Yahoo Finance Globe Life Inc. (NYSE:GL) Q1 2024 Earnings Call Transcript
Globe Life Inc. (NYSE:GL) Q1 2024 Earnings Call Transcript April 23, 2024
Globe Life Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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.
Stephen Mota: Thank you. Good morning, everyone. Joining the call today are Frank Svoboda and Matt Darden, our Co-Chief Executive Officers; Tom Kalmbach, our Chief Financial Officer; Mike Majors, our Chief Strategy Officer; and Brian Mitchell, our General Counsel. Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our earnings release and 2023 10-K on file with the SEC. Some of our comments may also contain non-GAAP measures. Please see our earnings release and website for discussion of these terms and reconciliations to GAAP measures. I will now turn the call over to Frank.
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?
Matt Darden: Thanks, Frank. Most recently, both the litigation and the DOJ's investigation were the subject of a lengthy attack on the company by a short seller. As we have stated publicly, we believe the report mischaracterizes many facts and it relies on anonymous sources, dismissed lawsuits and allegations that have not been proven in litigation to present a false and misleading overall picture of Global Life and American Income. In this instance, we believe the short seller's report demonstrates a fundamental lack of understanding of the life insurance business generally and about how our company operates and reports revenue. As we have disclosed in our annual reports and audited financial statements, Globe Life recognizes revenue from premiums for long-duration life and health insurance products over the life of the contract and when payments are due from the policyholder.
Therefore, premium revenue closely matches the cash we collect monthly. For example, during the fiscal year 2023, American Income's collected premium payments and reported GAAP premium income were essentially the same at $1.6 billion. A history of American Income's collected premium as compared to its reported GAAP premium is included in the supplemental financial information available on the Investors section of our website. Now we only report net sales and policies after they have been through our underwriting and quality control processes. And as disclosed in our public filings, when calculating net sales for American Income, we exclude policies that are canceled in the first 30 days after issue. Fundamentally, the success of our business depends on our underwriting rigor and our ability to continue selling policies to customers who keep their policies and pay their premiums over time.
Now this builds a solid book of business, and we have continued to do so year-over-year. In fact, over 80% of American Income's total life premiums are received from policies that have been in force for over one year. Please see our first year renewal GAAP premium page under the Financial Reports and Other Financial Information in the Investors section of our website. Now the more than 11,000 independent agents who sell American Income policies offer products designed to help families make tomorrow better by working to protect their financial future. Each agency office has a structured hierarchy, whereas agents above the writing agent receive an override commission paid by the company. While there is a hierarchy, there is no pyramid scheme as the policies require customers to pay the monthly premium for the policy to continue.
There is no third-party payer of premiums. It is important to note this business model has stood the test of time and is common in the industry. American Income realizes revenue and profits only when these customers pay their premiums over time. We have generated consistent growth, providing long-term value for our shareholders, with a history of integrity in our business practices and principles while providing our customers with financial protection when it matters most, as well as job opportunities for agents, small business owners and employees to build financial security. Now these agents are independent contractors and the agency offices are independent businesses. Notwithstanding their independence, Globe Life takes unethical agent conduct seriously, and has measures to detect and deter actions that are inconsistent with the company's values, including, among others, American Income has internal controls and monitoring processes in place to identify potential agent misconduct, and monitors relevant data metrics for each individual agent to identify and assess trends regarding unethical or fraudulent business practices, including data related to policy lapse and persistency.
Now our annual policy count and phased amount lapse rates are disclosed in our regulatory filings and our quarterly premium in-force lapse rates are disclosed each quarter in the supplemental financial information we provided. These controls also include background checks on all prospective agents. Agents who contract with American Income must have a valid license issued by the appropriate state departments of insurance who have their own processes for determining one's suitability to be a licensed insurance agent. American Income has controls to validate the indemnity and legitimacy of the sale to the customer, including conducting quality assurance calls to verify new applications. And when complaints are raised, including complaints alleging fraud, deceit, unethical business practices or other misconducts, American Income has a dedicated group responsible for investigating these allegations.
American Income has not hesitated to take disciplinary actions against agents and agency owners where warranted, including termination and notice to the appropriate regulatory bodies. Indeed, the short seller's report relies heavily on allegations by a former employee who, following an internal review, was terminated for cause based on violations of the company's policies prohibiting sexual harassment. This matter is the subject of pending litigation. The company’s investigate complaints when they are received and where appropriate authorizes independent investigations. The report also contains allegations regarding bribery and kickback schemes. These claims are based on a lawsuit that was filed by an insurance licensing exam test prep company.
This lawsuit was dismissed by the U.S. District Court for the Eastern District of Texas. American Income does not contract with or recommend any test prep companies to prospective agents, and we're not aware of any bribes or kickbacks to the company executives. Additionally, we want to make clear that the projections and guidance we will be providing on this call today incorporate our current view based on our knowledge of the business and the information we have at this time. Now with respect to our insurance operations, I'll turn the call back over to Frank.
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.
Matt Darden: Thank you, Frank. First, let's discuss American Income Life. At American Income Life, life premiums were up 7% over the year-ago quarter to $414 million, and life underwriting margin was up 7% to $187 million. In the first quarter of 2024, net life sales were $97 million, which is up 17% from a year ago quarter, primarily due to growth in agent count. The average producing agent count for the first quarter was 11,139. This is up 15% from a year ago. This is another strong quarter for American Income and builds on the growth in sales and agent count that we achieved in the third and fourth quarter of 2023. At Liberty National, life premiums were up 7% over the year ago quarter to $91 million, and life underwriting margin was up 11% to $31 million.
Net life sales declined 2% to $22 million, and net health sales were $8 million, up 7% from a year ago quarter due primarily to increased agent count. Now as a reminder, we report on sales after the policy has been through our quality control and underwriting processes. As we have previously discussed, we continue to make investments in technology to enhance our business. One of these investments is a new business and underwriting platform for our life business at Liberty National, which we implemented toward the end of the first quarter. As a result of this system implementation, our policy issues fee temporarily slowed down. Now I'm pleased to see that the amount of business submitted from the field to the underwriting department is up 11% from the prior-year quarter.
Now I anticipate as we finalize our transition to this new system, our throughput of policies will return to historical norms. The average producing agent count for the first quarter was 3,419, up 14% from a year ago. We continue to be proud of the strong agent count growth at Liberty National. At Family Heritage, health premiums increased 8% over the year-ago quarter to $103 million, and health underwriting margin increased 13% to $36 million. Net health sales were up 11% to $25 million and this is due to increased agent productivity enabled by our investments in technology. Average producing agent count for the first quarter was 1,295, approximately flat from a year ago. Family Heritage continues to focus on agent count and middle management growth.
Now let’s discuss Direct to Consumer. In our Direct to Consumer division at Globe Life, life premiums were flat compared to the year ago quarter at $248 million, while life underwriting margin increased 4% to $59 million. Net life sales were $29 million, down 12% from the year ago quarter. And as we have previously disclosed, this decline is primarily due to lower customer inquiries as we have reduced marketing spend on certain campaigns that did not meet our profit objectives. We will continue to focus on maximizing the underwriting margin dollars on new sales by managing the rising advertising and distribution costs associating with acquiring this new business. Additionally, the Direct to Consumer channel provides critical support to our agency business through brand impressions and the generation of sales leads.
Now let’s discuss United American General Agency. Here, the health premiums increased 7% over the year ago quarter to $142 million. Health underwriting margin at $12 million is down approximately $1 million from the year ago quarter. Net health sales were $16 million, up 7% over the year ago quarter, due to strong activity in the individual Medicare Supplement business. Now let’s discuss projections. Now based on the trends that we are seeing and our experience with our business, we expect the average annual producing agent count trends for 2024 to be as follows: At Liberty National, mid-teens growth; at Family Heritage, low single-digit growth. Net life sales for 2024 are expected to be as follows: For Liberty National mid-teens growth; Direct to Consumer slightly down.
Net health sales for 2024 are expected to be as follows: Liberty National, mid-teens growth; Family Heritage, low double-digit growth; United American General Agency, low to mid-single-digit growth. Now based on very recent events, we are actively evaluating the impact on AIL’s agent count and projected sales for the remainder of the year. Now to date, we have not seen a significant impact on our agent recruiting pipeline. As the majority of our business is produced by experienced agents, any negative recruiting trends should have a muted impact on 2024 sales. In addition, it should be noted that sales in the second half of the year have a diminished impact on premium earnings, especially since over 80% of American Income Life’s premiums come from policies that have been in force for greater than one year.
That said, taking into account what we know today and the knowledge of our business, at the midpoint of our guidance, we estimate average agent count growth and sales growth at AIL for the full year to be in the low single digits and mid-single digits, respectively. We acknowledge these are estimates and this agent count and sales growth could be higher or lower. The range of our earnings guidance contemplates a range of possibilities regarding sales and agent count growth, including reasonably severe scenarios. Due to the significant growth in the first quarter, our sales guidance does assume a moderation of sales for the remainder of the year. I will now turn the call back to Frank.
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.
Tom Kalmbach: Thanks, Frank. First, let me spend a few minutes discussing our share repurchase program, available liquidity and capital position. Parent began the year with liquid assets of $48 million and ended the quarter with liquid assets of approximately $66 million, slightly higher than the $50 million to $60 million that we had historically targeted. In the first quarter, the company repurchased almost 128,000 shares of Globe Life Inc. common stock for a total cost of approximately $16 million at an average share price of $122.13. Thus, including shareholder dividend payments of $21 million for the quarter, the company returned approximately $37 million to shareholders during the first quarter of 2024. The amount of share repurchases during the first quarter is lower than we had anticipated, solely due to the evaluation of a potential acquisition wherein we paused share repurchases until conclusion on the acquisition was reached.
We have decided not to pursue the acquisition and, as such, intend to continue repurchases as soon as possible. In addition to the liquid assets held by the Parent, the Parent Company generated excess cash flows during the first quarter and will continue to do so for the remainder of 2024. Parent Company’s excess cash flow, as we define it, results primarily from 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 $450 million to $470 million and is available to return to shareholders in the form of dividends and through share repurchases. Excess cash flows in 2024 are estimated to be higher than those in 2023, primarily due to higher statutory earnings in 2023 as compared to 2022.
Including $66 million of available liquid assets at the end of the quarter, along with the $390 million to $410 million in excess cash flows we expect to generate during the remainder of 2024, the company has approximately $455 million to $475 million of liquid assets available to the Parent for the remainder of 2024, of which we anticipate distributing approximately $65 million to $70 million to our shareholders in the form of dividend payments. As mentioned on previous calls, we will use our cash as efficiently as possible. At this time, we believe that share repurchases provide the best return or yield to our shareholders over other alternative investments – over other alternatives. Thus, we anticipate share repurchases will continue to be the primary use of Parent’s excess cash flows after the payment of shareholder dividends.
At the midpoint of our earnings guidance, we anticipate approximately $350 million to $370 million of share repurchases for the year, with approximately one half of that occurring in the second quarter and the remainder in the third and fourth quarters. That said, current market conditions, and should they remain favorable, we will clearly consider accelerating repurchases and may consider accelerating some portion of our anticipated 2025 excess cash flows into 2024. Now with respect to our capital levels at our insurance subsidiaries. Our goal is to maintain our capital levels necessary to support ratings – current ratings. Globe Life targets a consolidated company action-level RBC in the range of 300% to 320%. At the end of 2023, our consolidated RBC ratio was 314%.
At this ratio, our subsidiaries had, at that time, approximately $85 million of capital over the amount needed to meet the low end of our consolidated RBC target of 300%. Now with regards to policy obligations for the current quarter. As we discussed on prior calls, we have included within the supplemental financial information available on our website an exhibit that details the remeasurement gain or loss by distribution channel. As a reminder, in the third quarter of 2023, we updated both our life and health assumptions and there have been no changes to our long-term assumptions in the period since. No assumption updates were made in the first quarter of 2024 and we intend to update life and health assumptions in the third quarter of this year.
In addition to the impact of assumption changes, the remeasurement gain or loss also indicates experienced fluctuations. For the first quarter of 2024, life policy obligations were favorable when compared to our assumptions of mortality and persistency. The remeasurement gain related to experienced fluctuations resulted in $5 million of lower life policy obligations and $3 million of lower health policy obligations. As expected, life remeasurement gains were lower this quarter than in the first half of 2023 – sorry, in the last half of 2023, which we believe is due in part to the seasonally high first quarter life claims versus the rest of the year. We continue to be encouraged by the recent short-term trends and policy obligations experienced.
The range of earnings guidance encompasses the possibility of future favorable remeasurement gains through 2024. The recent experience as well as our life mortality trends in the first half of 2024 will inform the third quarter 2024 update to our endemic mortality assumptions. As we noted on our last call, our endemic mortality assumptions currently assumes returning to mortality levels slightly above pre-pandemic levels over the next few years. Recent trends, if they should continue, they indicate a quicker recovery than our current assumptions. Finally, with respect to earnings guidance for 2024. For the full year 2024, we estimate net operating earnings per diluted share will be in the range of $11.50 to $12, representing 10.3% growth at the midpoint of our range.
The $11.75 point midpoint is higher than our previous guidance and reflects recent and anticipated investment income results, in addition to a greater impact from the $350 million to $370 million of share repurchases in 2024 as discussed earlier. Those are my comments. I’ll now return the call back to Matt.
Matt Darden: Thank you, Tom. Those are our comments and we’ll now open up the call for questions.
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