Globe Life Inc. (GL) CEO Gary Coleman on Q1 2022 Results - Earnings Call Transcript

Apr. 21, 2022 3:05 PM ETGlobe Life Inc. (GL), GL.PC
SA Transcripts profile picture
SA Transcripts

Globe Life Inc. (NYSE:GL) Q1 2022 Earnings Conference Call April 21, 2022 11:00 AM ET

Company Participants

Mike Majors - Executive Vice President, Administration and Investor Relations

Gary Coleman - Co-Chief Executive Officers

Larry Hutchison - Co-Chief Executive Officers

Frank Svoboda - Chief Financial Officer

Brian Mitchell - General Counsel

Conference Call Participants

Jimmy Bhullar - JPMorgan

Andrew Kligerman - Credit Suisse

Eric Bass - Autonomous Research

Ryan Krueger - KBW

John Barnidge - Piper Sandler


Good day, and welcome to the First Quarter 2022 Earnings Release Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Mike Majors, Executive Vice President, Administration and Investor Relations. Please go ahead, sir.

Mike Majors

Thank you. Good morning, everyone. Joining the call today are Gary Coleman and Larry Hutchison, our Co-Chief Executive Officers; Frank Svoboda, our Chief Financial Officer and Brian Mitchell, our General Counsel.

Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our earnings release, 2021 10-K in any subsequent Forms 10-Q on file with the SEC. Some of our comments may also contain non-GAAP measures. Please see our earnings release and website for discussion of these terms and reconciliations to GAAP measures.

I will now turn the call over to Gary Coleman.

Gary Coleman

Thank you, Mike, and good morning, everyone. In the first quarter, net income was $164 million or $1.64 per share compared to $179 million or $1.70 per share a year ago. Net operating income for the quarter was $170 million or $1.70 per share, an increase of 11% per share from a year ago.

On a GAAP reported basis, return on equity was 8.5%, and book value per share is $69.16, excluding unrealized gains and losses on fixed maturities, return on equity was 11.5% and book value per share is $59.65, up 10% from a year ago.

In our life insurance operations, premium revenue increased 7% from a year ago to $755 million. Life underwriting margin was $150 million, up 10% from a year ago. The increase in margin is due primarily to increased premium.

For the year, we expect life premium revenue to grow around 6% and at the midpoint of our guidance, we expect underwriting margin to grow around 23% due primarily to an expected decline in COVID life claims.

In health insurance, premium grew 8% to $317 million, and health underwriting margin grew 10% to $79 million. The increase in underwriting margin is due primarily to increased premium and improved claims experience. For the year, we expect health premium revenue to grow 6% to 7%, and at the midpoint of our guidance, we expect underwriting margin to grow around 5%.

Administrative expenses were $73 million for the quarter, up 10% from a year ago. As a percentage of premium, administrative expenses were 6.8% compared to 6.6% a year ago.

For the full year, we expect administrative expenses to grow 10% to 11% and be around 6.9% of premium, that’s due primarily to higher IT and information security costs, employee costs, a gradual increase in travel and facilities costs and the addition of Globe Life Benefits division.

I will now turn the call over to Larry for his comments on the first quarter marketing operations.

Larry Hutchison

Thank you, Gary. At American Income, life premiums were up 10% over the year ago quarter to $370 million, and life underwriting margin was up 13% to $111 million. The higher premium is primarily due to higher sales in recent quarters.

In the first quarter of 2022, net life sales were $85 million, up 23%. The increase in net life sales is due to increased productivity, plus a gradual improvement in issue rates, as some challenges in underwriting such staffing and speed [indiscernible] medical records and other information are resolving.

The average producing agent count for the first quarter was 9,385, down 5% from the year ago quarter and down 2% from the fourth quarter. The producing agent count at the end of the first quarter was 9,543. We are confident American Income will continue to grow.

The agent count was trending up the last several weeks of the quarter, we also have seen improvement in personal recruiting this gentlemen [ph] yields better candidates and better retention and other recruiting sources. In addition, we have made changes to the bonus structure designed to improve agency middle management growth.

At Liberty National, life premiums were up 7% over the year ago quarter to $81 million, and life underwriting margin was up 35% to $13 million [ph]. The increase in underwriting margin is primarily due to improved claims expense. Net life sales increased 7% to $17 million and net health sales were $6 million, up 6% from the year ago quarter due to increased agent productivity.

The average producing agent count for the first quarter was 2,656, down 3% from the year ago quarter and down 2% compared to the fourth quarter. The producing agent count at Liberty National ended the quarter at 2,687.

We've introduced new training systems to help improve agent retention and updated our sales presentations to help agent productivity. We are pleased with the continued growth of Liberty National.

At Family Heritage health premiums increased 7% over the year ago quarter to $90 million, and health underwriting margin increased 9% to $24 million. The increase in underwriting margin is due to increased premium and improved claims experience.

Net Health sales were up 19% to $90 million due to increased agent productivity. The average producing agent count for the first quarter was 1100, down 14% from the year ago quarter, and down 8% from the fourth quarter. The producing agent count at the end of the quarter was 1,130. We have modified our agency compensation structure and are increasing our focus on agency middle management development to drive recruiting growth going forward. We were pleased with the record level of productivity at Family Heritage.

In our direct-to-consumer division of Globe Life, life premiums were up 3% over the year ago quarter to $251 million. And life underwriting margin increased 3% to $9 million.

Net life sales were $34 million, down 15% from the year ago quarter. We expected this sales decline due to the 22% sales growth experienced in the first quarter of 2021. Although sales declined from the first quarter of 2021, we are still pleased with this quarter's sales results.

At United American General Agency, health premiums increased 13% over the year ago quarter to $133 million and health underwriting margin increased 6% to $20 million. Net health sales were $13 million flat compared to the year ago quarter.

Is difficult to predict sales activity in this uncertain environment. I will now provide projections based on trends we are seeing and knowledge of our business. We expect the producing agent count for each agency at the end of 2022 to be in the following ranges, American Income, a decrease of 2% to an increase of 3, Liberty National, flat to an increase of 14%, Family Heritage, an increase of 8% to 25%.

Net live sales for the full year 2022 are expected to be as follows, American Income, an increase of 9% to 17%, Liberty National, an increase of 4% to 12%, direct-to-consumer, a decrease of 13% to a decrease of 3%.

Net health sales for the full year 2022 are expected to be as follows, Liberty National, an increase of 3% to 11%, Family Heritage, an increase of 4% to 12%, United American individual Medicare supplement, a decrease of 5% to an increase of 3%.

I will now turn the call back to Gary.

Gary Coleman

Thanks, Larry. We will now turn to the investment operations. Excess investment income, which we defined as net investment income less required interest on net policy liabilities and debt was $61 million up 1% from a year ago.

On a per share basis, reflecting the impact of our share repurchase program, excess investment income was up 5%. For the full year, we expect excess investment income to decline between 1% and 2% but be up around 2% on a per share basis.

As to investment yield, in the first quarter we invested $351 million in investment grade fixed maturities, primarily in the municipal and financial sectors. We invested at an average yield of 3.97%, an average rating of A, and an average life of 27 years.

We also invested $118 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 first quarter yield was 5.15%, down 9 basis points from the first quarter of 2021. As of March 31, the portfolio yield was also 5.15%.

Regarding the investment portfolio, invested assets are $19.5 billion, including $18 billion of fixed maturities at amortized cost as a fixed maturities, $17.4 billion are investment grade with an average rating of A minus, and below investment grade bonds are $583 million, compared to $802 million a year ago.

The percentage of below investment grade bonds fixed maturities of 3.2%, and I would add that this is the lowest ratio and has been for more than 20 years. Excluding net unrealized gains in the fixed maturity portfolio, the low investment grade bonds as a percentage of equity are 10%. Overall, the total portfolio is rated A minus, same as a year ago.

Bonds rated BBB or 54% of the fixed maturity portfolio. 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.

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 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.

I would also mention that we have no direct exposure to investments in Ukraine or Russia. And we did not expect any material impact to our investments in multinational companies that have exposure to those countries.

For the full year, at the midpoint of our guidance, we expect to invest approximately $1.1 billion in fixed maturities at an average yield of around 4.3% and approximately $200 million in limited partnership investments with debt like characteristic at an average yield of around 7.7%.

We are encouraged by the recent increase in interest rates and the prospect of higher interest rates in the future. Our new money rates will have a positive impact on operating income by driving up net investment income. We're not concerned about potential unrealized losses that are interest rate driven, since we will not expect to realize them. We have the intent and, more importantly, the ability to hold our investments to maturity. In addition, our life products have fixed benefits that are not interesting.

Now, I will turn the call over to Frank for his comments on capital and liquidity.

Frank Svoboda

Thanks, Gary. First, I want to spend a few minutes discussing our share repurchase program, available liquidity and capital position.

The parent began the year with liquid assets of $119 million. In addition to these liquid assets, the parent company will generate excess cash flows in 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 the parent company debt.

During 2022, we anticipate the parent will generate $350 million to $370 million of excess cash flows. 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 and the nearly 15% growth in our exclusive agency sales in 2021, both of which results in lower statutory income in 2021, and thus lower cash flows to the parent in 2022 that we'll receive in 2021.

Obviously, while an increase in sales creates a drag to the parents cash flows in the short term, the higher sales will result in higher operating cash flows in the future. Including the excess cash flows and the $190 million of assets on hand at the beginning of the year, we currently expect to have around $470 million to $490 million of assets available to the parent during the year, out of which we anticipate distributing a little over $80 million to our shareholders in the form of dividend payments.

In the first quarter, the company repurchased 880,000 shares of Globe Life Inc. common stock at a total cost of $88.6 million and at an average share price of $100.70. Year-to-date, we have repurchased 1,097,000 shares for approximately $110 million at an average price of $100.76.

We also made a $10 million capital contribution to our insurance subsidiaries during the first quarter. After these payments, we anticipate the parent will have $270 million to $290 million of assets available 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 the parents 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 issue new insurance policies, expand and modernize our information technology and other operational capabilities and acquire new long duration assets to fund their future cash needs.

As discussed on prior calls, we have historically targeted $50 to $60 million of liquid assets to be held at the parent. We will continue to evaluate the potential impact of the pandemic on our capital needs, and should there be excess liquidity, we anticipate the company will return such excess to the shareholders in 2022.

In our earnings guidance, we anticipate between $400 and $410 million will be returned to shareholders in 2022, including approximately $320 to $330 million through share repurchases.

Now with regard to our capital levels at our insurance subsidiaries, our goal is to maintain our capital 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%. At this RBC ratio, our subsidiaries have approximately $85 million of capital over the amount required at the low end of our consolidated RBC targets of 300%.

At this time, I'd like to provide a few comments related to the impact of COVID-19 on first quarter results. In the first quarter, the company incurred approximately $46 million of COVID life claims equal to 6.1% of our life premium. The claims incurred in the quarter were approximately $17 million higher than anticipated, due to higher levels of COVID deaths than expected, partially offset by lower average cost per 10,000 US deaths.

The Center for Disease Control and Prevention, or CDC, reported that approximately 155,000 US deaths occurred due to COVID in the first quarter, the highest quarter of COVID deaths in the US since the first quarter of 2021. This was substantially higher than the 85,000 deaths we anticipated based on projections from the IHME.

At the time of our last call, we utilized IHME's projection of 65,000 first quarter US deaths and added a provision for higher deaths in January, as reported by the CDC, but that were not reflected in IHME projection. IHME projection anticipated a significant drop off in deaths starting in mid-February. Obviously, the decline in death did not occur as quickly as anticipated, especially during the latter half of the quarter.

With respect to our average cost per 10,000 US deaths based on data we currently have available, we estimate COVID losses on deaths in the first quarter were at the rate of $3 million per 10,000 US deaths, which is at the low end of the range previously provided. This reflects an increase in the average age of COVID deaths, and a decrease in the percentage of those deaths occurring in the south [ph]

The first quarter COVID life claims include approximately $25 million in claims incurred in our direct-to-consumer division, or 10% of its first quarter premium income, approximately $4 million at Liberty National, or 5.5% of its premium for the quarter, and approximately $15 million at American Income, or 4% of its first quarter premium.

We continue to experience relatively low levels of COVID claims on policy sold since the start of the pandemic. Approximately two thirds of COVID claim counts come from policies issued more than 10 years ago. For business issued since March of 2020, we paid 624 COVID life claims with a total amount paid of $9.3 million. The 624 policies with COVID claims comprise only 0.01% of the approximately 4 million policies issued by Globe Life during that time. These levels are not out of line with our expectations.

As noted on past calls, in addition to COVID losses, we continue to experience higher life policy obligations from lower policy lapses and non-COVID causes of death. The increase from non-COVID causes of death are primarily medical related, including deaths due to lung ailments, heart and circulatory issues, and neurological disorders.

The losses we are seeing continued to be elevated over 2019 levels, due at least in part we believe, to the pandemic and the existence of either delayed or unavailable health care, and potentially side effects of having contracted COVID previously.

In the first quarter, the life policy obligations related to the non-COVID causes of death and favorable lapses were approximately $7 million higher than expected, primarily due to higher non-COVID death in our direct-to-consumer division than we anticipated.

For the quarter, we incurred approximately $22 million in excess life policy obligations, of which approximately $15 million relates to non-COVID life claims. For the full year, we anticipate that our excess life policy obligations will now be approximately $64 million or 2.1% of our total life premium, two thirds of which are related to higher non-COVID causes of death. This amount of the price made a $11 million greater than we previously anticipated.

With respect to our earnings guidance for 2022, we are projecting net operating income per share will be in the range of $7.85 to $8.25 for the year ended December 31, 2022. The $8.05 [ph] midpoint is lower than the midpoint of our previous guidance of $8.25 primarily due to higher COVID life policy obligations related to higher expected us deaths during the year.

We continue to evaluate data available from multiple sources, including the IHME and CDC to estimate total US deaths due to COVID, and to estimate the impact of those deaths on our enforce book.

At the midpoint of our guidance, we estimate we will incur approximately $71 million of COVID life claims, assuming approximately 245,000 COVID deaths in the US. This is an increase of $21 million overall prior estimate. This estimate assumes daily deaths will diminish somewhat from recent levels, but remain in an endemic state throughout the year.

With respect to our cost per 10,000 deaths, we now estimate we will incur COVID life claims at the rate of $2.5 million to $3.5 million per 10,000 US COVID deaths for the full year or approximately $2.8 million per 10,000 US deaths over the final three quarters of the year.

Those are my comments. I will now turn the call back to Larry.

Larry Hutchison

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

Question-and-Answer Session


Thank you. [Operator Instructions] We'll take our first question from Jimmy Bhullar with JPMorgan.

Jimmy Bhullar

Hi, good morning. So I had a couple of questions. First, if you could talk about the decline in the agent count. And I guess it's multiple factors. But to what extent is a difficulty finding new agents in this labor market versus just the sort of departures of people that you've hired over the past couple of years for other jobs?

And then did lead [ph] how do you think this applies for sales? Do you think this is something that will pressure sales as you get into late this year and into next year?

Gary Coleman

Jimmy, I'll address the first question first, I'm not sure the second part is true that recruiting has been challenging because there's so many work opportunities. I'd also remind everyone that there's typically a decline in agent count sequentially from the fourth quarter to first quarter because of seasonality of holidays that affect American Income and Family Heritage.

We also have open enrollments at Liberty National [indiscernible] the holidays, people are focused on open enrollment during that period. I do believe continued agency growth because our agency is selling the underserved middle income market. Also there's absolutely no shortage of underemployed workers looking for a better opportunity.

You know, historically we've been able to grow the agencies regardless of economic conditions. For example, during the economic downturn and high unemployment of 2008 to 2010, American Income had high - have very strong agency growth in 2018 and 2019, and US experienced record low unemployment, American Income, Liberty National, Family Heritage had strong growth.

Our long term ability to grow the agencies Jimmy, really depends on growing middle management, expanding new office openings and providing additional sales tools for agents.

During 2022, we anticipate opening new offices, increasing the number of general managers in all three agencies. We're also providing additional sales technology to support our agents. Jimmy, could you repeat the sales question, I don't think I heard the sales question.

Jimmy Bhullar

It was - it was just that like, obviously, to the extent that you are losing people who were recently hired, then you don't lose a lot of production from them because they hadn't ramped up. But how do you think that like - does the decline in the agent count both people leaving or already agents and difficulty in hiring new agents, does that make you less optimistic about sales later this year and into next year?

Gary Coleman

What doesn't make it less optimistic, new agents was less productive than veteran [ph] agents. As you look across the three agents, the increases in sales are partially explained by the increase in productivity. As example, the largest clients of Family Heritage, we had a 16% increase in the percentage of agents submitting business, also have a 22% increase in the average premium written for agents. So that level of productivity that comes from the veteran agents, decision agents.

In American Income, in the first quarter we saw personal recruits increased about 15% versus the first quarter of 2021. That's important because personal recruits are - they stay twice as long or twice as productive as the recruits from other sources. So you'll have confidence even though the agent increase will be slower this year, we'll still have the sales within the range that gave during the script.

Jimmy Bhullar

Okay. And then any comments on what you're seeing in terms of non-COVID mortality? Because it seems like claims for a number of life companies have been elevated even beyond COVID because of other health issues or related issues related potentially the COVID but not direct COVID claims?

Gary Coleman

Yeah, Jimmy. I mean, that is really consistent with what we're seeing right now as well and that we are seeing, especially in the first quarter, we really did see you know, elevated level at especially in our direct-to-consumer, but you know far across the distributions, and really across all the, you know, several different causes of deaths and - but you know, primarily, as I mentioned, in the heart and circulatory, lung, you know, some of the neurological disorder type areas, you know, we really do attribute to the various side effects of COVID, and whether just the, you know, not had getting care when they needed it, you know, throughout 2021, or side effects of having habits and, you know, declined health for the survivors of COVID.

You know, as we're looking at, in 2022, you know, looking back, we thought some early trends back in December, that kind of led us to believe that we would start to see a, you know, a decrease in those claims in 2022. And so we had originally anticipated, those kinds of trending back to more normal levels over the course of the year.

In the first quarter really wasn't worse than what, you know, we've seen in the past, a little bit elevated, but not substantially, so. But it was just, you know, greater than what we had anticipated. We do think over time, that these, again, you kind of revert back to normal levels, but probably a little bit more slowly, you know, that will be originally anticipated.

Jimmy Bhullar

And then, just lastly, on the accounting changes, do you have any sort of initial commentary on what you expect the impact to be, both in terms of the balance sheet, and on the income statement?

Gary Coleman

Yeah, no, no updates from what we had talked about on the last quarter, we do anticipate giving some more quantitative disclosure, here after the end of the second quarter. We're still in the process of finalizing, if you will, our model is doing the testing, making sure our controls are in place, looking at you know, the various aspects of validating our numbers, if you will.

So, as I said, on the last call, we do anticipate a favorable impact on operating earnings perspective primarily through, you know, reduced the changes being made on the amortization side of the balance sheet or the income statement. And then with respect to the equity on the AOCI, there will be some decrease there clearly from just the changes in the interest rate.

Jimmy Bhullar

Thank you.


Moving on, we'll go to Andrew Kligerman with Credit Suisse.

Andrew Kligerman

Hi, good morning. I thought I'd go back to the producing agent count numbers. So the new targets for American Income are negative 2 to positive 3, that's versus 3 to 8 at your last quarterly guidance. Liberty National zero to 14 is versus 3 to 18 last time, and then Family Heritage, 8 to 25 versus 12 to 30 last time.

So I guess the question is, was it - was it the tight labor market that's primarily driving this change in guidance? Is there something else? You know, what are some of the key drivers of this new guidance?

Gary Coleman

Like for American Income, one of the key drivers is just the amount of agency [ph] growth we had in 2020 and 2021. As you recall, we had greater than 20% agency growth, agency growth is always a stair step process. So I wouldn't expect the same level of agency growth in 2022 that we had in 2020 through 2021.

I think the uncertainty really is around the other two agencies has to do with COVID. Now if you recall, Liberty National really sells a majority of the sales worksite presentations and those take place at the place of business. And those appointments are made more difficult to set during the pandemic. The COVID continues to decline. And the agency count growth of Liberty National would be the upper end of the range. Because you're able to recruit to an end business sale, the COVID doesn't decline. I'd expect our guidance to be at the low end of the range.

Likewise, the Family Heritage, they don't sell life insurance with weeds [ph] they sell in the home, physically in the home or at the business. And those appointments were very difficult to set during the pandemic. Again COVID continues to decline. The agent count growth with Family Heritage with the upper end of the range, because you're better able to recruit to an at home or you're at business sales to a [indiscernible] expect Family Heritage

What was encouraged and I think, is the sales levels we had in the first quarter with a 90% sales growth at Family Heritage, that's really easy to recruit to because the agents are having such success. Likewise, we saw worksite sales increase 10% for the quarter, first quarter of '22 versus '21. So that's easy to recruit to win or more prospects in the worksite market.

Andrew Kligerman

That makes a lot of sense, particularly Liberty and Family Heritage. But I guess, again, on American Income, you know, you knew about the agency growth that was so strong in '20 and '21. And yet, you gave the guidance of 3% to 8%. Now, it's just it's off a bit sharply. Anything else, Larry, that might, you know, they've changed your thinking in the course of two or three months.

Larry Hutchison

Not two or three months. So I'd remind you at American Income, we had a large number of offices opened in 2018 and 2019, and recruited in - that resulted in higher agency growth for those new offices. During COVID was more difficult to open those new offices. So we have lower new office resumes in 2022, than we had in '21 and '22, excuse me, '21 and '22, to say '18 and '19.

Again, I will say that we look at American Income with approximately 10,000 agents, a 3% increase is 300 agents, that's a large number of agents to bring in and train and enter your systems. So again, referring back to the startup process, we always have agent growth, following the faster growth.

If you go back to '17 and '18, you would see that American Income and Family Heritage we had almost zero agent growth in those two years. Then in '19 to '20, we had the accelerated agent growth. So this follows a pattern that historically we've seen in all three agencies.

Andrew Kligerman

I see. Okay. And then, you know, you talked a little bit about going forward, some building out the middle management and an increasing the offices further, as we go through '22. Could you could you put any numbers around it or any further color?

Larry Hutchison

For the year for all three agencies, we expect to increase middle management for 5 to 8 percentage, that's so important, because middle management really drives most of the recruiting on all three agencies. So that the lack of agent growth at American and Family Heritage, put some middle management growth during 2022, as we see the agent growth accelerate, more people will take that opportunity and move into middle management.

Again, we've had such rapid agent growth at American Income. I think the 5% to 8% growth is certainly a reasonable number to assume for a reasonable range to assume for 2022. I feel the Heritage has - or excuse me, Liberty Nationals, you see the worksite sales increase, we'll see that same increase in middle management.

Andrew Kligerman

Got it. And, you know, I guess lastly, you were just touching on how sort of those elevated, you know, sort of non-COVID, but COVID related claims reverting back over time and we've heard that from some of the big US life reinsurers as well.

Anything further there, is it just you know, once COVID subsides all these - these kinds of situations where people aren't, aren't getting medical checkups, et cetera, et cetera, that'll just kind of subside with COVID. Anything else that gives you confidence that will revert over time?

Larry Hutchison

No, I think, Andrew that that's, you know, largely when you think about getting back to access to health care. And, you know, just generally people filling, you know, getting more comfortable with, you know, getting out of their homes and getting back into the doctor's office and getting the care that they need to take care of their conditions.

You know, I think that as time goes on, obviously, we'll start to see, you know, get more experience in the numbers, and be able to get a little better sense of that. I think, you know, at this point in time, it's, you know, where you look at this elevated level, and you kind of see the situation and it's more from the belief that over time. But as we get past the COVID pandemic, and just again, use of health care gets back to normal levels. That's where we would anticipate that it would give that the non-COVID deaths would get back into kind of normal levels as well, at least until we start to see, you know, some - something in the numbers that would indicate otherwise.

Andrew Kligerman

Yeah, that seems very encouraging for '23 and 2023 and '24. Anyway, thank you very much for answering the questions.

Larry Hutchison



[Operator Instructions] Next, we'll go to Eric Bass with Autonomous Research.

Eric Bass

Hi, thank you. It looks like the lapses ticked up a little bit from where they've been running in the life business. So just wondering, are you starting to see persistency begin to normalize? And is that something you'd expect to continue?

Gary Coleman

Eric, I think that's true of Liberty National appears that we're - we're getting back more towards the pre-pandemic level lapses. Of the direct-to-consumer side, we're - the lapse rates were a little bit higher, first relapse is a little bit higher than it had been in late 2020 and 2021. But it along with the renewal lapse rates are still favorable compared to where we were pre-pandemic.

American Income, I think we've had a fluctuation there this quarter. The first year lapse rate was a little over 10%, which is normally, you know, less than 9%. I think we're - I think that will settle down as we go forward. And I think, like direct consumer, the rights there in American Income will be a little bit higher than what we experienced in '21, but still favorable versus the pre-pandemic levels.

Eric Bass

Got it. Thank you. And then can you remind me, I think one of the other factors driving the excess life claims that you're assuming is the better persistency. Just kind of provide a reminder of what you're assuming there and how that works through?

Larry Hutchison

Yeah. About a third, you know, I've mentioned in the opening comments that, you know, for the year, we have total access policy obligations, and, you know, we're estimating at around $64 million. And about a third of that is due to the higher lapses.

Just over time, I mean, we are bringing that down, if you will, over the course of 2022. And, as Gary indicated, we still anticipate having favorable persistency you know, versus pre-pandemic levels. But we are kind of grading that back over time that by the end of the year, still anticipating some favorable persistency. And then that favorable persistency does result in some higher policy obligations than normal. So, over time, again, we kind of just graded that doubt slowly, though, over the course of the year.

Eric Bass

Thanks. And if I could sneak one more, on your excess investment income, I think it was up to year-over-year this quarter, and your guidance is still for it to decline on kind of $1 basis. Was there anything unusual in the investment income this quarter?

Frank Svoboda

Eric, we had, the income from the limited partnerships that we had was about $2.5 million higher than expected. And I think that's a little bit of a tiny thing. So the investment income – that investment income was weighted heavier towards the first quarter than will be later in the year.

Eric Bass

Got it. Thank you.


Moving on, we'll go to Ryan Krueger with KBW.

Ryan Krueger

Hi, good morning. On the 15 million of non-COVID excess mortality claims in the quarter. Can you give that by division, I guess I'm curious if it was more concentrated in direct-to-consumer like your - like the direct COVID claims or…

Gary Coleman

Yeah, so the total access obligations, I think indicated were about $7 million higher. You know, for…

Ryan Krueger

I was I was looking the $15 million of the – I think you said there was $24 million of indirect policy obligations and $15 million was from mortality?

Gary Coleman

Yes. Okay. Yes. And about $10 million of that was from related to DTC and about $2 million, each from, I guess, about $11 million DTC, $2 million each from AIO and NLL [ph]

Ryan Krueger

I guess, is there is there any - as you dug into the data is, is there - are there any conclusions as to why you think you're seeing more concentration in both direct and indirect COVID claims in direct-to-consumer relative to the agent driven divisions?

Gary Coleman

You know, I think just in general, as we look at it, you know, remember that direct-to-consumer is just a higher mortality, you know, business. So, you know, just in the normal course of time, their policy obligations make up about 54% or 55% of their total premium. Whereas for both Liberty and American Income, you know, they're in that 30% to 35% range, you know, kind of on a pre-pandemic level.

So just from a from a proportion perspective, DTC is just, you know, has this higher mortality. You know, other than just being part of that - there just tend to be a broader swath of the US population, if you will, and having just tends to be, I'm going to say, just be a little less healthy group of policyholders, just because we do less underwriting and remember as yet simplified underwriting and direct-to-consumer, we don't really see anything else in the numbers, if you want to specifically point to, you know, anything specific with DTC.

Ryan Krueger

Thanks. And then when I look at your - if I take your life underwriting income in both 2021, and in the first quarter, and if I add back the direct and indirect COVID, and mortality impacts that you cited, it looks like the margin would have been about 29% of premium.

If you add everything back, which is higher than it was running pre-pandemic, which I think was more in that 27% to 28% range. Is 29% more indicative of what you'd expect once the pandemic fully ends? Are there some other offset?

Larry Hutchison

You know, Ryan, I think one additional piece there is that we're - we're seeing improved or lower amortization of deferred acquisition costs because the improved persistency. And so that's a piece it gets you from the 20 into what we would say a normal 28 to the 29 that you came up with.

Ryan Krueger

Okay, understood. Thank you.


[Operator Instructions] Next we'll go to John Barnidge with Piper Sandler.

John Barnidge

Thank you very much. Can you maybe talk about how inflation changes the dynamics or distribution of products in your targeted demographic? Maybe at bit differently, how do you think through sales persistency holding up in a soft economic environment driven by inflation?

Gary Coleman

I'll first talk about the impact of inflation, its really different in each distribution for the agency channels. We expect a little impact on the level of sales due to inflation. Remember, we sell at a needs basis. [indiscernible] favorably the impacted customers need a larger face amount, should a client need to purchase additional coverage.

While monthly premiums associate the products for social is only a slight increase in premiums. Our premiums are designed to comprise only a small percentage of the agencies budget. The direct-to-consumer inflation could be a negative for the [indiscernible] channels, inflation increases overall cost of venture male [ph] media due to postal rate and paper cost increases. As such, we will probably need to adjust mail volumes to maintain profit margins.

However, we can't expand the use of the Internet and email channels to offset those decreases. For Medicare Supplement United American inflation can lead to higher medical trends, its higher in trend will be offset with rate increases over time to achieve the lifetime loss ratios. To the extent medical trends are higher than assumed, profit margins may actually improve as the fixed dollar acquisition costs become a lower percentage of premium.

John Barnidge

That's very helpful. And then maybe on the investment portfolio as a follow up. The rate environments clue changed a lot. Is this change maybe interesting floating rate securities versus more versus fixed at all? Or maybe talk about how rates have changed your view on investments?

Larry Hutchison

Well, John, we - as you know, we primarily invest long and that's the reason we do that is because our liabilities are long. Yeah, we have seen especially at CAGR [ph] rates we've seen you know the in the quarter from the beginning of quarter, the end of the quarter the curve flattening.

However, when you take in consideration, spreads, still a longer the 25 year bonds that we're buying, providing - still provide a substantial yield enhancement over the shorter are bonds. So - but we don't - you know, we're trying to look for the best opportunities. We don't rule out investing short.

There, especially times if we want to improve diversification or quality or whatever the - we do go shorter. And in fact, we are going short to a certain extent when you talk about the alternatives that we're investing in, as I mentioned, that we're going to invest approximately $200 million in 2022, in these limited partnerships that are credit structure - structured credit type of arrangement.

Yeah, they're shorter and they still give us a good yield. But for the most part, you know, when we're investing for assets to support our policy liabilities, we need to - we need to invest long, where we stand today, as I mentioned, 15% will be going to the shorter investors, but that means 85% are still going to be in the longer investments.

John Barnidge

Thank you very much for answering. Best of luck in the quarter ahead.


There are no further questions. I'd like to turn it back to Mr. Mike Majors for any additional or closing comments.

Mike Majors

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


Thank you. And that does conclude today's call. We'd like to thank everyone for their participation. You may now disconnect.

Recommended For You


To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.