Globe Life Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 10 speakers on the call.

Operator

Welcome to Globe Life's 4th 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. However, you will have the opportunity to ask questions towards the end of the call. I will now hand the call over to your host, Stephen Mota, Senior Director of Customer Relations to begin today's conference.

Operator

Thank you. Stephen, you may begin.

Speaker 1

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 they provided for general guidance purposes only. Accordingly, please refer to our earnings release and 2022 10 ks on file with the SEC.

Speaker 1

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.

Speaker 2

Thank you, Stephen, And good morning, everyone. I would note here that our reported results for the Q1 of 2023 2022 Reflects the adoption on January 1, 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.

Speaker 2

In the Q1, net income was $224,000,000 or $2.28 per share compared to $237,000,000 or $2.37 per share a year ago. Net operating income for the quarter was $248,000,000 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 percent and book value per share is $70.34 up 10% from a year ago. In life insurance operations, premium revenue for the Q1 increased 3% from the year ago quarter to $773,000,000 For the year, we expect Life premium revenue to grow around 4%. Life underwriting margin was $291,000,000 up 1% from a year ago.

Speaker 2

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 $322,000,000 and health underwriting margin was up 4% to $91,000,000 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 $74,000,000 for the quarter, up 2% from a year ago.

Speaker 2

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% 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 Q1 marketing operations.

Speaker 3

Thank you, Frank. At American Income Life, life premiums were up 5% over the year ago quarter to $388,000,000 And Life underwriting margin was up 2% to $176,000,000 In the Q1 of 2023, Net life sales were $83,000,000 down 2% from the year ago quarter. While 1st quarter sales declined slightly from a year ago, They grew 19% from the Q4 of last year. The average producing agent count for the Q1 was 9,714, up 4% from the year ago quarter and up 5% from the 4th quarter and is consistent with our expectations discussed on the last call. I'm very encouraged with the sales and agent count trends and see a lot of positive momentum in this division.

Speaker 3

At Liberty National, Life premiums were up 6% over the year ago quarter to $85,000,000 And Life underwriting margin was up 3% to $28,000,000 Net Life sales increased 27% to $22,000,000 and net health sales were $7,000,000 up 14% from the year ago quarter due to increased agent count and productivity. The average producing agent count For the Q1 was 3,011, up 13% from a year ago quarter. I'm very pleased with the results here as Liberty continues to successfully generate strong sales and recruiting activity. At Family Heritage, health premiums increased 7% over the year ago quarter to $96,000,000 and health underwriting margin Increased 15% to $32,000,000 The increase in underwriting margin is primarily due to higher premiums and improved claim experience. Net health sales were up 21% to $23,000,000 primarily due to increased agent count.

Speaker 3

The average producing agent count for the Q1 was 1298, up 18% from the year ago quarter. As we've mentioned previously, this agency has shifted focus over the last several quarters to recruiting and middle management development. Now in our direct to consumer division, life premiums increased 1% over the year ago quarter to $248,000,000 But Life underwriting margin declined 3% to $56,000,000 The decrease in underwriting margin is primarily due to an increase in lead related non deferred acquisition expenses. Net life sales were $32,000,000 down 4% from the year ago quarter. As we have mentioned on previous calls, direct to consumer marketing is one facet of our business that has been impacted by the current inflationary environment.

Speaker 3

We've had to pull back somewhat on circulation in mailings as increases in postage and paper costs impede our ability to achieve satisfactory return on our investment for specific marketing campaigns. There is an offset to this as we continue to generate more Internet activity, which has lower acquisition costs than our direct mail marketing. In fact, electronic sales have grown at a 5.8% compounded annual growth rate since 2019 and are currently approximately 70% of our new business. On to United American General Agency. Here, the health premiums increased 1% over the year ago quarter to $133,000,000 And health underwriting margin of $13,000,000 which is 10% of premium, is consistent with the year ago quarter.

Speaker 3

Net health sales were $15,000,000 up 13% in the year ago quarter. The increase in net health sales It's primarily due to the sales growth at Globe Life Benefits. Projections. I want to talk about based on the trends that we are seeing and the experience with our business, we expect the average producing agent count trends for 2023 to be as follows: at American Income Life, low double digit growth at Liberty National, Low double digit growth and Family Heritage low double digit growth. We're very nice to I'm pleased to project All three of our exclusive agencies are going to have low double digit growth through the remainder of the year.

Speaker 3

Net life sales for the full year 2020 3 are expected to be as follows: American Income Life, low single digit growth Liberty National, low double digit growth And direct to consumer, slightly down to relatively flat for the full year. Net health sales for the full year of 2020 3 are expected to be as follows: at Liberty National, low double digit growth Family Heritage, low double digit growth And at United American General Agency, mid single digit growth. I will now turn the call back to Frank.

Speaker 2

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 $29,000,000 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 $257,000,000 up 5% from the year ago quarter.

Speaker 2

Acquired interest, As adjusted to reflect the impact of the adoption of LDTI, it's 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% 12%. Now regarding our investment yield. In the Q1, we invested $311,000,000 in investment grade 4%, an average rating of A and an average life of 25 years. We also invested $45,000,000 in commercial mortgage loans and Limited partnerships that have debt like characteristics.

Speaker 2

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 Q1 yield was 5.18 percent, up 3 basis points from the Q1 of 2022 and flat versus the 4th quarter. As of March 31, the portfolio yield was 5.20%. Now regarding the investment portfolio.

Speaker 2

Invested assets are $20,200,000,000 including $18,500,000,000 of fixed maturities and amortized cost. Of the fixed maturities, dollars 17,900,000,000 are investment grade with an average rating of A-. 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.

Speaker 2

We realized an after tax loss of roughly $21,000,000 during the Q1 on Signature Bank Bonds. We also hold $39,000,000 of First Republic Bank Bonds, which have been impaired in the 2nd 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 $204,000,000 net book value of CMLs directly held on our balance sheet, which is 1% of our total investment portfolio. We also have $454,000,000 of limited partnership funds or 2.4% of the total investment portfolio that invest in CMLs.

Speaker 2

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 They generally have a floating rate, 3 year maturities and 2 optional 1 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 values reflected in our regulatory filings reflect the original as is appraisal At the time, the transitional loan was initiated, which does not take into account any increases in value after the renovations are completed.

Speaker 2

The loan to value method we consider in evaluating the property, what we call stabilized appraised value, It's 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 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 held directly on our balance sheet, $115,000,000 of gross book value were originated prior to 2022. We have $59,000,000 of loans with maturities in 2023, of which $22,000,000 have optional extensions Subject to satisfaction of certain criteria, of the loans with maturities in 2023, Only $8,000,000 are related to office properties, plus $2,000,000 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%.

Speaker 2

Our expected lifetime losses for our CML portfolio, which is equivalent to our CML's CECL allowance, Is $3,100,000 or 1.5 percent 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 DML Investments on our Investor Relations website under Financial Reports and Other Financial Information. These investments have been included in our portfolio's press testing that Tom will discuss in his comments. Our fixed maturity Investment Portfolio has a net unrealized loss position of approximately $1,300,000,000 due to the current market rates being higher than the book yield on our holdings.

Speaker 2

As we have historically noted, we are not concerned by the unrealized loss position And it's 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.

Speaker 2

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. The low investment grade bonds are $596,000,000 compared to $583,000,000 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 Our 54% of fixed maturities, the lowest ratio it has been in over 8 years.

Speaker 2

Finally, The amount of our fixed maturity portfolio is 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 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. As previously noted, Tom will address the potential capital implications of these stress tests in his comments.

Speaker 2

At the midpoint of our guidance for the full year, we expect to invest approximately $1,000,000,000 in fixed maturities At an average yield of approximately 5.6 percent and approximately $250,000,000 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 they are not interest sensitive. Now I'll turn the call over to Tom for his comments on capital, Liquidity and LDTI. Thanks, Frank.

Speaker 4

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 $91,000,000 In the Q1, the company repurchased 1,200,000 shares of Globe Life Inc. Common stock for a total cost of $135,000,000 which includes The acceleration of approximately $35,000,000 of our annual repurchase plan to take advantage of recent lower share prices. The average share price for these purchases was $115.04 and we ended the Q1 with liquid assets of approximately $77,000,000 Year to date, we have purchased 1,400,000 shares of Globe Life Inc. Common stock For a total cost of $158,000,000 and an average share price of $114.04 In addition to the liquid assets held by the parent, the parent company generated excess cash flows during the Q1 and will continue to do so throughout 2023.

Speaker 4

Parent company's excess cash flow as we define it Results were 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 $420,000,000 to $440,000,000 and is available to return to its shareholders in the form of dividends and through share repurchases. This amount is higher than 2022, primarily due to the lower life losses incurred in 2022, which resulted in higher statutory income in 2022 as compared to 2021, thus providing higher dividends to the parent in 2023 than were received in 2022. So as previously noted, we had approximately $77,000,000 of liquid assets at the end of the quarter as compared to $50,000,000 to $60,000,000 of liquid assets that we had historically targeted. In addition to the $57,000,000 of liquid assets, We expect to generate $295,000,000 to $315,000,000 of excess cash flows for the remainder of 2023, providing us with approximately $350,000,000 to $370,000,000 of assets available to the parent for the remainder of 2023, After taking into consideration the approximately $23,000,000 of share repurchases to date in the Q2, We anticipate distributing approximately $60,000,000 to $65,000,000 to our shareholders in the form of dividend payments for the remainder of 2023.

Speaker 4

In May, we have approximately $166,000,000 of senior debt maturing. In April, The company closed a $170,000,000 18 month term loan. The proceeds of this term loan will be used to retire The 7.875 percent senior notes maturing on May 15, 2023. We want to continue to monitor debt markets And our capital needs, our current plan is to issue new long term debt, long term senior debt in 2024 to pay off the term loan, reduce other short term debt and meet long term capital needs. As noted on previous calls, we will use our cash as efficiently as possible.

Speaker 4

We still believe that share repurchases provide the best return on yield to our shareholders over the other alternative other available alternatives. Thus, we anticipate share repurchases will continue to be the primary use of the parent's excess cash flows after the payment of shareholder dividends. It should be noted that the cash received by the parent 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, as well as to acquire new long duration assets to fund their future cash needs. The remaining amount is sufficient to support the targeted capital levels within our insurance operations and maintain the share repurchase program in 2023. In our earnings guidance, we anticipate between $370,000,000 $390,000,000 of share repurchases will occur during the year.

Speaker 4

With regard to 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 3 20%.

Speaker 5

At the

Speaker 4

end of 2022, our consolidated RBC ratio was 321%. At this RBC ratio, our subsidiaries had at that time approximately $125,000,000 of capital over the amount required to meet the low end of our consolidated RBC target of 300%. When adjusted for Q1 realized losses of $24,000,000 and anticipated $30,000,000 after tax loss related to First Republic Bank, The RBC ratio is reduced approximately to 3 12% and is near the midpoint of our targeted RBC range of 300% to 3 20%. We are well positioned to address any additional capital needed by our insurance subsidiaries due to potential downgrades and additional defaults that may occur due to a recession or other economic factors. As Frank mentioned, we routinely perform stress tests on our investment portfolio under multiple scenarios.

Speaker 4

Under these stress tests, we anticipate various levels of downgrades and defaults in our fixed maturity portfolio and include a provision for losses In our CML portfolio that reflect loss rates in excess of those in the Fed's severely adverse scenario. Under our scenarios, we do not anticipate that all the downgrades, defaults and losses in our CML portfolio would occur in 2023, but rather anticipate they would emerge over an extended period, which could be as long as 24 months. Even if the losses under our internal stress Tests occurred before the end of the year, we estimate only between $30,000,000 to $55,000,000 of additional capital Would be needed to maintain the low end of our consolidated RBC target of 300%. The parent has sufficient Capital sources of liquidity to meet this capital if it is needed to maintain our consolidated RBC ratio within our target range, while continuing our dividend and share repurchase program as planned.

Speaker 6

I'd like to

Speaker 4

provide a few comments related to policy obligations on the Q1 results. As we've talked about in prior calls, we have included in the supplemental financial information available on our website historical operating summary results under LDTI for each of the quarters in 2022. In the Q3 of 'twenty two, we updated both our life and health assumptions. The life assumption updates reflect our current estimates of continued excess mortality, particularly in the near term. For the Q1, the life policy obligations showed slightly favorable fluctuations when compared to our assumptions of mortality and persistency.

Speaker 4

This resulted in a small life remeasurement gain in the quarter. The supplemental financial information available on our website provides exhibits, which shows

Speaker 1

The remeasurement gain or loss by distribution channel.

Speaker 4

The remeasurement gain or loss shows the current period fluctuations in experience And the impact of assumption changes, if any, which are allocated to the current quarter as well as past periods. In the absence of assumption changes, it is indicative of experienced fluctuations. The remeasurement gain for the Life segment Was $2,700,000 lower policy obligations reflecting favorable fluctuations for the quarter, while for the Health segment Resulted in $2,000,000 higher policy obligations reflecting unfavorable fluctuations for the quarter. In the Q1, we had no changes to long term assumptions. Finally, with respect to our earnings guidance in 2023, we are projecting net operating income per share will be in the range of $10.28 to $10.52 per diluted common share for the year ending December 31, 2023.

Speaker 4

The 10.40 midpoint of our guidance is higher than what we had indicated last quarter. The increase in our expectations for 2023 is largely due to the impact of lower share price and slightly higher life margins as a result of lower policy obligations than previously anticipated. Consistent with our guidance on the last call and Frank's comments, for the full year 2023, we anticipate life underwriting margins to be in the range of 37% to 39% and help underwriting margins to be in the range of 28% to 30%. Given that our assumptions were recently updated, we believe 1st quarter obligation ratios are indicative of emerging policy obligations over the year. We will be reviewing assumptions and anticipate making updates in the Q3 each year.

Speaker 4

At this time, we do not believe them to be significant. Total acquisitions in the Q1 as a percent Premium is 21%, including both amortization and non deferred acquisition costs and commissions. We expect the full year to be consistent with this 21%. While the new GAAP accounting changes were significant, it is important to keep in mind that the changes only impact the timing of when our future profits will be recognized And that none of the changes impact our premium rates, the amount of premiums we collect and the amount of claims we ultimately pay. Furthermore, it has no impact on our statutory earnings, the statutory capital we're required to maintain for regulatory purposes

Speaker 2

or or the

Speaker 4

parent company's excess cash flows nor will it cause us to make any changes in the products that we offer. Those are my comments. I will now turn it back to Matt.

Speaker 3

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

Speaker 1

Melissa, we're ready to open up

Speaker 2

the call for questions now.

Operator

And 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.

Speaker 6

Hi, thanks. So first, just a question on investment losses and their potential impact on Statutory income and just your dividend capacity and share buybacks next year, should we assume that The loss that you took on Signature Bank and the upcoming loss on First Republic will have an impact on buybacks as you going into next year?

Speaker 4

Yes, 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, it's too early to tell what the impact Our buybacks plans are for 2024.

Speaker 6

Okay. And then on the decline in stat Should we commensurate with the losses on the 2 banks assuming nothing else?

Speaker 2

That is right. So as you think about the total realized losses that we had in the Q1, 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 $24,000,000 in there as well. But that as long as Republic would go through the statutory income in 2023 on an after tax basis. Okay. And then, Jim, I

Speaker 7

was just going

Speaker 2

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 obligation whether it be from COVID or COVID related and obviously as those kind of subside. So it's a little bit early to see. The initial anticipation was that those would be lower in 2023 than what they were in 20 22. 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.

Speaker 6

Okay. And then just on direct response, obviously, it seems like the Internet business is growing, but the mailing business, should we assume that if Unless inflation comes down a decent amount, then there shouldn't be much of a change in your circulation volumes and your sales activity.

Speaker 3

Yes. You're correct. Those 2 are offsetting each other. As we've mentioned in the past, we are reducing Some of our circulation in mail and we will continue to most likely do that through the remainder of 2023. In because of those costs associated with the higher production costs of that channel, but We're trying to offset that, of course, with increase in Internet sales.

Speaker 3

And so that's why we've guided Essentially, flat, maybe a slight decline from a sales perspective for 2023.

Speaker 6

Okay. And then just lastly, could you comment on the recruiting environment? I would I thought with the tight labor market, the agent growth would have been stunted, but it's actually been fairly strong across the various channels recently.

Speaker 3

Yes. As we talked about in the past, we've been able to successfully recruit in a variety of different economic environments. And as 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 that 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 So I'm 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.

Speaker 3

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 Q1 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.

Speaker 6

Thank you.

Operator

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

Speaker 7

Hey, good morning. I think you mentioned a senior debt maturity that's coming up here in May and I think that's going to be met with a draw on the term loan. But I think there's also some commercial paper around $285,000,000 that's coming due. So are you expecting that to also be satisfied with a term loan draw or is that going to be met some other

Speaker 4

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 $285,000,000 to $300,000,000 of commercial paper out there.

Speaker 7

Got it. That's helpful. And then on the CML portfolio outside the limited partnerships, You mentioned there are transitional or bridge loans for the most part. And I think 5% is shown in the office bucket, but it looks like a good portion of the mixed use Bucket is also related to office. So within your stress tests or your thoughts like how are you thinking about any higher capital charges on that portfolio either from Drift and Centimeters ratings are due to potentially having to take on some of those loans as owned real estate?

Speaker 2

Yes. So, Wes, when we did look at the stress tests 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 We did have some drift in those as well, but then we took a look at the loss rates And actually assumed in kind of our, the high end severe stress, about a 15% loss rate, which is about 2 times the Fed severely adverse scenario. I think theirs is around 6.8% or so. And so we doubled that with respect to what we included in our stress test.

Speaker 7

Got it. Thanks. And you touched on this a little bit, but the press release didn't have anything Related to COVID or excess mortality, I think previously maybe you guided to around 105 U. S. Deaths this year.

Speaker 7

Is that Still the case, has that changed and how much of that excess mortality is embedded in the midpoint of the 10.40 EPS guidance?

Speaker 4

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.

Speaker 4

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.

Speaker 7

Thank you.

Operator

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

Speaker 7

Thank you very much for the opportunity and good morning. If we could stick with the investment portfolio a Can you maybe talk about occupancy rates of that office and mixed use and then compare it to central business district versus suburban?

Speaker 2

Just in general on the BRIGHT 200

Speaker 7

I'm talking specifically around the office and then that 45% of the next uses.

Speaker 2

Yes. So on the ones that are maturing here in 2023, so we've got about $8,000,000 That you're 100 percent office. One of those is located in Washington, D. C, one of those in New York City. And then on the mixed use, there's about a $2,000,000 allocation to office use of that particular property.

Speaker 2

So there's only 3 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 100% office is 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.

Speaker 2

And as they sell those They are, repaying back down a portion that goes to pay back on the loan. Given some of the current sale bump from that particular property, it kind of points to actually a loan to value ratio of around 40 2%, 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.

Speaker 7

That's really helpful. My follow-up on mortality. Some have talked about an early flu peak in the Q4, others have suggested that didn't occur. Can you maybe talk about your seasonal Experience in the quarter? Thank you.

Speaker 4

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

Speaker 7

Thank you very much. Appreciate the answers.

Operator

Thank you. And our next question comes from Eric Sherbis of Autonomous Research. Please go ahead.

Speaker 8

Hi, thank you. First question, just when you give your free cash flow guidance for the year, do you have any placeholder For credit losses in that or is your assumption just that if those occur, they'd be borne by the excess RBC ratio in the subsidiary?

Speaker 4

It really the latter, right, that we don't reflect any excess 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 The Board and Myer, the liquidity resources and the surplus that we have and our the excess in our RBC ratio that we currently have.

Speaker 8

Got it. Which is, I guess, why with these losses, you're comfortable you bring the RBC ratio to the midpoint of your range, but there's really no impact on your free cash Full expectations.

Speaker 4

Exactly. And in addition, we just our liquidity resources that we have available to us. If those losses did occur, we have Resources available. Yes. Eric, remember, again, from

Speaker 2

the free cash flow from the excess cash flow, that's really, again, driven by the dividends out of our Subsidiaries from last year's statutory earnings. And so any of those losses don't affect that cash Any losses that we have this year will simply affect next year's cash flow. But again, as we So those would be included in our stress tests. And again, as we think about those stress tests, we're trying to really look at what maybe Could happen as we're doing a bottoms up approach, not necessarily what we think will happen. Because when we look at our particular portfolio, we don't necessarily I think that we'll end up and again, we have that ability to hold, especially on the fixed maturity side.

Speaker 2

So we don't anticipate Losses that would actually be occurring during the year.

Speaker 8

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 this, that change at all, how you think about kind of how much liquidity you want to hold or need to hold?

Speaker 4

Yes. As we were thinking about the best way to Refinance

Speaker 2

the debt that

Speaker 4

was maturing, we looked at a number of options. And we just one of the things that we're trying to do was to Look at our maturity ladder as well. And so we thought it best to issue debt in 2024 to space out some of our maturities going forward.

Operator

Thank you. And our next question comes from Ryan Krueger of KBW. Sir, please go ahead.

Speaker 5

Hi, good morning. I just wanted to understand the under LBTI, given that you already made an assumption for some level of Continued excess mortality. Is that is the 37% to 39% underwriting Margin guidance, was 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?

Speaker 4

Yes. The assumption change Last year, ended up being reflected in that 37% to 39% underwriting margin. So it's already embedded.

Speaker 5

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?

Speaker 4

Yes, it's probably about 1% Premium? Maybe.

Speaker 5

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

Speaker 4

Yes. Our debt capital ratio as of the Q1 is 23.9%. So we have quite a bit Debt capacity over $700,000,000 $700,000,000 to $800,000,000 to be below a 30% debt cap ratio, which is Kind of where Moody's sets their limit. So quite a bit of debt capacity. And we'd actually expect That debt capital ratio to go down during the course of the year as well to get us even more debt capacity.

Speaker 5

Thank you.

Operator

Thank you. And our next question comes from Andrew Kligerman of Credit Suisse. Sir, please go ahead.

Speaker 4

Good morning.

Speaker 9

Interesting, American Income agent count up 6%. Their average producing agent, I think was up 4%. And the guidance this year for sales in life Is low single digit. I'm kind of curious about your 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?

Speaker 3

Yes. Probably go back in history just a little bit. As far as if you look at The increase in life sales for AIL in Q1 of last year, so Q1 of 2022, We had a 23% increase in live sales and then in the Q2 of 2022, we had a 16% increase in live sales. So We've got tough comparables, so to speak, when you look at the Q1 and the Q2 of this year as compared to the But as we've talked about in the past, the agent count in the recruiting is a leading indicator for sales Yet to come. And so what we're very pleased about is just that growth in the agent count throughout the Q1 of this year.

Speaker 3

And in fact, each week in the month of March, We were over 10,000 agents again in American Income. So that momentum as those agents get up Producing and as we've talked about in the past, the more experienced agents obviously are more effective from a sales perspective. So as those New onboarded agents get more experience. We expect that sales growth to accelerate in the last half of this year and then obviously That would carry over into 2024.

Speaker 9

That's 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 is it?

Speaker 3

As far as our middle management growth in American Income, it's up 10% in the Q1 of this year, so that's what we're very pleased with. So that 10% growth In the middle management, again helps us from a recruiting perspective as well as training and onboarding agents And that's very good. We anticipate as far as just new agency owners, new offices being open in American Income, Still predict that for throughout 2023 to be in the 3 to 5 number range, so good growth there as well.

Speaker 9

Excellent. Thanks a lot.

Operator

Thank you. Our next question comes from Wilma Burdiss of Raymond James. Please go ahead. Hey, good morning. Just a question on the health margin that increased a little bit.

Operator

Could you talk Just drilling a little bit more, what happened there?

Speaker 4

Yes. We kept the well, we kept The bottom end of the range is the same, but we do see the potential for it to move up a little higher. We're seeing a little bit favorable experience on Family Heritage And we feel like if that continues, the health margins could go up overall. On the UA side, we have seen a little bit of 1st quarter, A little bit higher claims and I think others have seen that as well and that's fairly consistent with the seasonality of Medicare Supplement. But we think that Family Heritage actually provides kind of an opportunity for some upside.

Operator

Great. 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 and pressure sales a little bit this year?

Speaker 3

Generally, in the past, as we've looked through different economic trends, we really haven't seen that. Our sales Growth is really driven by agent count growth, and then agent count growth is really driven by middle management growth. And so That's why you're seeing us revise up. Just the momentum that we're seeing in our onboarding of new agents as well as the growth in the management Count across the 3 agencies is really what's driving our sales projections for the year.

Speaker 7

Thank you.

Operator

We do have one remaining one for now, Wes Carmichael of Wells Fargo. Please go ahead.

Speaker 7

Hey, thanks for taking my follow-up call. I actually 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 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 drift, That makes sense.

Speaker 2

There would be some overall, you're right, about 50% of Our CMLs are sitting there at CM2 and are you looking maybe I misunderstood your question here On just

Speaker 7

the Yes. I'm just thinking about so like the Sure. So like if you think about the gross C1 charges, and then you could do that math to your 300% to 3 20 percent 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?

Speaker 2

Yes. I'll be honest, I'm not sure that I'm able to give you that what that rule of thumb would be. I mean, there is definitely as we do think about the C1 Charges, we look a lot we think about size diversification and we work with that quite a bit and then trying to get the across the portfolio. I'll be honest, I don't have that stuff that I have handy to try to give you that rule of thumb.

Speaker 7

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 GAAP.

Speaker 7

Is that in the ballpark? Do you have that handy?

Speaker 4

I didn't put it in that framework, but we are definitely seeing Higher retained earnings as a result of restating 2021 2022 earnings under LDTI. It was and then the transitional balance sheet change was relatively small. There's like I said, it was about $12,000,000 So we had previously guided to the LDTI would increase earnings by 100 and $5,000,000 to $115,000,000 And so I think actually what might be helpful to you is to look in The supplemental financial information where we've restated the 2022 earnings numbers and That will help guide you. But 2021 was about $187,000,000 favorable over historical and 2022 was about $253,000,000 favorable over historical. So that's adding about $428,000,000 To retained earnings just because of the restatements of the prior historical numbers, yes, to the retained earnings

Speaker 2

as of twelvethirty one as of 'twenty two, Right. So that's right. That's the bill 3122.

Speaker 7

Yes, that's perfect. My math was 429. So it sounds like we're in the same ballpark. But Thank you and appreciate the follow-up.

Speaker 2

On the large part of that, of course, as you're thinking about restating on those prior years, it is because we had The large fluctuations with COVID in both of those years, so under LDTI, they got a good chunk of that got pushed out in the future years as well as then the impact from the Lower

Speaker 7

amortization. Thank you.

Operator

Thank you. And as we have no further questions, I'd like to I hand it back over to Steven Mota for any closing remarks.

Speaker 1

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

Operator

Thank you, everyone. That concludes our call. You may now disconnect. Host, please stand by.

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Earnings Conference Call
Globe Life Q1 2023
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