Globe Life Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2022

Key Takeaways

  • Net income for Q2 rose 12% to $205 million ($2.07/share) and GAAP ROE was 9.8% (12.6% ex-unrealized losses), with book value per share up 9% year-over-year.
  • Life and health operations delivered 4% and 8% premium growth, respectively, with underwriting margins up 11% in life and 7% in health, and full-year premium growth guidance of ~5% for life and 6–7% for health.
  • COVID-19 mortality costs in Q2 were $8.4 million, offset by a $9 million reserve true-up, and full-year COVID claims are now expected to be $62 million (down $9 million), while non-COVID deaths added $28 million in excess obligations but should moderate.
  • Investment portfolio yield was 5.16% on $18 billion of fixed maturities with an A- average rating (3.2% below-IG), and excess investment income per share was flat in Q2 but is projected up ~3% for the year after buybacks.
  • Capital deployment included $234 million of share repurchases year-to-date and plans to return $410–420 million to shareholders in 2022; upcoming GAAP LDTI changes are expected to boost annual earnings by $120–145 million but reduce AOCI by $7.5–8.5 billion at the 2021 transition.
AI Generated. May Contain Errors.
Earnings Conference Call
Globe Life Q2 2022
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good day, everyone, and welcome to the Globe Life Incorporated Second Quarter 2022 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mike Majors, Executive Vice President, Administration and Investor Relations. Please go ahead, sir.

Speaker 1

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, 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 ks and any subsequent forms 10 Q on file with the SEC. Some of our comments may also contain non GAAP measures.

Speaker 1

Please see our earnings release and website for a discussion of these terms and reconciliations GAAP measures. I'll now turn the call over to Gary Coleman.

Speaker 2

Thank you, Mike, and good morning, everyone. In the Q2, net income was $177,000,000 or $1.79 per share For the quarter, it was $205,000,000 or $2.07 per share, an increase of 12% from a year ago. On a GAAP reported basis, return on equity was 9.8% and book value per share is $54.18 Excluding unrealized losses on fixed maturities, return on equity was 12.6% And book value per share is $60.71 up 9% from a year ago. In life insurance operations, Premium revenue increased 4% from the year ago quarter to $760,000,000 Life underwriting margin was $198,000,000 up 11% from a year ago. The increase in margin is due primarily to increased premium and improved claims experience.

Speaker 2

For the year, we expect Life premium revenue to grow around 5% and at the midpoint of our guidance Expect underwriting margin to grow around 23%, due primarily to an expected decline in COVID claims for the full year. In health insurance, premium grew 8% to $319,000,000 and health underwriting margin was up 7% to $80,000,000 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 $74,000,000 for the quarter, up 9% from a year ago. As a percentage of premium, administrative expenses were 6.8% compared to 6.6% a year ago.

Speaker 2

For the full year, we expect administrative expenses to grow around 11% and be around 7% of premium, Due primarily to higher IT and information security costs, employee costs, an increase in travel and facilities costs and the addition of the Globe Life Benefits division. I will now turn the call over to Larry for his comments on the Q2 marketing operations.

Speaker 3

Thank you, Gary. At American Income, live premiums were up 8% over the year ago quarter to $376,000,000 and life underwriting margin was up 19% $128,000,000 a higher underwriting margin was primarily due to higher premium and improved claims experience. In the Q2 of 2022, net live sales were $85,000,000 up 16%. The increase in net life sales was caused by improvement in productivity and new business processing. The average producing agent count for the 2nd quarter was 9,670, down 8% from the year ago quarter, But up 3% from the Q1.

Speaker 3

The producing agent count at the end of the second quarter was 9,637. Decline in average age account resulted from a challenging recruiting environment. While conditions have been tough, the components necessary for agency growth Remain in place. Also in a slowing economy, it becomes easier to recruit and retain new agents. As we have said before, agency growth is a stair step process.

Speaker 3

It's best to compare agent counts over several years To evaluate agency growth, at Liberty National, life premiums were up 5% over the year ago quarter The increase in underwriting margin is primarily due to higher premium and improved claims experience. Net life sales increased 7% to $19,000,000 Net health sales were $7,000,000 up 10% from the year ago quarter, due mainly to increased agent productivity. The worksite business has picked up significantly as sales were up 11% over the year ago quarter And 24% for the Q1 of this year. The average producing agent count for the 2nd quarter was 2,713, Flat compared to the year ago quarter, but up 2% compared to the Q1. The producing agent count at Liberty National End of the quarter at 2,782.

Speaker 3

We continue to see positive momentum at Liberty National. At Family Heritage Health premiums increased 7% over the year ago quarter to $91,000,000 and health underwriting margin increased 9% to $24,000,000 The increase in underwriting margin is due to increased premium and improved claims experience. Net sales were up 1% to $19,000,000 due to agent productivity. The average producing agent count The 2nd quarter was 1173, down 4% from the year ago quarter. However, the agent count grew 7% From the Q1 to the Q2, I indicated in our Q1 call that Family Heritage would concentrate on recruiting.

Speaker 3

We are seeing results from those efforts. Reducing agent count at the end of the quarter was 1201. The recent sales and recruiting trends at Family Heritage are encouraging. In our direct to consumer division of World Life, Life premiums were flat over the year ago quarter to $249,000,000 The Life underwriting margin declined 16% To $29,000,000 The decrease in underwriting margin is due to increased policy obligations. Net life sales were $33,000,000 down 23% from the year ago quarter due to lower response rates and lower paid initial premium.

Speaker 3

As a reminder, direct to consumer provides reduced premium introductory offers and we do not record a sale until the first full premium is received. While changes in the macro environment have not impacted our marketing activities much in the past, the current environment with record inflation is challenging. Our typical direct to consumer customer is in a lower income bracket than our agency customers And generally has less discretionary income to purchase or retain insurance. We have also had to reduce our Circulation in mailings as increases in postage and paper costs impede our ability to achieve a satisfactory return on investment for certain marketing campaigns. At United American General Agency, health premiums increased 16% The year ago quarter to $135,000,000 and health underwriting margin increased 8% to $19,000,000 Net sales were $12,000,000 up 2% compared to the year ago quarter.

Speaker 3

I I'll 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 4%, Liberty National, an increase of 3% to 11% Family Heritage, an increase of 12% to 21%. Net life sales for the full year of 2022 Liberty National, an increase of 8% to 12% direct to consumer, a decrease of 19% To a decrease of 11%. Net Hill sales for the full year 2022 are expected to be as follows: Liberty National, An increase of 5% to 9%, Family Heritage, an increase of 7% to 11% United American General Agency, a decrease of 7% to an increase of 3%. I will now turn the call back to Gary.

Speaker 2

Thanks, Larry. We'll now turn to our investment operations. Excess investment income, which we define as net investment income less required interest on net policy liabilities and debt, $57,000,000 down 4% from the year ago quarter. On a per share basis, reflecting the impact of our share repurchase program, Excess investment income was flat. For the full year, we expect excess investment income to decline between 1% 2% due to higher interest on debt, but to be up around 3% on a per share basis.

Speaker 2

After 3 years of declining excess investment income, we expect to see growth in 2023 due primarily to the impact of higher interest rates On the investment portfolio, as to investment yield, in the 2nd quarter, we invested $400,000,000 in investment grade fixed maturities, primarily in the municipal and financial sectors. We invested at an average yield of 5.29%, An average rating of A plus and an average life of 26 years. We also invested $25,000,000 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 2nd quarter yield was 5.16%, down 8 basis points from the Q2 2021.

Speaker 2

As of June 30, the portfolio yield was 5.16%. While the yield declined 8 basis points from a year ago, it's worth noting that it's up 1 basis point from the end of the Q1. This is the first time we have seen an increase in the portfolio yield since 2016. Regarding the investment portfolio, invested assets are $19,600,000,000 including $18,000,000,000 Fixed maturities and amortized costs. Of the fixed maturities, dollars 17,400,000,000 are investment grade with an average rating of A minus.

Speaker 2

And overall, the total portfolio is rated A- same as a year ago. During the quarter, we went from a net unrealized gain position to a net unrealized loss position of approximately $814,000,000 Due to higher treasury rates and spreads, the unrealized loss position is mitigated by our ability and intent to hold fixed maturities to maturity. And overall, we are comfortable with the quality of our portfolio. Bonds rated BBB or 53% of the fixed maturity portfolio Compared to 55% a year ago. While this ratio is in line with the overall bond market, it is high relative to our peers.

Speaker 2

However, We have little or no exposure to high 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 Is that an issuer must have the ability to survive multiple cycles. We believe that the BBB securities 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 were $585,000,000 compared to $764,000,000 a year ago. The percentage of below investment grade bonds to fixed maturities is 3.2%.

Speaker 2

This is as low as this ratio has been for more than 20 years. Excluding net unrealized losses of the fixed maturity portfolio, below investment grade bonds as a percentage of equity 10%. The low investment grade bonds plus bonds rated BBB as a percentage of equity are 169 percent That's the lowest this ratio has been in 10 years. I would also mention that we have no direct investments in Ukraine or Russia and do not expect any material impact to our investments in multinational companies that have exposure to these countries. For the full year, at the midpoint of our guidance, we expect to invest approximately $1,300,000,000 in fixed maturities at an average yield The 4.9 percent and approximately $200,000,000 in limited partnership investments with debt like characteristics at an average yield Around 7.6%.

Speaker 2

We were encouraged by the 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. As I mentioned earlier, we're not concerned about unrealized losses that are interest rate driven since we would not expect to realize it. We have the intent and more importantly the ability to hold our investors to In addition, our life products have fixed benefits that are not interest system. Now, I'll turn the call over to Frank for his comments on capital and liquidity.

Speaker 4

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 $119,000,000 and ended the 2nd quarter with liquid assets of approximately $318,000,000 This amount is higher primarily due to the net proceeds of the issuance in May of a 10 year $400,000,000 senior note with a coupon rate of 4.8 percent less amounts used to temporarily reduce our commercial paper balances. The net proceeds will ultimately be used to redeem our $300,000,000 3.8 percent senior note maturing on September 15, with the excess proceeds being available for other corporate purposes. In addition to these liquid assets, The parent company annually generates excess cash flows.

Speaker 4

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 parent company debt. During 2022, we anticipate the parent will generate between $355,000,000 and $365,000,000 of excess cash flows. This amount of excess cash flows, which again is before the payment of dividends to shareholders, It's lower than the $450,000,000 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 resulted in lower statutory income in 2020 1, and thus lower cash flows to the parent in 2022 than we received in 2021. Obviously, while an increase in sales creates a drag to the parent's cash flows in the short term, the higher sales will result in higher operating cash flows in the future. We anticipate that approximately $145,000,000 of excess cash flows will be generated during the second half of the year, out of which we anticipate distributing approximately $40,000,000 to our shareholders in the form of dividend payments.

Speaker 4

In the Q2, the company repurchased 1,388,000 shares of Globe Life, Inc. Common stock At a total cost of $134,200,000 at an average share price of $96.64 Total repurchases during the quarter were higher than normal as we accelerated approximately $50,000,000 of repurchases from the second half of the year given favorable market conditions. These additional repurchases were at an average price of $94.39 Year to date, including $11,600,000 in purchases made so far in July, we have repurchased 2,400,000 shares for approximately $234,000,000 at an average price of $98.22 Taking into account the liquid assets of $318,000,000 at the end of the second quarter, plus the estimated 140 $3,000,000 of assets available to the parent for the remainder of the year. As previously noted, we have used $12,000,000 for buyback So far this quarter and anticipate using approximately $40,000,000 to pay shareholder dividends and approximately $180,000,000 in net debt reduction, leaving approximately $230,000,000 for other uses. 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 or yield Our shareholders over other available alternatives. Thus, we anticipate share repurchases will continue to be a primary use of the parent's excess cash flows along with the payment of shareholder dividends. It should be noted that the cash received by the parent company from our insurance operations We have historically targeted $50,000,000 to $60,000,000 of liquid assets to be held at the parent. We will continue to evaluate the potential capital needs. And should there be excess liquidity, we anticipate the company will return such excess to the shareholders in 2022.

Speaker 4

In our earnings guidance, we anticipate between $410,000,000 $420,000,000 will be returned to shareholders in 2022, including approximately $330,000,000 to $340,000,000 through share repurchases. With regard to the capital levels at our insurance subsidiaries, our goal is to maintain our capital at levels necessary to support our current ratings. Global Life targets a consolidated company action level RBC ratio in the range of 300% to 3 20%. For 2021, our consolidated RBC ratio was 3 15%. At this RBC ratio, Our subsidiaries have approximately $85,000,000 of capital over the amount required at the low end of our consolidated RBC target related to longevity and mortality risk, also known as C2 factors.

Speaker 4

While the longevity risk factors that primarily relate To life contingent annuities will have little impact on our subsidiaries, the new mortality factors do apply to our products And will increase our company action level required capital by approximately 4% to 5%. We believe the conservative statutory reserve level held for our life Insurance products already provide for a very strong total asset requirement. Given the consistent generation of strong statutory gains from operations From our product portfolio, these new factors will simply result in even stronger capital adequacy at our target RBC ratios. At this time, while we do not anticipate that any additional capital will be required to maintain the low end of our targeted RBC ratio, At this time, I'd like to provide a few comments related to the impact of COVID-nineteen and our excess non COVID policy obligations on 2nd quarter results. In the Q2, the company incurred approximately $8,400,000 of COVID life claims relating to approximately 30,000 U.

Speaker 4

S. COVID deaths occurring in the quarter as reported by the CDC. However, these incurred claims were fully offset by a favorable true up of COVID life claims incurred in prior quarters. Based on the additional claims data we now have available related to Q1 COVID deaths, We now estimate that our average cost per 10,000 U. S.

Speaker 4

Deaths in the quarter was approximately $2,400,000 down

Speaker 5

from the

Speaker 4

$3,000,000 average cost previously estimated on our last call. As a result, the net COVID life claims reported in the second quarter were not significant overall or at any of the individual distributions. For the full year and at the midpoint of our guidance, We now estimate we will incur approximately $62,000,000 of COVID life claims, a decrease of $9,000,000 from our prior estimate. This estimate assumes an estimated 60,000 U. S.

Speaker 4

COVID deaths and an average cost per 10,000 deaths of approximately $2,800,000 in the second half of the year. While we had favorable experience with respect to COVID losses incurred in prior quarters, we did experience Higher life policy obligations from non COVID causes. The increase from non COVID causes of death are primarily medical related, including deaths due to lung disorders, heart and circulatory issues and neurological disorders. The losses We are seeing continued to be elevated over 2019 levels. As stated on prior calls, we believe these higher deaths are due in large part to the pandemic.

Speaker 4

Given the lessening number of COVID deaths, we do anticipate these claims will moderate over the remainder of the year. In the Q2, we estimate that our excess non COVID life policy obligations were approximately $28,000,000 $10,000,000 higher than expected, primarily due to adverse development of 1st quarter incurred losses in our direct to consumer channel. For the full year, We anticipate that our excess life policy obligation will be around $64,000,000 or around 2% of our total life premium. Essentially, all of these higher obligations relate to higher non COVID causes of death. With respect to our earnings guidance for 2022, we are projecting net operating income per share will be in the range of $7.90 to $8.30 for the year ended December 31, 2022.

Speaker 4

The $8.10 midpoint is higher than the midpoint of our previous guidance of 8.05 primarily due to a greater impact of our share repurchase program. We continue to evaluate data available from multiple sources, Including the IHME and CDC to estimate total U. S. Deaths due to COVID and to estimate the impact of those deaths on our in force book. We estimate the total U.

Speaker 4

S. Debts from COVID will be in the range of 215,000 to 275,000 And that our cost per 10,000 U. S. Debt for the year will be approximately $2,500,000 Before I close, A few comments with respect to the potential impact of the upcoming changes of long duration accounting that will be effective in 2023. As I discussed on our February call, we expect the new accounting guidance to have a significant impact on our reported GAAP income and our reported equity including accumulated other comprehensive income or AOCI.

Speaker 4

The impact on GAAP will primarily result from changes that affect the future capitalization and amortization of deferred acquisition costs and to some degree Changes in the manner of computing policyholder benefits. The impact on AOCI will primarily be related to the new requirement to revalue policy reserves using current discount rates. The new accounting guidance is especially relevant to our GAAP financial statements since nearly all of our business is subject to the new rules. Our products are highly profitable and persistent and we have many policies still on the books that were sold decades ago. While the GAAP accounting changes will be significant, it is very important to keep in mind that none of the changes will impact our premium rates, The amount of premiums we collect nor the amount of claims we ultimately pay.

Speaker 4

Furthermore, it has no impact on the statutory earnings the statutory capital we are required to maintain for regulatory purposes nor will it cause us to make any changes in the products we offer. In other words, the accounting change will in no way modify the way we think or manage our business. Under the new standard, our GAAP earnings will be higher. The annual amortization of deferred acquisition costs or DAC will be lower than under current guidance in the near and intermediate term Due to changes in the treatment of renewal commissions, the treatment of interest on DAC balances and the methods of amortizing DAC, We currently estimate that these changes will increase net income after tax in the range of $120,000,000 to $145,000,000 on an annual basis. Due to the treatment of deferred renewal commissions in our captive agency channels, We do expect the impact of this change to diminish over a period of time.

Speaker 4

It is important to note that our policyholder As reported for 2021 2022 will be required to be restated to reflect the new guidance. While we aren't able to provide a range of expected impact at this time, the restated policy obligations as a percent of premium are expected to be lower in both 20212022 than under the current guidance Due to the treatment of COVID life claims and other fluctuations in claims experience in both of these years, as the new guidance requires us in concept to recognize these fluctuations over the life of the policies. This will result in higher net income in both 2021 2022 then reported under current guidance. Going forward, we anticipate that our policy obligations as a percent of premium will be similar in the near term to those restated percentages in the absence of assumption changes. With respect to changes to the balance sheet and AOCI, the new guidance adopts a new requirement to remeasure the company's future policy benefits each Quarter, utilizing a discount rate that reflects upper medium grade fixed income yields with the effects of the change to be recognized in AOCI, a component of shareholders' equity.

Speaker 4

The upper medium grade fixed income yields generally consist of single A rated fixed income securities that are reflective of the currency and tenor of the insurance liability cash flows. On the transition date, which will be January 1, 2021. The company expects an after tax 7,500,000,000 to $8,500,000,000 decrease in the AOCI balance as of this date due to this new requirement Since the discount rate to be used will be lower than what was used in valuing the future policy benefits under existing guidance. Given the long average duration of our liabilities, changes in the current discount rate could have a meaningful effect on the reported AOCI. For instance, if we were to hold all else equal as of the transition date, but use current discount rates as of June 30, 2022, The after tax decrease in AOCI due solely to the increase in future policy benefits would have been only in the range of 2.4 to $3,200,000,000 Keep in mind that AOCI would also be adjusted in such a situation to reflect changes in the valuation of the fixed maturity As discussed on the February call, while the new guidance requires the company to recognize the inherent unrealized interest rate loss Given our strong underwriting margins, this omission has the effect of reporting a policy liability that understates the value of these margins.

Speaker 4

This fact, along with the non economic impact of this new requirement for determining our future policy obligations for AOCI purposes, We continue to believe that equity, excluding AOCI, will be a more meaningful measure of Globe's financial condition going forward. The new guidance also requires a more granular assessment of the ratio between present value of benefits and the present value of gross premium, also known as the net premium ratio. Any blocks of business that require increases in future policy benefits to minimum levels Or that have a net premium ratio greater than 100 percent will require a decrease to the opening balance of retained earnings. At the transition date, we expect this adjustment to retained earnings to be less than $50,000,000 We will provide more discussion of the impact of the accounting change in our Q2 Form 10 Q to be filed next month, And we may be in a position to provide more guidance on our anticipated restated 2021 2022 operating income and initial views on 2023 earnings on our next call. Those are my comments.

Speaker 4

I will now turn the call back to Larry.

Speaker 3

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

Operator

And we'll take our first question from Jimmy Bhullar of JPMorgan.

Speaker 6

Hi. I had a question first Just on persistency, and it seems like during the pandemic, you benefited from people unwilling to cancel policies and now you're seeing an uptick in lapse rates. Do you think that's because of the weaker economy or is it because of a catch up from what's happened during the pandemic as the pandemic impact fading or Are there other reasons that sort of make you concerned about persistency getting worse if we in fact do enter a recession?

Speaker 2

Jimmy, there are several reasons that could be causing The slight uptick in lapses and the economy inflation, We've said in the past that during periods of inflation, we haven't seen that much impact on persistency. But Of course, this is the highest inflation we've had in 40 years. So it's reasonable to think that inflation could be affecting persistency, especially in the Direct to consumer area. But also the end of the government COVID relief payments is Less income in the hands of our policyholders, that could have an impact. And also we think we're seeing a little bit of Some insurers feeling like they don't they no longer need the coverage.

Speaker 2

Maybe they bought it at the beginning of the COVID outbreak and now they're seeing that or feeling like they don't need the coverage. It's hard to pinpoint what the causes are, but I do want to emphasize that we're not concerned about having Adverse persistency, havoc getting worse. So what we're seeing is it looks like it's getting back towards the pre pandemic levels. And but at this point, we don't see anything to indicate that that's going to be an ongoing increase in lapses.

Speaker 6

Okay. And can you talk about the labor market and how and just your ability to recruit and retain agents With the fairly tight labor market that we have though?

Speaker 3

Well, it's been a tough recruiting market. Sequentially, we did see the producer and agent count increase in American Income, through International and Family Heritage. What's more important than the labor market are the necessary for agent growth and those remain in place. All three agencies are opening new offices in 2022. Management is projected to grow by 5% to 10% this year, and we're providing additional sales technology to the agency forces.

Speaker 3

Also in a solid economy, Jimmy, it's always easier to recruit and retain new agents.

Speaker 6

Okay. And then just lastly on can you quantify the impact or what the actual COVID claims were this quarter and what The offsetting reserve release was because I think on a net basis you had a negative $1,000,000 impact from COVID, but what were the actual claims and what were the associated Reserve releases that led to negative net result.

Speaker 4

Yes, Jimmy, as I noted, we estimate that our If you will, it was about $8,500,000 of COVID losses just related to the truly related to Q2 incurred deaths. And that was about a $9,000,000 $9,500,000 favorable development or true up, if you will, to those prior period claims.

Speaker 6

Okay. Thank you.

Speaker 4

And I will say that on DTC, it was about the excess was so we had originally projected around $5,600,000 but it was ended up probably being about $2,500,000 of a negative, if you were, net

Operator

Thank you. Moving on to our next question, Erik Bass with Autonomous Research.

Speaker 3

Hi, thank you.

Speaker 5

I was hoping

Speaker 7

you could provide a little bit more color on the non COVID mortality experience this quarter, particularly in the direct Consumer block, and maybe talk a little bit as well about the out of period adjustment there, and I guess where you see margins Being for DTC in the near term and where you think they can get to if mortality normalizes?

Speaker 4

Yes. Eric, in general in the second quarter, We had originally estimated about $18,000,000 of total excess obligations. We ended up with, as I noted, about $28,000,000 So it was about $10,000,000 higher than what we had anticipated. Really all of that was on the non COVID side. Lasses were actually a little bit favorable.

Speaker 4

They were The lapses were higher than what we had anticipated for the quarter. So some of the releases of some of those excess reserves there helped out. All of that difference related to DTC and that's what it was about $10,000,000 of additional claims that we're Seeing higher policy obligations incurred in the Q2 relating to those non COVID claims. So Really what we're kind of seeing in both of DTC as well as just organization as a whole, while we have those favorable Developments, if you will, on COVID, there's maybe a little bit of a misclassification, if you will, with respect to some of the non COVID, because then we clearly saw the non COVID being a little bit higher. So and whether that stems from Just some changes in how debt certificates are ultimately getting recorded and how precise some of those are being or if it's just some of the other factors Just our estimation techniques, it's a little bit hard to tell, but a little bit of an offset with the higher non COVID that we saw with the favorable developments on the COVID side.

Speaker 6

And

Speaker 4

with respect to overall for the year for DTC, TC, we do anticipate that the non COVID the excess non COVID clients Kind of for the full year, probably about 2% of premium and excuse me, about 5% of premium For the entire year, so in total about $45,000,000 around $50,000,000 Of total excess obligations for direct to consumer related to the non COVID causes of death And probably about 3% yes, about 3% related to COVID.

Speaker 7

Got it. And then from a margin standpoint, I guess looking forward, if in a normal environment, would you still expect to be in So I guess the 17% to 18% margin range for DTC and kind of 28% for Life overall?

Speaker 4

Yes. For the full year, we estimate that we're probably somewhere in that 11% to 13% range for our projected margin for the entire year. And with COVID, if you will, the higher obligations for COVID and non COVID being around 8%, that kind of points around 20. But with some of the favorable persistency that we've had in the past couple of years, our amortization of our DAC is a little bit favorable. You kind of normalize all that.

Speaker 4

It kind of does bring you back down in that 17% to 19% range, right around 18% to 19%.

Speaker 7

Got it. And 28% sort of for the overall Life business. Is that still reasonable?

Speaker 4

That is reasonable, yes.

Speaker 7

Got it. And if I could squeeze in one last quick one. For the LDTI impacts, I think you gave the earnings impact on a net income basis. Would you expect much Difference for operating income?

Speaker 4

No. Would be essentially the same. Some of the components of Not operating income, how we think about excess investment income versus some of the underwriting income and how we treat required interest on that. Those components will be a little bit different, but the overall net operating income would be The net same impact overall.

Speaker 7

Got it. Thank

Operator

Next, we'll hear from Andrew Kligerman of Credit Suisse.

Speaker 5

Hey, good morning. So just to kind of follow on with The excess non COVID claims of about $28,000,000 this quarter, did I recall correctly that You were expecting about $64,000,000 of excess non COVID for the year. Is that correct?

Speaker 4

That's correct.

Speaker 5

And that's what you were previously, Frank, guiding to. So even though you had $10,000,000 more than I think that's what you said, dollars 10,000,000 more than anticipated this quarter. You're still standing by that Previous guidance of $64,000,000 And if that's the case, you just I guess you're just kind of anticipating that this Excess non COVID mortality is going to gradually dissipate. It will still be there, but you'll continue to kind of see that subside. Is that right?

Speaker 4

That I mean that is correct over the course of the year that we do anticipate that the additional impact of that will be less Then what we've seen in the Q1 and Q2. But we have kept the overall view of about $64,000,000 But what we've done there, Andrew, is we've increased Our expectations of what portion of that is related to so the increases that we've seen on the non COVID causes of death, What's really happened is that we've that's been offset by decreases in our excess obligations related to lapses. And so as our persistency As the last has just ticked up, then some of those excess reserves that we were carrying have been released And our the effect of that is offsetting the higher non COVID claims, kind of keeping our total year approximately the same.

Speaker 5

Got it. And nothing would lead you to believe that in 2023 or 2024, Assuming and hoping that COVID dissipates that this excess non COVID will be a problem.

Speaker 4

Yes. What really something we've done here recently is we've gone back our actuarial team has gone back and really tried to Look back at relationships that are higher non COVID losses and the Cboe relationship these higher non COVID losses have to the actual Timing of the COVID deaths. And we've actually seen a really strong relationship between the COVID deaths, Especially with this heart circulatory and the neurological disorders and more recently the lung disorders. And so given those strong relationships that we have been We have seen over the course of this pandemic and with the decline in COVID deaths, I think that gives us a level of comfort that as That those that the excess non COVID causes of death will start to dissipate as well. And so at least at this point, we're not seeing any reason why We any evidence that was pointed that they should be higher in the long term and that they eventually should gravitate back to normal more normal levels.

Speaker 5

Got it. As I said, that makes a lot of sense. And then just lastly, on lapsation, you gave some really good reasons, inflation, Given the environment we're in, I guess, is the expectation that we could kind of See these elevated lapses, particularly in direct to consumer over the foreseeable future?

Speaker 4

Yes, I think from What we're seeing what we're anticipating in the midpoint of our guidance is that we are expecting the level of lapses To be more toward more normal levels, it's always possible in DTC that they could Mike, continue to be a little bit elevated. We're really pretty comfortable on the exclusive agencies given the nature and the touch points With our agents, that persistency will just kind of more be at the normal level. But that's In our guidance of what we've got for the remainder of the year, we do just anticipate that they'll be consistent with pre COVID levels.

Speaker 2

Yes. Andrew, I would add that we have seen more of the increases in the labs as we have Seeing in the policies in the last 2, 3 years. And that if you go out policies have been on the books longer, We haven't seen as much of an increase in the lapse rate. So and that gets back to what we talked about earlier, maybe that some of the policies that we sold in the last Because for years people are thinking they don't need that coverage anymore. So at this point, especially looking at the Policies have been on the books longer.

Speaker 2

We don't see anything to indicate that we're having a major shift and it's going Obviously, we'll continue to monitor it. But so far, it's more of the lapse rates moving back to where they were In the 2019 time period.

Speaker 5

That's great to hear. Actually, let me just sneak one in. American Income looked good. Your guidance has bumped up 1% in terms of agent count on that Growth over year, are you getting a little more encouraged by what you're seeing? Is it easier to recruit than you thought 3 months ago?

Speaker 3

Yes, we are encouraged. We're seeing more. I guess, Ken is looking for the opportunity. What we see is a changing economy. Recruiting has actually increased During the Q2 and through current date, all we need to do is convert more of those agents or more of those recruits into producing agents.

Speaker 3

And we see that happening. There's always a lag between recruiting and producing agents. And so I think in the Q3, the increase in recruiting we saw in the Q2 Should carry through in the next quarter, particularly the American Income. Now the American Income position is also more attractive. 85% of our sales are still virtual.

Speaker 3

And with the cost of gasoline with inflation, there's a need to, I guess, work or produce business. At the same time, you can work from home and you have lower expenses. So I think the opportunity of American Income is much better than it was pre COVID.

Speaker 5

Thanks so much.

Operator

And next we'll hear from John Barnidge of Piper Sandler.

Speaker 7

Thank you. My first question, you'd previously talked about 20% increase in average Premium, how did that trend in 2Q 2022? Just trying to dimension if the consumers may be pulling back on size of policy possibly.

Speaker 3

Well, I'll address it from an agency standpoint. We're talking about the average premium per sale. What we see is that increase across the 3 agencies. So at American Income, Family Heritage and in our Liberty National unit, the average premiums increased and that's what's driven sales is the increase in productivity or average premium and also the percentage of agents submitting business. As you've seen the agent counts, the average agent counts were fairly flat quarter over quarter as we added agents in the 2nd quarter that did help Sales and Family Heritage more than the other 2 agencies.

Speaker 3

I think the other thing you're seeing is, particularly at Liberty National, I mentioned in the script that the worksite sales increased both year over year with a substantial increase In the Q4, I think what you're seeing is a return to normal in terms of that worksite market. That's helping the average premium increase And productivity agents in that market also.

Speaker 7

Okay. And then my follow-up question. You provided some great color on the portfolio. Clearly, some concern generally in the world about economic growth and the changing business cycle. Appreciate BBB portfolio is targeted for multiple sectors.

Speaker 7

But can you talk about maybe plans to re underwrite for Potential credit rating changes and whether you'd opportunistically maybe trim some of the BBBs?

Speaker 2

Well, we have done some of that. In the Q2, we did a slight repositioning The portfolio, we sold $185,000,000 worth of bonds, that's about 1% of the portfolio. These were bonds that we didn't have credit concerns regarding, but market conditions were such That we could sell these bonds and reinvest in higher grade bonds. What we did is we reinvested the proceeds and We sold BBB bonds, reinvested in AA bonds, muni bonds. We also Increased earnings because we reinvested at a higher yield and with the higher quality, it also reduces our required capital.

Speaker 2

And at the same time, we were able to offset some prior year tax gains. So it was a win win all the way around. This is an example of how we from time to time will take advantage of situations and where we can improve the quality. But with that, We feel good about the quality of the portfolio. Through the last 3 years, we've added more Municipal bonds that are in the AA category, as I mentioned earlier, our Ratio of BBB and below investment grade bonds as a percentage of equity is as low as it's been in 10 years.

Speaker 2

And also we feel good about The issues that we've had on the books for a while, during the pandemic, companies bolstered their balance sheets. So going forward, we feel like our portfolio, the quality will hold up well.

Speaker 5

Thank you.

Operator

And Thomas Gallagher of Evercore ISI has our next question.

Speaker 8

Hi. First question is the $28,000,000 of elevated non COVID excess That you referenced, was any of that related to prior period catch up from 1Q? And if so, how much of that $28,000,000 would have been 2Q versus 1Q?

Speaker 4

Yes, it was about $10,000,000 of that Really did relate to a catch up from Q1. And that was pretty much primarily a direct to consumer.

Speaker 8

Got you. So if we were to look at kind of a normal margin in direct to consumer, we should probably be adding the $10,000,000 back from a run rate

Speaker 4

Yes, I think that would be right.

Speaker 8

Okay. You also referenced On direct to consumer, some of the expenses like shipping costs, etcetera, have gone up making it less attractive. If that was the case, how did you respond to that? Did you just scale back in mailings? Did you change pricing at all?

Speaker 8

What was the response to that?

Speaker 3

I think I wouldn't agree with the statement. It's less attractive. If we remember our direct response that the acquisition expenses incurred prior to the sale, this contrast to the agencies where At the time of the sale, you incurred the acquisition expense. So if you think about direct to consumer, we determine our mail ins, we determine our insert media Based on our analytics, which is based on tests that we do, as we see lower response rates, are we And when we're issued premium in response to those offers, we've lowered the volume of those mailings or lowered the volume of the Internet Media. So it's really maintaining the return on investment that's adequate for that particular campaign.

Speaker 3

And realize too, during the year, We have 30, 40, 50 campaigns going on. So each one is measured independently. And so we adjust that Continually to see what are response rates, what are the first full premium paid in response to the applications received, That's how we determine what the volumes are going to be. Based on what we see in the analytics to date, we expect in Direct to consumer, we're going to have a reduction in our mailings this year of about 9% And our in circulation will decrease in the range of 9% to 11% for 2022. As the campaigns continue, If the economy improves, if we see a higher demand for life insurance again and it's not really Increasing the investment, it's increasing the investment in response to the results we're seeing those campaigns.

Speaker 8

Got you. That's helpful color. And then just a final one for me on LDTI. So, it's kind of interesting. You had it's a meaningful positive, from a GAAP operating earnings perspective, but At least upon the initial balance sheet implementation date, looking back to when rates were lower, I I think it would have resulted in Globe having a negative book value, given the size of The adjustment to AOCI, and I realize that's a lot less now with where rates are.

Speaker 8

I think you said the Transition impact was all the way down only $2,400,000,000 to $3,200,000,000 as of June 30, so that's clearly a Less of an impact. But any initial sense just given those 2 kind of large impacts Positive on income statement, but meaningful negative on GAAP book value. Any initial response from the rating agencies that you think this is going to be consequential? Because I think I heard you say earlier, and I think every other company has said this won't impact capital adequacy at all. But is the fact that that could have resulted in negative book value, Raising any eyebrows at the rating agencies or not necessarily?

Speaker 4

So Tom, let me correct it. As of Twelvethirty Onetwenty, Which would be the balance sheet that we'd be restating at the transition date. Our total equity as reported was about $8,800,000,000 At that point in time. So the adjustment that we're anticipating right now won't take us into a negative. It will still be kind of at the midpoint of that range would point to something around $1,000,000,000 of positive GAAP equity as of that transition date.

Speaker 4

That being said, that's still a significant decline, Admittedly, a significant decline in the reported equity, which we say again is related to these market adjustments Relating to that market rates at that point in time being significantly below The average portfolio yield, so our average portfolio yield is around 5.8% and was around that. And The average probably closer to a 3%. It's kind of it moves around with the curve And that type of thing, but so it's a significant drop from that period of time. But so as that curve has improved since twelvethirty one 20 up to the current time as we kind of said that helps to it won't be as significant. I think that's one of the reasons and just That we look at AOCI as not being a really a difficult measure To evaluate the company on, is because there is so much of that interest rate driven, and it will change over time.

Speaker 4

With respect to the rating agencies, we don't anticipate any issues at this point in time given the nature of It doesn't change in our ability to generate cash flows, our ability to repay our debt and our obligations Or just the overall strength of our operations, especially from just an overall cash flow and statutory earnings generation perspective. So But as we continue to have further discussions with all of them, we'll be able to provide more Input on that and as time goes on and they're able to absorb not only what they're seeing From our company, but as well as others in the industry.

Speaker 8

Okay. Thanks for the color.

Operator

Thank you. Our final question will come from Ryan Krueger of KBW.

Speaker 9

Hi, thanks. I just had one more follow-up on LVPI. The increase in GAAP earnings of $120,000,000 to $145,000,000 annually, is that something that you would expect to be Relatively stable for over the intermediate term and because I think you had mentioned over time it will decline some. If you

Speaker 4

Yes. We do anticipate in the near and intermediate term that it would be relatively Stable. It kind of will increase over time as the new rules will require us to as we continue to pay deferrable renewal commissions, Those will increase some of our amortization with respect to new business as we put that new business on the books And just in future periods on existing business as well. So, but that'll be You'll take a while for some of that to make a real meaningful impact as well.

Speaker 9

Got it. And then on the increased C2 mortality factors, would that have much of an impact on your Future free cash flow generation or do you view that as more of a one time increase to required capital?

Speaker 4

Yes, it'd be more of a one time increase to required capital for the most part that we'll have to Taken to account, so I don't see it. I mean, there'll be some incremental impact, obviously, from year to year just as some of the growth in that business, but It shouldn't have a meaningful impact on a going forward basis.

Speaker 9

Okay, got it. Thank you.

Operator

And there are no further questions at this time. Mr. Majors will turn the conference back over to you for any additional or closing remarks.

Speaker 7

All right. Thank you for joining

Speaker 1

us this morning. Those are

Speaker 8

our comments and we'll talk to you again next quarter.

Operator

That does conclude today's conference. We do thank you for your participation. You may

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