in 2024? Just trying to think about what that would be, I guess, when you roll forward a year to a more normalized level.

Ryan Krueger:

Okay. Great. Thanks. And then just if I could sneak in one last one, I just wanted to clarify on mortality. I guess am I reading this correctly that you’re still seeing some level of excess mortality, but it’s better than the excess mortality that you had assumed in your projections this year?

Ryan Krueger:

I was just saying that you have already assumed excess mortality in the near-term in your cash flow assumption. So you’re seeing excess mortality, but it’s not as bad as what you had already assumed. Is that right?

Ryan Krueger:

Thanks a lot.

Ryan Krueger:

Got it. That’s helpful. Thank you.

Maxwell Fritscher:

Hi, good morning. I’m calling in for Mark Hughes. A similar question was asked last quarter, but I just wanted to get your updated broad outlook on recruiting with agent count being up in all channels and the labor market still being tight.

Maxwell Fritscher:

Thank you. And sorry if I missed it, but did you guide to a full year 2024 agent count number?

Maxwell Fritscher:

Okay. That’s all I have. Thank you very much.

Tom Gallagher:

Good morning. I wanted to circle back on the experience gains in life insurance. I must be doing something wrong when I’m calculating this because at least the way I’m trying to understand this, it looks to me like your mortality experience is favorable, probably as good, if not better than pre-pandemic levels. But just so if you could help correct the math here or at least explain the proper way to think about it, if I followed the logic on the experience gains in mortality for the quarter, I would have gotten $3 million negative for the assumption review for life, which would mean the $11 million gains would have been $14 million of experience gains. Is that – am I thinking about that part of it correctly?

Tom Gallagher:

Okay. And then is the way – is the $13 million representative of around 30% of the experience and then 70% gets capitalized and amortized? Is that still a proper way to think about the smoothing aspect to this or no?

Tom Gallagher:

Okay. So I’m not misunderstanding that if I just isolated Q3 and I looked at the claims experience, this to me looks like the best quarter you’ve had, I don’t know, in three or four years. Is that fair?

Tom Gallagher:

Okay. And again, not to get too in the weeds on this, but am I thinking about it correctly? If I was to say, what was the actual experience? Would I – would it be around $45 million of favorability on the total claims, but the majority of that gets smoothed? Or like, is that the gross claim number that would be favorable that I should be thinking about here?

Tom Gallagher:

Okay. All right. Yes. So suffice to say though, if you had a repeat of this quarter for a while, then there would be probably some consideration giving to changing future assumptions.

Tom Gallagher:

Okay.

Tom Gallagher:

Okay. All right. Thanks for the help.

Wes Carmichael:

Hey, good morning. And sorry, I guess I got disconnected earlier, but I wanted to kind of still follow-up on the mortality trend question and I’m serious. And to Tom’s point to it was a good quarter favorable, but what do you – what are you thinking for 2024 in terms of assuming excess mortality? Is that just informed by the pandemic or are you expecting COVID deaths going forward or any other cause of death that you might be able to help us with in your expectation?

Wes Carmichael:

Got it.

Wes Carmichael:

Understood. And then a different question, but to the extent, and I know you don’t really expect this, but to the extent you see any additional credit losses or ratings drift, would you let the RBC ratio fall below your 300% low end, or would you expect to kind of temper the buyback program to kind of maintain the capital themselves?

Frank Svoboda:

Yes. I would say that, you think of it at that point in time, if we were – we would make the commitment to maintaining that minimum level of RBC, but then we would think of it as a financing transaction at that point in time. How do we finance that? What’s our best way of doing that? We would look to alternative sources, more cheaper sources, if you would rather than the buybacks. And those would be our first line sourcing. And only if we weren’t able to find alternative sources, we then do know that we have the buybacks available to us, so we’re not concerned on our ability to do so. But we would seek to use other sources of financing before using the buyback.

Tom Kalmbach:

Yes. I haven’t really solidified or around an amount, but again, would confirm we’d probably do at least $300 million to be index eligible. And we’ll just continue to look at market environments and when the best time to do that is.

Operator:

[Operator Instructions] The next question comes from a line of Suneet Kamath from Jefferies. Please go ahead.

Frank Svoboda:

So I would say, well, both of those, with respect to the stress testing, no real material change to our thoughts around that. We’ve – we have updated that. We always do kind of a bottom-up approach with respect to what we think potential downgrades would be. Overall, we feel really good about where the portfolio is. We’ve had seven straight quarters of net upgrades in the portfolio, and we’ve positioned it pretty well to where, of course, we have potentials for downgrades and would expect if in fact, there’s some economic downturns, some downgrades and at least the potential for some defaults. But right now in our base case for 2024, we don’t anticipate any defaults with respect to that. Now, if we have any anticipate that there could be some overall net downgrades, but those would be in our expectations around capital and capital requirements and feel comfortable with our ability to manage that. It doesn’t really have an impact, if you will on the earnings guidance for 2024.

Frank Svoboda:

Yes. For 2024, we basically take a look at the Bloomberg survey of economists and where they are projecting both bench and overall index rates for, we tend to look at that BBB, BBB+, kind of space, if you will, and around looking at 30-year figure that our overall maturities are probably in that 25 to 30-year range. We do see that. They generally are predicting it to decrease over the course of 2024. Most of that, in the second half of the year and on average, we are anticipating our expectation on average about 5.7% for the year.

Frank Svoboda:

Yes.

Matt Darden:

Yes. It’s a significant portion. It depends on there’s fluctuations in this, so you’re right. It’s kind of a rule of thumb, but it can generally be 30% or 40% or more of our new sales come from those agents that have been recruited in the first year. And if you remember, our business model is recruit agents, and then they start moving into those middle management ranks, and then their time is split between sales and recruiting, training, and onboarding new agents. And so that’s why a lot of our sales are driven from those first year agents because the middle management count or that middle management growth is driving more of activity around recruiting, training, and development of those new agents.

Operator:

There are no further questions. So I’ll hand you back to Stephen Mota to conclude today’s conference.

Operator:

Thank you for joining today’s call. You may now disconnect your lines. Hosts, please stay connected and await further instructions.

Operator:

Good day, and welcome to Globe Life Second Quarter 2023 Earnings Release Conference Call. Today's conference is being recorded. For the duration of the call, your lines will be in listen-only. [Operator Instructions]. I will now hand you over to Stephen Mota, Senior Director Investor Relations.

Frank Svoboda:

Thank you Stephen, and good morning everyone. In the second quarter, net income was $215 million, or $2.24 per share, compared to $224 million, or $2.26 per share a year ago. Net operating income for the quarter was $251 million, or $2.61 per share, an increase of 3% from a year ago. On a GAAP reported basis, return on equity was 22.4% and book value per share is $41.44. Excluding Accumulated Other Comprehensive Income, or AOCI return on equity was 14.6% and book value per share of $72.09, 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 $782 million. For the year, we expect life premium revenue to grow around 4%. Life underwriting margin was $296 million in the second quarter, down 1% from a year ago. At the midpoint of our guidance, we expect life underwriting margin for the full year to grow around 5%, and as a percent of premium to be in the range of 37% to 39%. In health insurance, premium grew 3% to $329 million, and health underwriting margin was up 1% to $92 million. For the year, we expect health premium revenue to grow around 3%. At the midpoint of our guidance, we expect health underwriting margin to be relatively flat and as a percent of premium to be in the range of 28% to 30%. Administrative expenses were $75 million for the quarter, up 2% from a year ago. As a percentage of premium, administrative expenses were 6.8% same as the year ago quarter. For the full year, we expect administrative expenses to be up approximately 3% and be around 6.9% of premium. Higher labor and IT costs are expected to be largely offset by a decline in pension-related employee benefit costs. I will now turn the call over to Matt for his comments on the second quarter marketing operations.

Frank Svoboda:

Thanks Matt. We will now turn to the investment operations. Excess investment income, which for 2023 we define as net investment income less only required interest on policy liabilities was $31 million, up $7 million from the year ago quarter. Net investment income was $261 million, up 7% or $16 million from the year ago quarter due to higher yield on fixed maturities and short-term investments. And an increase in floating interest rates on our commercial mortgage loans, including mortgage loans and limited partnerships. I would point out here that while we benefit from the higher floating rates on the commercial loans these investments do have rate floors that mitigate the impact of a decline in rates. Required interest as adjusted to reflect the impact from the adoption of LDTI is up 4% over the year ago quarter, in line with the increase in net policy liabilities. For the full year, we expect net investment income to grow approximately 6% as a result of the favorable rate environment and steady growth in our invested assets and expect excess investment income to grow in the range of $11 million to $12 million. Now regarding our investment yield. In the second quarter, we invested $359 million in investment-grade fixed maturities primarily in the municipal and industrial sectors. We invested at an average yield of 5.75% and an average rating of AA minus and an average life of 24 years taking advantage of opportunities in the municipal sector to obtain higher yield as well as higher quality. We also invested $39 million in commercial mortgage loans and limited partnerships that have debt-like characteristics. These investments are expected to produce additional yields and are in line with our conservative investment philosophy. For the entire fixed maturity portfolio the second quarter yield was 5.18% up two basis points from the second quarter of 2022 and flat from the first quarter. As of June 30 the portfolio yield was 5.21%. Now regarding the investment portfolio. Invested assets are $20.3 billion, including $18.6 billion of fixed maturities at amortized cost. Of the fixed maturities, $18.1 billion are investment grade with an average rating of B minus. Overall the total portfolio is rated A minus same as a year ago. As a reminder we have information on our website regarding our banking and commercial mortgage loan investments. As we mentioned previously during our first quarter earnings call, we took a $30 million after-tax provision for credit loss early in the second quarter as a result of the default of First Republic Bank. Our fixed maturity investment portfolio has a net unrealized loss position of approximately $1.6 billion due to current market rates being higher than the book yield on our holdings. As we have historically noted we are not concerned by the unrealized loss position as it is primarily interest rate driven. We have the intent and more importantly the ability to hold our investments to maturity. Bonds rated BBB are 49% of the fixed maturity portfolio compared to 53% from the year ago quarter. This is the lowest this ratio has been in over 10 years. While this ratio is in line with the overall bond market it is high relative to our peers. However, keep in mind, that we have little or no exposure to higher-risk assets such as derivatives, common equities , residential mortgages, CLOs and other asset-backed securities. Additionally unlike many other insurance companies we do not have any exposure to direct real estate equity investments or private equities. We believe that the BBB securities that we acquire 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. Below investment-grade bonds are $496 million compared to $585 million a year ago. The percentage of below investment-grade bonds to fixed maturities is 2.7%. This is as low as this ratio has been in more than 20 years. In addition below investment-grade bonds plus bonds rated BBB are 52% of fixed maturities the lowest ratio it has been in over 15 years. Overall, we believe we are well-positioned not only to withstand a market downturn, but also to be opportunistic and purchase higher-yielding securities in such a scenario. Because we primarily invest long a key criterion utilized in our investment process is that an issuer must have the ability to survive multiple cycles. We have performed stress tests under multiple scenarios on both our fixed maturity portfolio and our commercial mortgages held directly and through limited partnerships. Tom will address the potential capital implications of these stress tests in his comments. At the midpoint of our guidance for the full year we expect to invest approximately $1.1 billion in fixed maturities at an average yield of 5.7% and approximately $325 million in commercial mortgage loans and limited partnership investments with debt-like characteristics and an average yield of 7.5% to 8.5%. As we've said before, we are pleased to see higher interest rates as this has a positive impact on operating income by driving up net investment income with no impact to our future policy benefits since they are not intrasensitive. Now I will turn the call over to Tom for his comments on capital and liquidity.

Mike Majors:

$2.4 million.

Matt Darden:

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

Wes Carmichael:

Hey, good morning or good afternoon. I had a clarification question on your comments on the investment portfolio. In the fixed maturity portfolio, I think the allowance for credit losses went up about $40 million in the quarter. Is that related to the losses on First Republic? I just want to make sure that that's not being driven by something else?

Wesley Carmichael:

Got it. Thanks. And just a follow-up. Do you have any updated plans regarding issuing new long-term senior debt to pay off the term loan for April? I'm just wondering what you're thinking kind of in terms of size of new debt issuance.

Frank Svoboda:

Yeah. And I think Wesley we do take a look at that. Clearly, we have the term loan out there for the $170 million and we'll have to consider what the size of that might be and we will definitely consider whether that needs to be $300 million issue or something larger to just make it index eligible, but we'll see what kind of the needs are at that point in time.

Operator:

Next question comes from Jimmy Bhullar from JPMorgan.

Matt Darden:

Yeah. On the Direct to Consumer channel it is subject to inflationary pressures particularly on the marketing and distribution side. As we've noted in the past and we continue to note the reduction in our I'll call it traditional channels from mail and print media perspective we are continuing to reduce that circulation based upon the cost that we're incurring to market in that channel. And that is being offset by growth in our digital channel. As I noted in the comments our growth in the digital channel is up 4%. So we've got a couple of competing factors going on there. But that is really, we're focused on just making sure that we maintain our target margins in that distribution and to the extent that certain marketing campaigns, particularly on the print side don't meet those profit objectives than we are scaling back in that area. I would say just to add on to that related to just inflationary pressure from a consumer perspective the sales are actually up on a per policy basis. So the premium per policy is actually -- so we're really not seeing a deterioration from consumer demand perspective related to inflationary pressure it's really on the marketing side.

Matt Darden:

Yes. What's really driving that is just some things that we've put in place really focused on growing our middle management count, putting more tools in the hands of our agent, managers and agency owners to be able to get better line of sight into activity, and so there's just been a strong growth as we've grown that middle management count who are responsible in many ways for that new agent recruiting onboarding and training. So the growth is as you've noted we're very pleased with that in all three channels. and think that will continue. Don't really see headwinds at this point. It depends on which economists you believe but it looks like there's predictions for the labor market potentially cooling a little bit. If that's the case that's generally been an additional tailwind for us in the recruiting area. So we're very pleased with the things that we've put in place and believe the growth is driven more by our activity than the overall economic or market. And I think indicative of that is if you look at just some of the industry trends from an agent count growth that we believe we're outpacing that. So we're very pleased with the results that we're getting.

Matt Darden:

And one thing, I would add to that is, some of the feedback that we're hearing from the field is one of the dynamics that is going on out there, is the return to work from an office perspective. Our opportunity is a flexible opportunity. It's much more entrepreneurial in nature and we seem to be attracting, additional individuals that are looking for that ability to manage their own schedule, and have an opportunistic approach to grow their income in an entrepreneurial manner. So, I think that's a dynamic that's going on out there, that's more influential of our particular experience than really the labor market or that being tight.

Frank Svoboda:

Yes. It's a little early right now for us to give clear guidance on what we believe excess cash flow to be next year. But just as we think about it, we think it'd be kind of in a similar range of where excess cash flow was this year, just given some of those realized losses.

Operator:

The next question comes from John Barnidge from Piper Sandler. Please go ahead.

Matt Darden:

Well, I would say, that we're always looking for additional channels. There's a lot of opportunities on the electronic media side, different methods of distribution from an online perspective, as well as that's supported by our agent call center. So we're always looking at new and different platforms and there's a lot of testing that goes on in that area, as we test into it. So as you can see, as I mentioned 70% plus of our sales these days are from an electronic source. And you just go back very few years ago, it was about 50%. So, we're definitely growing that piece as we continue to scale back on the traditional print media side. But there -- to the extent that we are getting profitable sales in the print media side, we'll continue to do that. But obviously the growth engine is going to be more on the electronics side.

Matt Darden:

Sure. Really, what we look at is just kind of as you had mentioned the share of the wallet. Obviously, that from a macro perspective is, going to have potentially some impact to tightening of that. I don't see that impacting our particular demographic too much. What we're continuing to see is an increase in all of our distribution channels including our Direct to Consumer channel, which is generally a lower income demographic. Our sale -- a premium per sale is still going up. And as a reminder, we charge -- the policies have a low premium, per month perspective. So it's not a big share of the wallet that we're talking about. In our DTC channel, it may be $20 or $40 a month as an example. And so, really I don't think that's going to have too much of an impact on our particular segment of the market as we think about our future sales.

Operator:

The next question is from Erik Bass from Autonomous Research.

Frank Svoboda:

Yes. We did see United Healthcare reported that and they have a large block of Medicare Advantage coverage. I wouldn't necessarily expect those trends to carry over to our Medicare supplement business. We are seeing a little bit higher than anticipated health cost trends in our Medicare Supplement business that are impacting margins slightly. But the good thing is the seasonality that we saw in the first quarter has subsided a bit and also, where we have seen some increased utilization has really been isolated to our group retiree health business so more on the group side than on the individual side. If that does occurs continues to occur those higher cost trends, we take into account in setting our renewal rates for 2024. And so we then fully expect to be able to offset any of those in the future.

Frank Svoboda:

Yes. Medicare Advantage is covering kind of the full medical costs where Medicare supplements a different clientele but also, we're covering more of the deductibles and items above what Medicare would not cover.

Thomas Kalmbach:

No you're right. We did see mortality slightly favorable from our expectations in our assumptions. You can see that coming through the remeasurement gain on the Life business. What I'd say is we've seen improvement in excess deaths [ph] where we're still seeing some elevated excess deaths from what we did experience in 2019. So it is getting better but it still seems a little bit elevated for some particular causes. Particularly health and heart and circulatory causes in cancer are lower than 2021 and '22 which is a really good sign because those are some of the bigger causes of death. And then I want to say last quarter it's nice to see COVID deaths in the U.S. decline and we're probably seeing some benefit from those declines in COVID deaths as well.

Thomas Kalmbach:

Yes. We're definitely seeing some continued excess mortality. We probably expect that to continue for at least for the remainder of this year and probably into the next couple of years.

Thomas Kalmbach:

Exactly.

Operator:

Next question is from Maxwell Fritscher from Truist Securities.

James Darden:

It's primarily a function of agent growth. We've had significant double-digit agent growth. Our growth in the agent count for Liberty really started accelerating in 2022 in the latter half. And so as that's kind of a leading that agent count is a leading indicator those new agents come on board become more productive. So as those agents get onboarded and get more experience then it drives the sales. We have a little bit of agent productivity gains is just the amount of premium that we're selling on a per-agent basis but a vast majority of it is really just coming from that agent count increase.

Frank Svoboda:

Yes it's really predominantly the increase in the short-term rates, which are really hitting our -- the floating rates impacting our commercial mortgage loans as well as the commercial mortgage loan that are in our limited partnership investments. About two-thirds of our limited partnerships are in commercial mortgage loans as well. So we're seeing increases in those rates as well as a little bit on the short-term investments that we have which is not as significant. But overall, so we just saw a very good growth in our net investment income and the income grew at a faster pace than the invested assets. And then also, when you think of the excess investment income, it's -- you take required interest into account. So, you had investment at the net investment incomes growing at a faster rate than our net investment income. So we ended up with a good increase in the excess investment income.

Operator:

Next question is from Tom Gallagher from Evercore.

Tom Kalmbach:

Yes. There's definitely an element of smoothing. So it's not as kind of easy as you had indicated. I think that, again the remeasuring gains are reflecting fluctuations from our underlying assumptions. So the life business is performing better than those assumptions. What I'd say about our excess mortality assumptions is, yes, they're consistent with kind of that overall excess mortality that we talked about the $45 million. But we also expect that to kind of wear off over time. And so that's kind of underlying those assumptions as well. So it's difficult to kind of pinpoint exactly how that will come through. But what I would say is when we see fluctuations. So if we had -- it's generally in the current year we see probably about a quarter of that come through into the current quarter results. And then the other thing to remember is we are going to look at updating our assumptions again coming up in this third quarter. We don't expect them to have a significant impact but we will kind of be revisiting our excess mortality assumption going forward as well.

Tom Gallagher:

That's really helpful. So, I'm sorry, just a follow-up. So the 2.4 -- just so I'm clear on this the $2.4 million remeasurement gain, if it was on the old GAAP, that would have been a bigger -- we'll call it favorable impact on the quarter by -- so that would have been larger by 3x or something like that?

Tom Gallagher:

Okay. All right. That’s helpful. That’s all I had. Thanks.

Suneet Kamath:

Hi. I don't know if you disclosed this or talked about it in your prepared remarks, but do you have the year-to-date statutory operating income and statutory net income?

Suneet Kamath:

Okay. And then the comment about the capital under your stress test, I think you had said $25 million to $50 million, is that comparable to the $30 million to $55 million that you guys talked about last quarter, or was that a different calculation?

Suneet Kamath:

So it actually got better sequentially?

Suneet Kamath:

Got it. Okay. And then the only other one I had is again, I don't know if this is going to affect you but obviously over the past couple of weeks we've learned about the FDA approving some of these new Alzheimer's drug and whether or not Medicare is going to cover that. I think it's still an open issue. Is that something that ultimately could affect you guys, or is it not that material for you?

Matt Darden:

And I think I was going to add to that. I think part of it too is just understanding what utilization may look like in the future. There's a lot of risks that are currently disclosed related to those drugs as well. But as Tom said, we can price for that based upon what ultimate utilization may look like. And what we -- as we thought about our '23 rates that are in effect right now we've actually like I said compensated some of that and we think those costs are pretty much in line with what we would expect.

Operator:

As there are no further questions, I will hand the call back over to your hosts for any closing remarks.

Operator:

Thank you. That will conclude today's conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.

Operator:

Hello and welcome to Globe Life's First [ph] Quarter 2022 Earnings Call. My name is Melissa and I will be your coordinator for today's event. Please note this conference is being recorded. And for the duration of the call your lines will be listen-only. [Operator Instructions] I will now hand the call over to your host Stephen Mota, Senior Director of Customer Relations to begin today's conference. Thank you. Stephen you may begin.

Frank Svoboda:

Thank you, Stephen and good morning everyone. I would note here that our reported results for the first quarter of 2023 and 2022 reflects the adoption on January 1st, 2023 of the new LDTI accounting guidance. First, I want to thank the many members of our accounting, actuarial, investment, and technology teams for getting us ready to adopt this new accounting guidance this quarter. It was a substantial project and they did a fantastic job. Tom will discuss the new guidance in more detail in his comments. In the first quarter, net income was $224 million or $2.28 per share compared to $237 million or $2.37 per share a year ago. Net operating income for the quarter was $248 million or $2.53 per share, an increase of 4% from a year ago. On a GAAP reported basis, return on equity was 22.9% and book value per share is $39.74, excluding accumulated other comprehensive income or AOCI, return on equity was 14.6% and book value per share is $70.34, up 10% from a year ago. In Life Insurance Operations, premium revenue for the first quarter increased 3% from the year ago quarter to $773 million. For the year, we expect life premium revenue to grow around 4%. Life underwriting margin was $291 million, up 1% from a year ago. At the midpoint of our guidance, we expect life underwriting margin as a percent of premium to be in the range of 37% to 39%. As we've discussed on prior calls, underwriting margin is different under the new LDTI accounting rules. In Health Insurance, premium grew 2% to $322 million and health underwriting margin was up 4% to $91 million. For the year, we expect health premium revenue to grow around 3% at the midpoint of our guidance, we expect health underwriting margin as a percent of premium to be in the range of 28% to 30%. Administrative expenses were $74 million for the quarter, up 2% from a year ago. As a percentage of premium, administrative expenses were 6.7% compared to 6.8% a year ago. For the full year, we expect administrative expenses to be up between 2% and 3% and be around 6.9% of premium, due primarily to higher IT and information security costs. Higher labor and other costs are expected to be offset by a decline in pension related employee benefit costs. I will now turn the call over to Matt for his comments on the first quarter marketing operations.

Frank Svoboda:

Thanks, Matt. We'll now turn to the investment operations. Excess investment income which for 2023 we define as net investment income less only required interest was $29 million up 13% from the year ago quarter. On a per share basis, reflecting the impact of our share repurchase program, excess investment income was up 15%. Net investment income was $257 million, up 5% from the year ago quarter. Acquired interest as adjusted to reflect the impact from the adoption of LDTI is up 4% over the year ago quarter in line with the increase in net policy liabilities. For the full year, we expect net investment income to grow approximately 5% as a result of the favorable rate environment and steady growth in our invested assets. And excess investment income to grow between 10% and 12%. Now, regarding our investment yield. In the first quarter, we invested $311 million in investment-grade fixed maturities, primarily in the municipal, industrial and financial sectors. We invested at an average yield of 5.84% and an average rating of A and an average life of 25 years. We also invested $45 million in commercial mortgage loans and limited partnerships that have debt-like characteristics. These investments are expected to produce additional yield and are in line with our conservative investment philosophy. I will further discuss our commercial mortgage loans momentarily. For the entire fixed maturity portfolio the first quarter yield was 5.18% up three basis points from the first quarter of 2022 and flat versus the fourth quarter. As of March 31 the portfolio yield was 5.20%. Now regarding the investment portfolio. Invested assets of $20.2 billion including $18.5 billion of $6 million -- of fixed maturities at amortized cost. Of the fixed maturities, $17.9 billion are investment grade with an average rating of A minus. Overall, the total portfolio is rated A- same as a year ago. I would like to make a few comments regarding our banking and commercial mortgage loan investments. Total bank investments are 7% of our fixed maturity portfolio. We realized an after-tax loss of roughly $21 million during the first quarter on Signature Bank bonds. We also hold $39 million of First Republic bank bonds, which have been impaired in the second quarter due to recent developments. We did not have any exposure to the Silicon Valley Bank or the Credit Suisse AT1 bonds that defaulted. Regarding our commercial mortgage loans. We have $204 million net book value of CMLs directly held on our balance sheet, which is 1% of our total investment portfolio. We also have $454 million of limited partnership funds or 2.4% of the total investment portfolio that invest in CMLs. These limited partnerships are carried at fair value, which is updated quarterly and managed by PIMCO and MetLife. The CMLs we hold directly and most of our limited partnership CML investments are transitional or bridge loans that generally have a floating rate three-year maturities and two optional one-year extensions, if certain criteria are met. We prefer the risk return profile of these types of loans over traditional commercial mortgage loans and believe they provide good diversification away from corporate securities. Transitional or bridge loans are typically used to renovate or otherwise improve a particular property. For loans that are on our balance sheet, oftentimes the appraised value is reflected in our regulatory filings reflect the original as-is appraisal at the time the transitional mode was initiated, which does not take into account any increases in value after the renovations are completed. The loan-to-value method we consider in evaluating the property, what we call stabilized appraised value is the basis we use in the supplemental information we provided on our website and reflects appraisals that take into consideration, the effect such renovations are expected to have on the property's value, using market comps and other standard appraisal techniques at the time the loan – of loan origination. Thus the stabilized appraised values are typically higher than the original appraised values reflected in the regulatory filings. With respect to the CML tell directly on our balance sheet $115 million of gross book value were originated prior to 2022. We have $59 million of loans with maturities in 2023, of which $22 million have optional extensions subject to satisfaction of certain criteria. Of the loans with maturities in 2023, only $8 million are related to office properties plus $2 million related to the pro rata office portion of mixed-use properties. The average loan-to-value ratio of the 2023 maturities is 64% with none greater than 90%. Our expected lifetime losses for our CML portfolio, which is equivalent to our CML CECL allowance is $3.1 million or 1.5% of book value. Based on both the underlying structure of our direct and indirect CML investments and the specific properties involved, we believe that the incremental risk inherent in these investments is more than offset by the additional yield they generate. As mentioned in our earnings release, we have provided additional information regarding our banking and CML investments on our Investor Relations website under Financial Reports and other financial information. These investments have been included in our portfolio stress testing that Tom will discuss in his comments. Our fixed maturity investment portfolio has a net unrealized loss position of approximately $1.3 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 is mostly interest rate-driven. We have the intent and more importantly the ability to hold our investments to maturity. Bonds rated BBB are 51% of the fixed maturity portfolio compared to 55% from the year ago quarter. While this ratio is in line with the overall bond market, it is high relative to our peers. However, keep in mind that we have little or no exposure to higher-risk assets, such as derivatives, common equities, residential mortgages, CLOs and other asset-backed securities. Additionally, unlike many other insurance companies, we do not have any exposure to direct real estate equity investments or private equities. We believe that the BBB securities that we acquire provide the best risk-adjusted capital-adjusted returns due in large part to our ability to hold securities to maturity, regardless of fluctuations in interest rates or equity markets. Below investment-grade bonds are $596 million compared to $583 million a year ago. The percentage of below investment-grade bonds to fixed maturities is 3.2%, still near historical lows. In addition, below investment-grade bonds plus bonds rated BBB are 54% of fixed maturities, the lowest ratio it has been in over eight years. Finally, the amount of our fixed maturity portfolio subject to either negative outlook or negative watch by the rating agencies is at the lowest level since 2010. Overall, we believe we are well positioned not only to a standard market downturn, but also to be opportunistic and purchase higher-yielding securities in such a scenario. Because we primarily invest long, a key criterion utilized in our investment process is that an issuer must have the ability to survive multiple cycles. We have performed stress tests under multiple scenarios on both our fixed and maturity portfolio and our commercial mortgages held directly and through limited partnerships. As previously noted, Tom will address the potential capital implications of these stress tests in his comments. At the midpoint of our guidance for the full year, we expect to invest approximately $1 billion in fixed maturities at an average yield of approximately 5.6% and approximately $250 million in commercial mortgage loans and limited partnership investments with debt-like characteristics at an average yield of 7% to 8%. As we've said before, we are pleased to see higher interest rates as this has a positive impact on operating income by driving up net investment income with no impact to our future policy benefits since days are not interest sensitive. Now, I'll turn the call over to Tom for his comments on capital liquidity and LDTI.

Matt Darden:

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

Operator:

[Operator Instructions] I think we do have a few questions in the queue. And our first question will come from Jimmy Bhullar. Jimmy, you may please go ahead.

Frank Svoboda:

Yeah, Jimmy. We would expect statutory earnings to be lower from our subsidiaries in 2023 which would impact the dividends that the Parent receives in 2024, as a result of those losses.

Frank Svoboda:

It's too early to really tell what the impact on our buybacks plans are for 2024.

Frank Svoboda:

Yeah. Go ahead.

Frank Svoboda:

No. That is right. So as you think about the total realized losses that we had in the first quarter there was the one bank. We did have a smaller small bond related to a University of Georgia property that was included in the net $24 million in there as well. But that as long as Republic, would go through the statutory income in 2023, on an after-tax basis.

Frank Svoboda:

And then, Jimmy, I was just going to note that…

Frank Svoboda:

And then, Jimmy, I was just going to note that there's other -- as we think about the changes in our loss claims, so we still have a certain amount of expectations with respect to the payments of -- we've talked in the past on excess obligations whether it be from COVID or COVID-related and obviously as those kind of subsides. So it's a little bit early to see. I think the initial anticipation was that those would be lower in 2023 than what they were in 2022. So we typically have some growth in our statutory earnings as well over time. We'll see how that plays out over the course of the year.

Matt Darden:

Yeah. Jimmy, it does. You're correct. Those two are offsetting each other. Our -- as we've mentioned in the past, we are reducing some of our circulation in mail. And we'll continue to most likely do that through the remainder of 2023, in because of those costs associated with the higher production cost of that channel. But we're trying to offset that of course with increase in Internet sales. And so that's why we've guided to essentially flat maybe a slight decline from a sales perspective for 2023.

Matt Darden:

Yeah. As we've talked about in the past, we've been able to successfully recruit in a variety of different economic environments. And as we think about, it we really look at what are the things that we are doing, because we always have good sources of recruits. And so we really focus on how effectively can we onboard new agents. And as we've mentioned, that growth in the middle management count who's doing a lot of the recruiting of new agents, training them and getting them onboarded that's a key aspect that we're focused on growing to be able to grow that agent count. So we're really not seeing an impact from a macroeconomic environment from an employment perspective. And if you reflect back on, we had strong agent count growth in Family Heritage and Liberty in Q3 and Q4 of last year. That momentum is continuing on. And then, as we talked about on the last call AIL, some of the things that we've put in place right at the end of the year are showing some fruits here in the first quarter. And so we've upped our projections for the agent count growth at AIL and in fact across all three of the agencies, just based on the individual things that we're putting in place in each of those divisions.

Operator:

Thank you. And our next question comes from Wes Carmichael of Wells Fargo. Sir, please go ahead.

Frank Svoboda:

Yeah. We generally have commercial paper out there, maturing and then issuing again. So we would expect to just reissue that commercial paper as well. And we generally will maintain that $285 million to $300 million of commercial paper out there.

Frank Svoboda :

Yes. So when we did look at the stress test on those, we did take into consideration both the potential drift in the downgrades along with any downgrades, we would have within the fixed maturity portfolio. We looked at that the same way if we did have some drift in those as well. But then we took a look at the loss rates on those that actually assumed in kind of our -- the high-end severe stress about a 15% loss rate, which is about two times the Fed's severely adverse scenario. I think there is around 6.8% or so. And so we doubled that with respect to what we included in our stress test.

Frank Svoboda :

Yes. Good question. So we still think COVID deaths for the year will be around in the U.S. around 105,000. We haven't changed from that estimate. While we updated our assumptions last year, we reflected what we thought from an excess deaths perspective from the pandemic both from COVID and non-COVID causes. So that's embedded in our the midpoint of our guidance.

Operator:

Thank you. And our next question comes from John Barnidge of Piper Sandler. Sir, please go ahead.

Frank Svoboda :

Just in general on the broad 200…

Frank Svoboda :

Yes. So on the ones that are maturing here in 2023, so we've got about $8 million of -- that are 100% office. One of those was located in Washington, D.C. one of those in New York City. And then on the mixed use there's about a $2 million allocation to office use of that particular property. So there's only three properties that make up that entire amount that's due here in 2020, or it's maturing in 2023. One of those is in the process doing renovations, they're in the process of actually extending that for another 24 months. So that will be extended into 2025. The other one that's a 100% office It's around -- it's a little bit different, because they're actually taking it and then selling it into condo style offices. They're in the process of selling that. And as they sell those offices it's -- they are repaying back down a portion of that goes to pay back on the loan. Given some of the current -- the sale bump from that particular property it kind of points to actually a loan-to-value ratio of around 42%. So something we're not very concerned there. And on the mixed-use they've actually got it's actually 100% leased and occupied at this point in time.

Frank Svoboda :

Yes. Just -- I mentioned that we had a small favorable fluctuation in mortality during the quarter. So we were pleased with kind of the overall mortality results really very consistent with our expectations slightly positive.

Operator:

Thank you. And our next question comes from Erik Bass of Autonomous Research. Please go ahead.

Matt Darden :

It's really the latter, right? We don't reflect any access losses. And we do anticipate losses in general during the course of the year, we'll have some realized gains and losses. But -- so our base case does assume some, but not a significant portion. So in general, I'd say any subsequent losses would be borne by our other liquidity resources and the surplus that we have in our -- the excess in our RBC ratio that we currently have.

Matt Darden:

Exactly. And in addition, we -- just our liquidity resources that we have available to us, if those losses did occur we have resources available.

Erik Bass:

Got it. Thank you. And then can you talk about the decision to use the term loan to pay off the debt maturity as opposed to issuing senior debt now? And I guess as you think of liquidity management, you'll now have the term loan maturity next year to deal with. Does that change at all how you think about kind of how much liquidity you want to hold or need to hold?

Erik Bass:

Got it. Thank you.

Ryan Krueger:

Hi, good morning. I just wanted to understand the under LDTI given that you already made an assumption for some level of continued excess mortality, is that -- is the 37% to 39% underwriting margin guidance does that actually -- is that being negatively impacted at all by the excess mortality, or did the assumption change that you made last year basically reflect that upfront already?

Ryan Krueger:

Got it. I guess maybe the question maybe to ask another way is, if -- how much upside would there be to that margin if the excess mortality kind of fully subsided?

Ryan Krueger:

Got it. And then just one more. How are you thinking about your leverage capacity if we did end up in an environment where you had more credit losses, do you think you could end up just issuing additional debt and maintain the buyback at a consistent level?

Ryan Krueger:

Thank you.

Andrew Kligerman:

Good morning. Interesting American Income agent count up 6%. Their average producing agent, I think was up 4%. And the guidance this year for sales and life is low-single-digit. I'm kind of curious about you're recruiting how that's coming along, and just kind of the seasoning of these new recruits, and could we expect a really nice number next year as a result?

Andrew Kligerman:

Very helpful. And then just staying on that topic you mentioned -- and I didn't get the exact numbers increasing the branch managers. And maybe you could talk a little bit about those initiatives within American Income. What's the delta there? And how impactful?

Andrew Kligerman:

Excellent. Thanks a lot.

Wilma Burdis:

Good morning. Just a question on the health margin that increased a little bit. Could you talk just drilling a little bit more what happened there?

Wilma Jackson:

Great. And it seems like all of the recruiting and sales numbers came up a little bit which is great to see. But I guess my one quick question is, if there's any recessionary impacts that could kind of flow through on pressure sales a little bit this year?

Wilma Jackson:

Thank you.

Wes Carmichael:

Hey, thanks for taking my follow-up call. Actually, I had a technical one. As we're thinking about stress testing and I'm really thinking about the RBC framework but it does kind of give you credit through diversification benefit of the C risk. So I think you guys are a pretty C2 heavy company. I was just wondering if there's any way to think about a rule of thumb for the diversification benefit within C1, if you see any credit risk, if that makes sense.

Wes Carmichael:

Yes, I'm just thinking if that's really like -- sure. So like if you think about the gross C1 charges and then you could do that math to your 300% to 320% RBC target. But then when you actually put it into the RBC formula, the square root calculation gives you some offset against those growth factors. So I'm just thinking about -- is there a rule of thumb we can use, so we're not overestimating the credit drift impact to Globe for RBC.

Wes Carmichael:

Okay. And just last one on LDTI. It looked like there might have been a favorable impact on retained earnings and thus book value ex AOCI. Just wondering, is there a way to quantify that? My math was there's a few moving pieces, but I thought it was around $4.50 a share versus prior gas. Is that in the ballpark? Do you have that handy?

Wes Carmichael:

That's perfect. My math was 4.29%. So it sounds like we're in the same ballpark. But, I appreciate the follow-up.

Wes Carmichael:

Thank you.

Stephen Mota:

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

Operator:

Hello, and welcome to the Globe Life Fourth Quarter 2022 Earnings Call. My name is George. I'll be your coordinator for today's event. Please note, this conference is being recorded, and for duration of the call your lines will be in a listen-only mode. However, you will have the opportunity to ask questions at the end of the call. [Operator Instructions] I'd now like to hand the call over to your host today, Mr. Stephen Mota, Investor Relations Director. Please go ahead, sir.

A - Frank Svoboda:

Thank you, Stephen, and good morning, everyone. Before getting started, I want to let you know that due to the ice storms in the DFW area, we are doing this call from multiple locations. So, if there are any issues with connections, please bear with us. Then, Matt and I would like to quickly take this opportunity to thank Gary Coleman and Larry Hutchison once again and acknowledge their accomplishments as Globe Life's co-CEOs over the last 10 years, including 2022, another good year for Globe Life. Now to the results of the quarter. In the fourth quarter, net income was $212 million, or $2.14 per share compared to $178 million or $1.76 per share a year ago. Net operating income for the quarter was $221 million or $2.24 per share, an increase of 32% from a year ago. On a GAAP reported basis, return on equity was 12.3%, and book value per share was $49.65. Excluding unrealized losses on fixed maturities, return on equity for the full year was 13.4%, and book value per share as of December 31 was $64.01, up 9% from a year ago. It is encouraging that our return on equity, excluding unrealized gains and losses for the fourth quarter, was 14.3%, reflecting the lessening impact of excess life claims on our operations. In the life insurance operations, premium revenue for the fourth quarter increased 3% from the year ago quarter to $754 million. For the full year 2022, premium income grew 4%. Growth in premium income was challenged due to the lower sales growth we've seen this year, primarily in our direct-to-consumer channel in addition to the impact of foreign exchange rates on our Canadian premiums at American Income. In 2023, we expect life premium to grow around 4%. Life underwriting margin was $212 million, up 45% from a year ago. The increase in margin is due primarily to improved claim experience. With respect to anticipated underwriting income, as we've talked about on prior calls, underwriting margin will be calculated differently under the new LDTI accounting rules and is expected to be substantially higher due to the changes required by the new accounting standards. Tom will discuss the expected impact of LDTI in his comments. In health insurance, premium grew 4% to $324 million, and health underwriting margin was up 1% to $82 million. For the full year 2022, premium grew 6%. In 2023, we expect health premium revenue to grow around 3%, lower than 2022 due to lower premium growth in our United American and General Agency operations. Administrative expenses were $78 million for the quarter, up 12% from a year ago. As a percentage of premium, administrative expenses were 7.2% compared to 6.7% a year ago. For the year, administrative expenses were 7% of premium compared to 6.6% a year ago. In 2023, we expect administrative expenses to be up approximately 3%, and be around 6.9% of premium due primarily to higher IT and information security costs. Higher labor costs are expected to be offset by a decline in pension-related employee benefit costs. I will now turn the call over to Matt for his comments on the fourth quarter marketing operations.

A - Frank Svoboda:

Thanks, Matt. We'll now turn to the investment operations. Excess investment income, which for 2022, we defined as net investment income, less required interest on net policy liabilities and debt, was $63 million, up 7% from the year ago quarter. On a per share basis, reflecting the impact of our share repurchase program, excess investment income was up 10%. Net investment income was $254 million, up 6% from the year ago quarter. On a per share basis, net investment income was up [90%] (ph). With the adoption of LDTI in 2023, we will begin viewing excess investment income as net investment income less only required interest. For the full year 2023, we expect net investment income to grow approximately 5% as a result of the favorable rate environment. With respect to required interest, it will be substantially higher than reported in 2022 as a result of changes related to the adoption of LDTI. As mentioned previously, Tom will further discuss LDTI in his comments. Now regarding investment yield. In the fourth quarter, we invested $239 million in investment-grade fixed maturities, primarily in the financial, municipal and industrial sectors. We invested at an average yield of 6.10%, an average rating of A, and an average life of 21 years. We also invested $104 million in commercial mortgage loans and limited partnerships that have debt-like characteristics. These investments are expected to produce additional yield and are in line with our conservative investment philosophy. For the entire fixed maturity portfolio, the fourth quarter yield was 5.18%, up 1 basis point from the fourth quarter of 2021 and up 1 basis point from the third quarter. As of December 31, the portfolio yield was 5.19%. Now regarding the investment portfolio. Invested assets are $20 billion, including $18.3 billion of fixed maturities at amortized cost. Of the fixed maturities, $17.8 billion are investment grade with an average rating of A-minus. Overall, the total portfolio is rated A-minus, same as a year ago. Our investment portfolio has a net unrealized loss position of approximately $1.8 billion due to the high -- higher current market rates on our holdings than book yields. We are not concerned by the unrealized loss position and it is mostly interest rate driven. We have the intent and, more importantly, the ability to hold our investments to maturity. Bonds rated BBB are 51% of the fixed maturity portfolio, down from 54% from a year ago. While this ratio is in line with the overall bond market, it is relative -- high relative to our peers. However, we have little or no exposure to higher-risk assets such as derivatives, equities, residential mortgages, CLOs and other asset-backed securities. We believe that the BBB securities that we acquire provide the best risk-adjusted, capital-adjusted returns due in large part to our ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets. Low investment grade bonds are $542 million compared to $702 million a year ago. The percentage of below investment-grade bonds to fixed maturities is 3%. This is as low as this ratio had been for more than 20 years. In addition, below investment-grade bonds plus bond rated BBB are 54% of fixed maturities, the lowest ratio it has been in eight years. Overall, we are comfortable with the quality of our portfolio, because we primarily invest long. A key criterion utilized in our investment process is that an issuer must have the ability to survive multiple cycles. During 2022, we executed some repositioning of the fixed maturity portfolio to improve yield and quality. Over the course of last year, we sold approximately $359 million of fixed maturities with an average rating of BBB and reinvested the proceeds in higher-yielding securities with an average rating of A-plus. Overall, we believe we are well positioned not only to withstand a market downturn, but also to be opportunistic and purchase higher-yielding securities in such a scenario. I would also mention that we have no direct investments in Ukraine or Russia and do not expect any material impact to our investments in multinational companies that have exposure to these countries. At the midpoint of our guidance, for the full year 2023, we expect to invest approximately $940 million in fixed maturities at an average yield of 5.5% and approximately $310 million in commercial mortgage loans and limited partnership investments with debt-like characteristics at an average cash yield of 7% to 8%. As we've said before, we are pleased to see higher interest rates as this has a positive impact on operating income by driving up net investment income with no impact on our future policy benefits, since they are not interest sensitive. Now, I will turn the call over to Tom for his comments on capital, liquidity and LDTI. Tom?

A - Matt Darden:

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

Jimmy Bhullar:

Hey, good morning. So, I had a question first on direct response sales. They've been weak for the last several quarters. Wondering how much of it is a reduction in your part on mailings and circulations versus just weak consumer demand with higher inflation?

Jimmy Bhullar:

Okay. And then, maybe with the economy and inflation overall, there had been concerns about policy retention. And it seems like lapses are now close to historical levels, but do you expect that they'll go up above where they were pre pandemic?

Jimmy Bhullar:

Okay. Thanks. And if I could just ask one more on LDTI, obviously, it's affecting the timing of income, GAAP income, it doesn't really change the underlying economics. But do you -- and I'm assuming had you not been growing -- if you don't grow the business at some point in the next several years, it would actually have a negative impact on your results. But how do you think about with normal growth, could you reach a point where LDTI goes from being a tailwind to a drag on your results? Do you see that happening in the next like three, four, five years or so?

Jimmy Bhullar:

Yes, last quarter.

Jimmy Bhullar:

Okay. Thank you.

Erik Bass:

Hi, thank you. So, it looks like recruitings turned nicely at Liberty and Family Heritage, and you're starting to see the growth in the agent count there, but it hasn't come through American Income yet. And I realize the fourth quarter can have some noise with the holidays. I was hoping you just talk more about the trends you're seeing in both recruiting and retention and what steps you're taking to improve those at American Income in 2023.

Erik Bass:

Thank you. And then, I appreciate all of the color you gave on the LDTI impacts. Just a quick question. When do you expect to release an updated financial supplement with recast financials?

Erik Bass:

Got it. So, I guess we shouldn't expect that in advance, so we should kind of model based off of the numbers you walked through on the call?

Frank Svoboda:

One of the things, Erik, we have to be a little bit careful about is we can't be releasing some of the numbers on the restated '21 and '22 until it's actually get audited. So, we get into a little bit of a timing, especially around the first quarter. So, as Tom said, that -- we really tend to be able to provide more of the detail on that, as we said later on.

Operator:

Thank you very much, sir. We'll now move to Mr. Ryan Krueger calling from KBW. Please go ahead, sir.

Tom Kalmbach:

Hey, Ryan, it's Tom. I would say that the midpoint, more like $9.25, so it dropped by about $0.10. And really, the main drivers there are the lower premium growth that we had previously -- that we mentioned. And then, we are seeing a little bit higher lead costs and agency expenses impacted by inflation. As travel starts increasing and as meetings start increasing, and we have some additional training and recruiting costs that were incurred, we just had that pick up a bit. And then, as I mentioned also higher cost on debt given the higher cost for commercial paper, just the rates are a bit higher. And then, given the share repurchase program, just a slightly higher share count than what we had previously estimated in our prior guidance work.

Frank Svoboda:

I'll just say one thing I'd just add on that is with the higher share count, the -- wasn't from the amount that we were anticipating, but just a higher -- with the higher share price that we're at this current time versus where we were back at the time of the last call, obviously, we're just getting fewer shares purchased with the same amount of dollars.

Tom Kalmbach:

Yes. The way that we think about that is last year, we had combined -- in 2022, we had combined COVID non-COVID about $118 million. And in '23, we expect about $45 million. So, kind of the difference between those two should result in higher statutory earnings in 2023, which would, therefore, lead to higher dividends to the parent in 2024.

Tom Kalmbach:

Exactly, yes.

Operator:

Thank you very much, sir. We'll now move to John Barnidge calling from Piper Sandler. Please go ahead.

Matt Darden:

Yes. And as I'd mentioned, we're really focused on growing our Internet and electronic media inquiries in -- which results in additional applications and sales. And so that's been the offset is that, as I mentioned in my comments, continue to grow and is much more a significant part of the business than it was just even three or four years ago. So really, that's the offset as we've declined based on profitability in our models, the direct mail operation, we've offset that with an increase on the electronics side. So, overall, those dynamics are going on. But if inflation, depending on how that market dynamic plays out over the next several quarters, we will continue to adjust throughout the year based on the returns that we're seeing in the profitability. So, overall, we want to make sure that we're maintaining our profitability targets on each of these campaigns and we're flexible enough that we can adjust that throughout the year as market conditions warrant.

Tom Kalmbach:

For 2023, you mean?

Tom Kalmbach:

Yes. So, for 2023, for the -- we expect a little bit higher COVID deaths in the first quarter than we would for the third -- second, third and fourth quarter. So that's -- we do kind of think that will be front-loaded a little bit during the course of '23.

Operator:

Thank you very much, sir. Next question will come from Mr. Andrew Kligerman calling from Credit Suisse. Please go ahead, sir. Your line is open.

Matt Darden:

No, that's a great question as we do believe we can get back there. As a reminder, agent count and average agent count for the quarters is a leading indicator, and it takes time to get these new agents onboarded, trained and producing. And then, obviously, the longer they've been here, the more effective they are from a production perspective. And so, that's why you'll see in our guidance as we have growth projected on the agent count side, but the sales are lagging that a little bit and more toward flat. We do believe that we can get to middle management growth in 2023 that will drive that longer term growth in -- on the sales side in '24. We also anticipate opening three to five offices in American Income over this next year, and that too will set us up for good growth in 2024. And I also wanted to just clarify, when we talk about compensation adjustments, there's two primary components to the compensation for agents. One is just the base commission on sales. And then, we also have incentive-based compensation that's targeted at specific behavior. And we do that throughout our history. So, when we talk about changing the compensation we're really not changing the total amount of compensation that is in our overall pricing and profitability targets, but really, we're targeting two specific activities and behavior that we're trying to influence. So, I just wanted to clarify that overall, our compensation and acquisition costs are going to be consistent with what we've experienced in the past.

Matt Darden:

Yes. I'll say what we saw throughout 2022 was just more aggressive pricing by certain competitors. And we're focused on maintaining our profitability targets and underwriting margins in this area, and we're really not going to chase the sales, so to speak. But -- and we are also seeing and experiencing a movement toward Medicare Advantage plans as well. I'll say that we've been in this business since the program started, and we've seen these market dynamics happen over time. And so, we anticipate that some of that will abate as we move forward. But Mike, do you want to add anything to that? You've been running this area for quite some time.

Andrew Kligerman:

And just to kind of a little further clarification on this, so you're seeing the competition across agencies and online. And is there any interest [Technical Difficulty] in terms of kind of transitioning to more Medicare Advantage products as opposed MedSup?

Andrew Kligerman:

Absolutely. So, in terms of distribution competitors, is it pretty much across agency and online? And then, with that, is Globe likely to pivot more to Med Advantage as opposed to historically being in the MedSub area?

Matt Darden:

Sure.

Matt Darden:

Let me start. I'll say we don't have plans to pivot into the Medicare Advantage area. I think the competition is coming from all pass. We do have a little bit of our sales that are online as well. So, we do see the competition in the pricing, in the agency and online channels. A bulk of our sales are in the agency [Technical Difficulty] business. So, Mike, do you want to add to that?

Andrew Kligerman:

Seems like a thoughtful approach as usual.

Andrew Kligerman:

Absolutely. Thank you.

Mark Hughes:

Yes, thank you. Excuse me, good morning. I don't know if you touched on the [Technical Difficulty] Is there anything about the LDTI accounting standard that impacts your growth on a go-forward basis? You, obviously, got a nice EPS benefit this year. But just the timing and the emergence of profitability, is it changed over time so that there's a natural acceleration or deceleration perhaps as time goes by, that will impact your kind of trend line growth rate in future years?

Frank Svoboda:

And Mark, the one thing I would just add to that is, I think, really other than that, and other than assumption changes that might come through from time to time, I would expect once it kind of gets reset, then that the general level of growth rate should be somewhat similar.

Operator:

Thank you, Mr. Hughes. [Operator Instructions] We do not appear to have any further questions at this time, gentlemen. I'd like to turn the call back over to you, Mr. Mota, for any additional or closing remarks.

Operator:

Ladies and gentlemen, that will conclude this conference. Thank you very much for your participation. You may now disconnect. Have a good day, and goodbye.

Operator:

Hello and welcome to the Q3 2022 Globe Life Inc. Earnings Call. My name is Jess and I will be your coordinator for today’s event. [Operator Instructions] I will now hand over to your host, Mike Majors, to begin today’s call. Thank you.

Gary Coleman:

Thank you, Mike and good morning everyone. Before we get into the third quarter results, I want to note our separate announcement yesterday that Frank Svoboda and Matt Darden have been appointed as Co-CEOs effective January 1, 2023. Gary and I will continue to serve as Co-Chairman of the Board. We are very pleased to hand the rights over to Frank and Matt. You may recall that in April of this year, we appointed them to the newly created title of Senior Executive Vice President to reflect their significant contributions and leadership. As noted in the announcement, Frank and Matt bring a vast range of experience and skill sets to the company. Yesterday’s announcement is the conclusion of a long-planned succession strategy that is a result of a thoughtful and deliberate process undertaken by the board. We believe this outcome best positions Globe Life for the next chapter of growth and value creation, while ensuring that our executive leadership structure continues in a way that allows us to best serve all our stakeholders, including our employees, agents, policyholders, as well as our shareholders. Larry and I, along with the Board, look forward to this transition. And with that, I’d like to begin the discussion of the third quarter results. In the third quarter, net income was $187 million or $1.90 per share, compared to $189 million or $1.84 per share a year ago. Net operating income for the quarter was $211 million or $2.15 per share, an increase of 21% from a year ago. On a GAAP reported basis, return on equity was 11.2% and book value per share is $44.56. Excluding unrealized losses on fixed maturities, return on equity was 13.1%, and book value per share is $62.01, up 9% from a year ago. In the life insurance operations, premium revenue increased 4% from the year ago quarter to $755 million. Life underwriting margin was $208 million, up 28% from a year ago. The increase in margin is due to improved claims experience. For the year, we expect life premium revenue to grow around 4.5%. And at the midpoint of our guidance, we expect underwriting margin to be up around 23%, due primarily to a decline in COVID and excess mortality for the full year. In health insurance, premium revenue grew 7% to $319 million and health underwriting margin was up 4% to $80 million. For the year, we expect health premium to grow around 6%. And at the midpoint of our guidance, we expect underwriting margin to be up around 5%. Administrative expenses were $75 million for the quarter, up 10% from a year ago. As a percentage of premium, administrative expenses were 7% compared to 6.6% a year ago. For the full year, we expect administrative expenses to be up around 11% and be around 6.9% of premium, due primarily to higher IT and information security costs, employee costs and the addition of the Globe Life Benefits division. I will now turn the call over to Larry for his comments on the third quarter marketing operations.

Gary Coleman:

Thanks, Larry. We will now turn to the investment operations. Excess investment income, which we define as net investment income less required interest on net policy liabilities and debt, was $56 million, down 5% from the year ago quarter. On a per share base, reflecting the impact of our share repurchase program, excess investment income was down 2%. For the full year, we expect excess investment income to decline between 1% and 2%, but to be up around 3% on a per share basis. After 3 consecutive years of declining excess investment income, we expect to see growth in 2023 of 10% to 12%, due primarily to the impact of higher interest rates on the investment portfolio. Regarding investment yield, in the third quarter, we invested $431 million in investment-grade fixed maturities, primarily in the financial and municipal sectors. We invested at an average yield of 5.56%, an average rating of A and an average life of 18 years. We also invested $21 million in limited partnerships that have debt-like characteristics. These investments are expected to produce additional yield and are in line with our conservative investment philosophy. For the entire fixed maturity portfolio, the third quarter yield was 5.17%, down 4 basis points from a year ago, but up 1 basis point from the end of the second quarter. As of September 30, the portfolio yield was 5.18%. Invested assets were $19.8 billion, including $18.2 billion of fixed maturities at amortized cost. Of the fixed maturities, $17.6 billion are an investment grade with an average rating of A-. Overall, the total portfolio is rated A- same as a year ago. Our investment portfolio has a net unrealized loss position of approximately $2.2 billion due to the higher treasury rates and spreads. We are not concerned with the unrealized loss position as it is primarily interest rate driven. We have the intent and more importantly, the ability to hold our investments to maturity. Bonds rated BBB are 52% of the fixed maturity portfolio compared to 54% from the year-ago quarter. While this ratio is in line with the overall bond market, it is high relative to our peers. However, we have little or no exposure to higher-risk assets such as derivatives, equities, residential mortgages, CLOs, and other asset-backed securities. We believe that the BBB securities that we acquire provide the best risk-adjusted, capital-adjusted returns, due in large part to our ability to hold the securities to maturity regardless of fluctuations in interest rates or equity markets. Below investment grade bonds are $543 million compared to $782 million a year ago. The percentage of below investment grade bonds to fixed maturities is 3%. This is as long as this ratio has been for more than 20 years. Below investment grade bonds plus bonds rated BBB are 55% of fixed maturities, the lowest ratio it has been in 8 years. Overall, we are comfortable with the quality of our portfolio. During 2022, we have executed some minor repositioning of the fixed maturity portfolio to improve yield and quality. In the last two quarters, we sold approximately $324 million of fixed maturities with an average rating of BBB and reinvested the proceeds in higher-yielding securities with an average rating of A+. Because we primarily invest long, a key criterion utilized in our investment process is that an issuer must have the ability to survive multiple cycles. We believe we are well-positioned not only to withstand market downturn, but also to be opportunistic and purchase higher yielding securities in such a scenario. I would also mention that we have no direct investments in Ukraine or Russia and do not expect any material impact to our investments in multinational companies that have exposure to these countries. At the midpoint of our guidance, for the full year 2022, we expect to invest approximately $1.4 billion in fixed maturities at an average yield of 5.1% and approximately $200 million in limited partnership investments with debt-like characteristics at an average yield of 7.9%. Also at the midpoint of our guidance, we expect the yield on the fixed maturity portfolio to be around 5.16% for the full year in 2022 and 5.19% in 2023. While the expected increase is just 3 basis points, it is noteworthy and encouraging as this will be the first time we have seen the portfolio yield increase since 2008. As we have said before, we are pleased to see higher interest rates as this has a positive impact on operating income by driving up net investment income with no impact on our future policy benefits since they are not interest sensitive. Now before turning to Frank to review the financials, we want to invite Matt to say a few words.

Frank Svoboda:

Yes. Thanks, Matt. I am excited to work with Matt as we engage more deeply together in Globe Life’s strategies, both financial and operational, and to capitalize on the many opportunities we have for continued growth. I am confident that our collective knowledge of the business and its functions will help continue Globe Life’s success and history of shareholders’ value creation. I share Matt’s view on our business model. It has served the company very well over the years, and I firmly believe that it provides us the best opportunity to succeed in the future. I look forward to hitting the ground running as Co-CEO and getting even more involved in the business through the transition period and beyond. Now looking at the quarter, let me spend a few minutes discussing our share repurchase program, available liquidity and capital position. In the third quarter, the company repurchased 564,000 shares of Globe Life Inc. common stock at a total cost of $56 million at an average share price of $99.43. For the full year through September 30, we have utilized approximately $279 million of cash to purchase 2.8 million shares at an average price of $98.46. The parent ended the third quarter with liquid assets of approximately $141 million, down from $318 million in the prior quarter. The decrease is primarily due to the redemption in September of the $300 million outstanding principal amount of our 3.8% senior notes. In addition to these liquid assets, the parent company will generate additional excess cash flow during the remainder of 2022. The parent company’s excess cash flow, as we define it, results primarily from the dividends received by the parent from its subsidiaries less the interest paid on debt. We anticipate the parent company’s excess cash flow for the full year will be approximately $360 million, of which approximately $32 million will be generated in the fourth quarter of 2022. This amount of excess cash flows, which again, is before the payment of dividends to shareholders, is lower than the $450 million received in 2021, primarily due to higher COVID life losses in 2021, plus the nearly 15% growth in our exclusive agency sales, both of which resulted in lower statutory income in 2021, and thus lower cash flows to the parent in 2022. Taking into account the liquid assets of $141 million at the end of the third quarter, plus $32 million of excess cash flows expected to be generated in the fourth quarter, we will have approximately $173 million of assets available to the parent for the remainder of the year, out of which we anticipate distributing approximately $20 million to our shareholders in the form of dividend payments. The remaining amount is sufficient to support the targeted capital within our insurance operations and to maintain the share repurchase program for the remainder of the year. As noted on previous calls, we will use our cash as efficiently as possible. We still believe that share repurchases provide the best return or yield to our shareholders over other available alternatives. Thus, we anticipate share repurchases will continue to be a primary use of parent’s excess cash flows along with the payment of shareholder dividends. 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 fully fund new insurance policies, expansion and modernization of our information technology and other operational capabilities, and acquisition of new long-duration assets to fund their future cash needs. As discussed on prior calls, we have historically targeted $50 million to $60 million of liquid assets to be held as the parent. We will continue to evaluate potential capital needs, and should there be excess liquidity, we anticipate the company will return such excess to the shareholders. In our earnings guidance, we anticipate approximately $415 million will be returned to shareholders in 2022, including approximately $335 million through share repurchases. With regard to the capital levels at our insurance subsidiaries, our goal is to maintain our capital at levels necessary to support our current ratings. Globe Life targets a consolidated company action level RBC ratio in the range of 300% to 320%. For 2021, our consolidated RBC ratio was 315%, providing approximately $85 million of capital over the amount required at the low end of our consolidated RBC target of 300%. During 2022, the NAIC is adopting new RBC factors related to longevity and mortality risks, also known as C2 factors. While the longevity risk factors that primarily relate to life contingent annuities will have little impact on our subsidiaries, the higher mortality factors will apply to our products and will increase our company action level required capital by approximately $30 million or about 5% of our required capital. We believe the conservative statutory reserve levels held for our life insurance products already provide for very strong capital levels. Given the consistent generation of strong statutory gains from operations from our product portfolio, these new factors will simply result in even stronger capital adequacy at our target RBC ratios. At this time, while we do not anticipate that any additional capital will be required to maintain the low end of our targeted RBC ratio, the parent company does have sufficient liquid assets available should additional capital be required to maintain our targeted levels. Now I’d like to provide a few comments related to the impact of excess policy obligations on third quarter results. In the third quarter, the company incurred approximately $7.6 million of COVID life claims related to approximately 40,000 U.S. COVID deaths occurring in the quarter as reported by the CDC. However, these incurred claims were fully offset by favorable true-up of COVID life claims incurred in prior quarters. Based on the additional clients payment data we now have available, we estimate that our average cost per 10,000 U.S. deaths in the third quarter was approximately $1.9 million, down from the $2.8 million average cost previously estimated on our last call, consistent with the shift in COVID deaths toward older ages in recent quarters. Year-to-date through September 30, we have incurred approximately $44 million in COVID life claims on approximately 215,000 U.S. COVID deaths as reported by the CDC or an average of $2 million per 10,000 U.S. deaths. This average cost is similar to the average cost of our COVID life claims in 2020 and much lower than in 2021. As a result of downward revisions for prior quarters in both the number of U.S. deaths reported by the CDC and our average cost per 10,000 U.S. deaths, the net COVID life claims reported in the third quarter were not significant overall or at any of the individual distributions. As stated on prior calls, we also continue to incur excess deaths as compared to those expected based on pre-pandemic levels from non-COVID causes, including deaths due to lung disorders, heart and circulatory issues, and neurological disorders. We believe the higher level of mortality we have seen is due in large part to the pandemic. As the number of COVID deaths has moderated, so has the number of deaths from other causes. In the third quarter, we estimate that our excess non-COVID life policy obligations were approximately $15 million, down from $28 million in the second quarter. For the full year, we anticipate that our excess life policy obligations will be approximately $70 million or around 2% of our total life premium. Substantially, all of these higher obligations relate to the direct-to-consumer channel. With respect to our earnings guidance for 2022, we are projecting net operating income per share will be in the range of $8 to $8.20 for the year ended December 31, 2022. The $8.10 midpoint is consistent with the guidance provided last quarter. For the full year and at the midpoint of our guidance, we now estimate we will incur approximately $50 million of COVID life claims. This estimate assumes approximately 35,000 U.S. COVID deaths in the fourth quarter at an average cost per 10,000 deaths of approximately $1.9 million. While our estimated COVID losses are lower than we previously anticipated, our estimate of total excess clients from all causes of death has remained largely consistent with last quarter. For the year ending December 31, 2023, excluding the impact of the adoption of the new LDTI standard, we anticipate that our guidance that our excess mortality will be substantially reduced from 2022 levels. While still very early and levels of claims activity in the fourth quarter could influence our views, at the midpoint of our guidance, we estimate total excess obligations will be around 1.5% of life premium, down from approximately 4% expected in 2022. This includes an estimated $20 million relating to COVID, which we currently anticipate will exist in an endemic state through 2023. Due to the reduced impact of excess mortality in 2023, we anticipate our life underwriting margins, again, before any impact of the new LDTI accounting, to grow in the 13% to 17% range, and be approximately 27% to 29% of life premium. Driven by the anticipated growth in life underwriting margin and the favorable impact of higher interest rates on excess investment income noted by Gary, we estimate our 2023 net operating earnings will be in the range of $9 to $9.70 under current accounting guidance, representing 15% growth at the midpoint of the range. As noted on prior calls, we will adopt on January 1, 2023, the new LDTI accounting guidance relating to long-duration contracts. Under the new standard, we expect our GAAP earnings will be higher in 2023 than what would be reported under existing guidance. The largest driver of the increase is lower amortization of deferred acquisition costs, or DAC, than under current guidance due to changes in the treatment of renewal commissions, the treatment of interest on DAC balances, the updating of certain assumptions, and the methods of amortizing DAC. Due to the treatment of deferred renewal commissions in our captive agency channel, we do expect that acquisition costs as a percent of premium will increase slightly in the first few years after adoption. In addition to the changes affecting the amortization of DAC, the new guidance changes the manner in which policy obligations are determined. Under the new guidance, life policyholder benefits reported for 2021 and 2022 will be required to be restated to reflect the new guidance and are expected to be significantly lower in those years than under the current guidance due to the treatment of COVID life claims and other fluctuations in claims experience as well as changes in assumptions in those years. This is expected to result in slightly higher policy benefits as a percent of premium in 2023 than what would otherwise be expected under current guidance. Overall, we currently estimate that the changes required from the adoption of the new LDTI guidance will increase 2023 net operating income after tax in the range of $105 million to $130 million, almost all of which relates to the lower amount of DAC amortization. Of course, 2022 is not yet complete and actual sales, claims experience, and other events in the fourth quarter this year could impact our assumptions and projected impact of 2023 results. Going forward, fluctuations in experience and changes in assumptions will result in changes in both future policy obligations and amortization of DAC as a percent of premium. With respect to changes in the balance sheet and AOCI, we noted last quarter that the new guidance adopts the new requirement to remeasure the company’s future policy benefits each quarter, utilizing a discount rate that reflects upper medium grade, fixed income instrument yields with the effect of the change to be recognized in AOCI, a component of shareholders’ equity. The upper medium grade fixed income instrument yield generally consists of single A-rated fixed income instruments that are reflective of the currency and tenor of the insurance liability cash flows. The expected impact of the adoption of the new guidance with the transition date for January 1, 2023, will be an after-tax decrease in AOCI of $7.5 billion to $8.5 billion. Since that time, our weighted average discount rate has increased and we estimate that the after-tax impact on AOCI at September 30, 2022, all else being equal, but using current discount rates as of the end of the third quarter, would be only approximately $1 billion to $1.6 billion. While the GAAP accounting changes will be significant, it is very important to keep in mind that the changes impact the timing of when our future profits will be recognized and that none of the changes will impact our premium rates, the amount of premiums we collect, nor the amount of claims we ultimately pay. Furthermore, it has no impact on statutory earnings, the statutory capital we are required to maintain for regulatory purchases, or the parent’s excess cash flows. Nor will it cause us to make any changes in the products we offer. As such, the accounting change will in no way modify the way we think about or manage our business. Before I turn the call back to Larry, I want to once again thank Gary and Larry for their many years of service to Torchmark and Globe Life. While both of them have been part of these earnings calls for a number of years, I would be remiss if I didn’t point out that Gary has participated in every earnings call since February of 1995, a string of 112 straight quarters. Truly impressive. It has been a pleasure working with both of them, and I think they have done a remarkable job.

Operator:

[Operator Instructions] The first question comes from the line of Jimmy Bhullar from JPMorgan. Please go ahead.

Gary Coleman:

Jimmy, I don’t think it’s from the tight labor market. American Income actually had a strong recruiting quarter with 6% growth in recruits over the prior year, but we had higher terminations than expected. We addressed this with restructuring compensation and middle management bonuses to address agent retention. I think the other factor here is that if you look at the other two agencies, they have had growth in the agency this year. The other two agencies have had growth in the middle management. But for the year, middle management is projected at Family Heritage to increase by 5% to 8%; 3% to 6% in Liberty National, but middle management will be flat in American Income. It was really not economic conditions or the labor market that affects recruiting. It’s really the real drivers of recruiting, once a company develops middle management, we open new offices, we provide better technology and sales support for the field.

Gary Coleman:

I see the weakness there has really been inflation. As we’ve talked about in the past, the sales levels there are dependent on our circulation, our mailings and the Internet traffic. If you look for the year, our expectation is that insert media decreased 6% to 10%, insert circulation decreased about 9% to 10%, and inquiries are flat or up 3%, and mailing volumes are down 8% to 11% for 2022. This really is a result of inflation. We’ve had an increase in the cost of paper and increase in the cost of postage and those increases affect the above items I referred to, because you don’t have a return on investment for the lower producing segments of that business. And I think as this inflation lessens, hopefully, with recession, or higher interest rates, as we see the costs stabilize, I would expect that sales would also stabilize in 2023.

Frank Svoboda:

Yes, Jimmy, I’m not sure if at what point it actually becomes a strain, because as we start putting on new business and you start thinking about the treatment of renewal commissions, we know that it’s going to be probably an increase in the DAC amortization percent as a percentage of premium, somewhere maybe 0.5% a year for the first few years and some of that as we start having to capitalize the renewal commissions and getting that into the strain. But then as we start putting on new business and that has lower initial commissions that are getting capitalized, there will be a point that it will start to stabilize. I don’t have right now exactly when that will be or if we actually get to the point to where, if you will, worse than current guidance.

Frank Svoboda:

At some point, it seems logical, just not sure exactly if that’s in – at this point in time, we haven’t gotten quite far enough along to see where that really – if that will occur or if it even will occur, yes. If you look at that, we should be able to give some more guidance on that as we get a little bit further along on this and kind of really finalize our ‘22 and start to look a bit longer, we can take a look at that.

Operator:

Next question comes from the line of Wilma Burdis from Raymond James. Please go ahead.

Matt Darden:

Do you want to answer that?

Matt Darden:

Yes. Frank, I was going to say, it continues with the existing management structure that’s in place, minimal disruption to that, and we’re focused on continuing to execute our strategy in the best way we see fit, and this structure seems to support that.

Frank Svoboda:

Yes. We are anticipating right now at the midpoint of our guidance at $55 million, $56 million in that range. We will take a look at where – there are a few moving parts, the C2 charges being one of them. Also, we haven’t completed yet our third quarter statutory financial statements. So we will rely on those to kind of get a better sense of what our actual statutory income and capital will be at the end of the year. If it does turn out that we don’t need any additional amount of capital as of the end of the year, I would anticipate potential – some of that could come out before the end of the year, if not, we’d anticipated coming out in 2023.

Operator:

Next question comes from the line of John Barnidge from Piper Sandler. Please go ahead.

Gary Coleman:

Excuse me, what we’re saying is we’re seeing a slightly higher lapse rates when compared to the 2018, ‘19 period. They are quite a bit higher when you compare to ‘20 and ‘21. But those 2 years we had very, very favorable lapse rates, that was unusual. We think that – what we know is that the higher lapse rates are primarily in policy years 1 through 3. Once we get past that, the lapses are either at or near the historical levels. We think one reason for that is people that bought policies in 2020, ‘21, with COVID down less, they may think they don’t need the coverage. We think that’s certainly a factor. But also, we think that inflation is having some impact as well. But if we look back in the past history, if we look back into 2010, ‘11 period, when it was a down economy, we had a little bit of a spike in lapses there, but it didn’t last long. This spike isn’t as much as what we experienced back then, and we think too that at some point it will get back to what we call normal lapses. I will say at the midpoint of our guidance for 2023, we assume that over the course of the year that we will move back to what we would call historical levels of lapsation. We don’t know for sure. That’s our best guess at this point.

Frank Svoboda:

Yes. With respect to kind of the range, we did bring it in a little bit from where we were at this point in time last year. You feel there is a little bit better certainty around COVID and some of the impacts of COVID and feel more comfortable with it being in endemic state and what the impact of that really may mean. Still some fluctuation, we still left a little wider, if you will, than we’ve had in some years in the past, pre-COVID, again, kind of recognizing some of the uncertainty around new variants and such that potentially could pop up. With respect to the LDTI, the range kind of that $105 million to $130 million after tax, really more intended to be kind of our estimate at this point in time, more in the middle, if you will, of the range. There is still a lot of moving parts, but I wanted to get some sense to all on what we kind of see as being that net income impact for ‘23. We don’t really anticipate that broadening the range that we need to have. And so that variability, if you will, that I have from the impact of the LDTI, we think that really will be – will fit within that overall range that we provided under the old guidance.

Operator:

Next question comes from the line of Erik Bass from Autonomous Research. Please go ahead.

Frank Svoboda:

Yes. It’s still a little bit early with respect to coming up with our excess cash flows for next year. We do anticipate them being a little bit – or our share repurchases anyway at the midpoint of our guidance being a little bit higher than where we were this year. If you recall that, as I have noted earlier, we had about $360 million overall of excess cash flows before our shareholder dividends. We had around $80 million of shareholder dividends here in 2022. So, after that, it was like $280 million, that’s essentially available for buybacks in 2022. We do anticipate our statutory earnings in 2022 will be higher and at the end of the day, having share buyback is probably a little bit north of where we were this year.

Frank Svoboda:

Yes. I think that’s fair to say. We would anticipate, clearly, as it would appear, we have got one more year here of normalization, if you will, of the COVID claims, and we would expect next year to be lower than what we anticipated this year. So, I do anticipate that excess cash flow more normalizing at that point in time.

Gary Coleman:

Well, Erik, first of all, on the investment income side, we are thinking it will be up around 5% to 6%. And that is because of the higher yields on the fixed maturities, but also higher yields on the long-term investments that we have. And that’s a 5% increase, when in the past couple of years we have had about a 3% increase in investment income. So, that’s definitely a factor. But also on the required interest, this year, it will be between 4% and 5%. We are thinking next year that will be a little bit lower, as I say, the 4% range. And also on the interest expense, interest expense is higher this year because of the negative carry that we had. We will go back to a more normal increase in interest expense. So, the higher increase in investment income and the lower increases in required interest and interest on debt is what’s – when you add all that up, that’s where you come up to the 10% to 12% increase.