Q2 2022 Globe Life Inc Earnings Call
Thank you for standing by your currently on hold for today's Globe Life, Inc. Second quarter 2022 earnings release conference. At this time, we are still in many additional participants and expect to be underway. Shortly we do thank you for your patience and please continue to standby.
[music].
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.
Thank you and good morning, everyone. Joining the call today are Gary Coleman, Larry Hutchison, our co Chief Executive officers, Frank Svoboda, Our Chief Financial Officer, and Brian Mitchell, Our General Counsel.
Some of our comments or answers to your questions may contain forward looking statements that are provided for general guidance purposes only.
Accordingly, please refer to our earnings release 2021 and 10-K.
And any subsequent forms 10-Q on file with the SEC.
Some of our comments May also contain non-GAAP measures. Please see our earnings release and website for discussion of these terms and reconciliations to GAAP measures I will now turn the call over to Gary Coleman.
Thank you, Mike Hey, good morning, everyone.
In the second quarter, net income was $177 million or $1 79 per share.
Paired with $200 million or $1 92 per cent per share a year ago.
Net operating income for the quarter was $205 million or $2 70 per share.
An increase of 12% from a year ago.
On a GAAP reported basis return on equity was nine 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 or 71 cents.
9% from a year ago.
And life insurance operations premium revenue increased 4% from the year ago quarter to $760 million.
Life underwriting margin was $198 million up 11% from a year ago.
The increase in margin is due primarily to increase premium and improved claims experience.
For the year, we expect life premium revenue to grow around 5% and.
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 premiums grew 8% to $319 million and health underwriting margin was up 7% to $80 million.
For the year, we expect health premium revenue to grow six 7%.
At the midpoint of our guidance, we expect underwriting margins to grow around 5%.
Administrative expenses were $74 million for the quarter up 9% from a year ago.
As a percentage of premium administrative expenses were six 8% compared to six 6% a year ago.
For the full year, we expect administrative.
Fences to grow around 11% and be around 7% of premiums.
Due primarily to higher it and information security calls.
Roy calls.
An increase in travel and facilities costs.
And the addition of globe life benefits.
I will now turn the call over to Larry for his comments on the second quarter marketing operations.
Thank you Gary at American income life premiums were up 8% for the year ago quarter to $376 million and life underwriting margin was up 19% to $128 million.
Underwriting margin was primarily due to higher premium and improved claims experience.
Second quarter of 2022, net life sales were $85 million up 16%.
The increase in net life sales was caused by improvement in productivity.
New business processes.
The average producing agent count for the second quarter was 9678.
8% from the year ago quarter.
Up 3% from the first quarter.
Traditional agent count at the end of the second quarter was 9637.
The decline in average unit count, resulting from a challenging recruiting environment conditions have been tough components necessary for Asia growth remain in place.
Also in a slowing economy becomes easier to recruit and retain new agents.
We have said before agency growth is a stair step process, especially compare Asia accounts for several years to evaluate agency growth.
Liberty National life premiums were up 5% for the year ago quarter to $81 million and life underwriting margin was up 12% to $18 million.
The increase in underwriting margin is primarily due to higher premium and improved claims experience net.
Net life sales increased 7% or $19 million net health sales were $7 million 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% with a year ago quarter and 24% for the first quarter of this year.
The average producing agent count for the second quarter was 2730, <unk> flat compared to the year ago quarter and up 2% compared to the first quarter.
The agent count at Liberty National as a quarter at 2782.
We continue to see positive momentum at Liberty National.
At family Heritage Health premiums increased 7% over the year ago quarter to $91 million and health underwriting margin increased 9% to $24 million the accretion or any margin is due to increased premium and improved claims experience net.
<unk> sales were up 1% to $19 million due to agent productivity.
The average producing agent count for the second quarter was 1173 down 4% for the year ago quarter. However, the agent count grew 7% for the first quarter to the second quarter.
I indicated our first quarter call the family heritage with concentrate on recruiting we are seeing results from those efforts.
<unk> agent count at the end of the quarter with 1200 was reached.
The recent sales and recruiting trends at family Heritage are encouraging.
And our direct to consumer division of whole life life premiums were flat over the year ago quarter to $249 million, our life underwriting margin declined 16% to $29 million. The decretion underwriting margin is due to increase policy obligations.
Net life sales were $33 million down 23% from the year ago quarter due to lower response rates and lower paid initial premium hasnt.
As a reminder, direct to consumer provides a reduced premium introductory offers and we did not record a sale until the first full premium is received.
All changes in the macro environment has not impacted our marketing activities much in the past the current environment with record installation is challenging or.
Our typical direct to consumer because.
Typical direct to consumer customer.
Lower income brackets, our agency customers has generally has less discretionary income to purchase or retain insurance.
We have also had to reduce our share count circulation in dailies as increases in postage and paper costs impede our ability to achieve a satisfactory return on investment for certain marketing campaigns.
United American General Agency Health premiums increased 16% for the year ago quarter to $135 million and health underwriting margin increased 8% to $19 million.
Net health sales were $12 million up 2% compared to the year ago quarter.
I will now provide projections based on trends, we are seeing and knowledge of our business.
We expect the producing agent count for each agency at the end of 2020 to be in this holiday rages Amira.
American income a decrease of two two an increase of 4%.
Liberty National.
The increase of 3% to 11%.
L. A heritage an increase of 12% to 21%.
Net life sales for the full year of 2020 to persuade them to be as follows.
American income an increase of 12% to 18%.
Liberty National and increase of eight to 12 per share.
Direct to consumer a decrease of 19, two a decrease of 11%.
Net health sales for the full year 2022 are expected to be as follows.
Liberty National and increase of 5% to 9%.
Family Heritage, an increase of seven 211%.
United American General Agency, a decrease of 7% to an increase of 3%.
I will now turn the call back to Gary.
Yes.
Thanks, Larry I will 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.
With $57 million down 4% from the year ago quarter.
On a per share basis, reflecting the impact of our share repurchase program.
Investment income was flat.
For the full year, we expect excess investment income to decline between 1% and 2%.
Due to higher interest on debt, but to be up around 3% on a per share basis.
After three 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 second quarter, we invested $400 million in investment grade fixed maturities.
Primarily in the municipal and financial sectors we.
<unk> at an average yield of 529%.
An average rating of a plus and an average life of 26 years.
We also invested $25 million of limited partnerships that have debt like characteristics.
Investments are expected to produce additional yield and are in line with our conservative investment philosophy.
For the entire fixed maturity portfolio, the second quarter yield was 516%.
Down eight basis points in the second quarter 2041.
As of June 30, the portfolio yield was 5.16%.
While the yield declined eight basis points from a year ago, it's worth noting that it's up one basis point from the end of the first quarter.
This is the first time, we have seen an increase in the portfolio yield since 2016.
Regarding the investment portfolio invested assets were $19 6 billion.
Including 18 billion of fixed maturities at amortized cost.
Of the fixed maturities $17 4 billion are investment grade with an average rating of AA minus.
And overall the total portfolio is rated a minus 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 million.
Due to higher treasury rates and spread.
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 triple b 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. However.
However.
We have little or no exposure to higher risk assets, such as derivatives equities residential mortgages.
<unk> and other asset backed securities.
Because we primarily invest long a key criteria in utilizing our investment process is that an issue or a must have the ability to survive multiple cycles.
We believe that the Triple B Securities, we acquire provide the best risk adjusted capital adjusted returns due.
Due in large part to our ability to hold securities to maturity, regardless of fluctuations in interest rates or equity markets.
Below investment grade bonds are $585 million compared to $764 million a year ago.
<unk> to below investment grade bonds to fixed maturities is three 2%.
This is as low as this ratio has been for more than 20 years.
Excluding net unrealized losses in the fixed maturity portfolio below investment grade bonds.
Equity or 10%.
The low investment grade bonds, plus bonds ready to triple B as.
As a percentage of equity are 169% and that is the lowest this ratio has been in 10 years.
I would also mentioned that we have no direct investments in Ukraine, or Russia and.
And do not expect any material impact to our investments and multinational companies that have exposure to these countries.
For the full year at the midpoint of our guidance, we expect to invest approximately $1 $3 billion and fixed maturities at an average yield of four 9%.
And approximately $200 million and limited partnership investments with debt like characteristics.
At an average yield of around seven 6%.
Yeah.
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 potential unrealized losses that are interest rate driven.
Since we would not expect to realize we have the intent and more importantly, the ability to haul.
All of our investments to maturity.
In addition, our life products at fixed benefits, they're not interested.
Now I will turn the call over to Brian for his comments on capital and liquidity.
Thanks, Gary.
First I want to spend a few minutes discussing our share repurchase program available liquidity and capital position.
The parent began the year with liquid assets of $119 million and ended the second quarter with liquid assets of approximately $318 million.
This amount is higher primarily due to the net proceeds of the issuance in may of a 10 year $400 million senior note with a coupon rate of four 8% less amounts used to temporarily reduce our commercial paper balances.
The net proceeds will ultimately be used to redeem our $300 million three 8% senior note maturing on September 15th.
The excess proceeds being available for other corporate purposes.
In addition to these liquid assets the parent company annually generate excess cash flows.
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 million and $365 million of excess cash flows.
This amount of excess cash flows, which again is before the payment of dividends to shareholders is lower than the $450 million received in 2021, primarily due to higher COVID-19 life losses, and the nearly 15% growth in our exclusive agency sales in 2021.
Both of which resulted in lower statutory income in 2021.
And thus lower cash flows to the parent in 2022.
Then what we received in 2021.
Obviously, while an increase in sales creates a drag to the parents cash flows in the short term the higher sales will result in higher operating cash flows in the future.
We anticipate that approximately $145 million of excess cash flows will be generated during the second half of the year out of which we anticipate distributing approximately $40 million to our shareholders in the form of dividend payments.
In the second quarter.
The company repurchased 1.388 million shares of Globe Life, Inc. Common stock.
At a total cost of $134 2 million at an average share price of $96 64.
Total repurchases during the quarter were higher than normal as we accelerated approximately $50 million of repurchases for the second half of the year given favorable market conditions.
These additional repurchases were at an average price of $94 and 39.
Year to date, including $11 $6 million in purchases made so far in July we have repurchased two 4 million shares for approximately $234 million.
At an average price of $98.22.
Taking into account the liquid assets of $318 million at the end of the second quarter, plus the estimated $145 million of excess cash flows expected to be generated in the second half of the year.
We anticipate having around $463 million of assets available to the parent for the remainder of the year.
As previously noted we have used $12 million for buybacks. So far this quarter and anticipate using approximately $40 million to pay shareholder dividends and approximately $180 million in net debt net debt reduction.
Leaving approximately $230 million for other uses.
Yes.
As noted on previous calls, we will use our cash as efficiently as possible.
We still believe share repurchases provide the best return or yield to our shareholders over other available alternatives. Thus.
We anticipate share repurchases will continue to be a primary use of the parent's excess cash flows along with the payment of shareholder dividends.
It should be noted that the cash received by the parent company from our insurance operations is after our subsidiaries have made substantial investments during the year issued new insurance policies expand and modernize our information technology and other operational capabilities and acquired new long duration assets to fund their future cash needs.
As discussed on prior calls we have historically targeted 50% to $60 million of liquid assets to be held at the parent we will continue to evaluate the potential capital needs and should there be excess liquidity, we anticipate the company will return such exits to the shareholders in 2022.
In our earnings guidance, we anticipate between 410 and $420 million will be returned to shareholders in 2022, including approximately $330 million to $340 million through share repurchases.
With regard to the capital levels at our insurance subsidiaries.
Our goal is to maintain our capital at levels necessary to support our current ratings.
Global life targets, a consolidated company action level RBC ratio in the range of 300% to 320%.
For 2021, our consolidated RBC ratio was 315%.
At this RBC ratio, our subsidiaries have approximately $85 million of capital over the amount required at the low end of our consolidated RBC target of 300%.
During 2022 that NTIC was will.
We will be adopting new RBC factors related to longevity and mortality risk.
Also known as C. Two factors.
While the longevity risk factors that primarily relate to life contingent annuities will have little impact on our subsidiary 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 levels held for our life insurance products already provide for a very strong total asset requirement.
Given the consistent generation of strong statutory gain 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 any additional capital will be required to maintain the low end of our targeted RBC ratio. The parent company does have sufficient liquid assets available should additional capital would be required.
At this time I'd like to provide a few comments related to the impact of COVID-19, and our excess non COVID-19 policy obligations on second quarter results.
In the second quarter, the company incurred approximately $8 $4 million of Covid life claims relating to approximately 30000 U S. Covid deaths are 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 first quarter Covid deaths. We now estimate that our average cost per 10000 U S deaths in the quarter was approximately $2.4 million down from the $3 million average costs 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 million of Covid life claims a decrease of $9 million from our prior estimate.
This estimate assumes an estimated 60000 U S COVID-19 deaths and an average cost per 10000 deaths of approximately $2 $8 million in the second half of the year.
While we had favorable experience with respect to COVID-19 losses incurred in prior quarters, we did experience higher life policy obligations from non COVID-19 causes the.
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.
So 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.
Given the lessening number of Covid deaths, we do anticipate these claims will moderate over the remainder of the year.
In the second quarter, we estimate that our excess non COVID-19 life policy obligations were approximately $28 million $10 million higher than expected, primarily due to adverse development of first quarter incurred losses in our direct to consumer channel.
For the full year, we anticipate that our excess life policy obligations will be around $64 million or around 2% of our total life premium.
Essentially all of the tire obligation related to higher non COVID-19 causes of death.
With respect.
Spec 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.
The $8 tests at midpoint is higher than the midpoint of our previous guidance of $8 at five.
Primarily due to a greater impact of our share repurchase program.
We continue to evaluate data available from multiple sources, including the IH M B and C. D. C to estimate total U S deaths due to COVID-19 and to estimate the impact of those deaths on our in force book.
We estimate the total U S deaths from Covid will be in the range of 215000 to 275000 and that our cost per 10000 U S deaths for the year will be approximately $2 $5 million.
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 OCI.
The impact on GAAP income 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 the LTI 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 persistence and we have many policy is 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 premium we collect nor the amount of claims we ultimately pay.
Furthermore, it has no impact on statutory earnings are the statutory capital we require 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 debt balances and the methods of amortizing DAC.
We currently estimate that these changes will increase net income after tax in the range of $120 million to $145 million 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.
It is important to note that our policyholder benefits reported for 2021, and 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 2021 and 2022 that 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 and concepts to recognize these fluctuations over the life of the policies.
This will result in higher net income in both 2021 and 2022, then reported on our current guidance.
Forward, we anticipate that our policy obligations as a percent of premium will be similar in the near term to those restated percentages.
The absence of assumption changes.
With respect to changes to the balance sheet and a OCI.
The new guidance adopts a new requirement to re measure of 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 a OCI a component of shareholders equity.
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 one 2021.
The company expects an aftertax seven 5 billion to $8 5 billion dollar decrease in the OCI 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 our reported a OCI for.
For instance, if we were to hold all else equal as of the transition date, but used current discount rates as of June 32022.
The after tax decrease in ALC I do solely to the increase in future policy benefits would have been all the in the range of 2.4 to $3 2 billion.
Keep in mind, a LTI would also be adjusted in such a situation to reflect changes in the valuation of the fixed maturity bond portfolio.
As discussed on the February call, while the new guidance requires the company to recognize the inherent unrealized interest rate loss for purposes of determining a LTI. It ignores the unrealized gains from underwriting margins that are available to fund future policy benefits and changes in interest rates.
Given our strong underwriting margins. This submission has the effect of reporting our policy liability that understates the value of these margins.
This fact, along with the non economic impact of this new requirement for determining our future policy obligations for LCI purposes. We continue to believe the equity excluding a OCI will be a more meaningful measure of global financial condition going forward.
The new guidance also requires a more granular assessment of the ratio between present value benefits and the present value of gross premium also known as a net premium ratio.
Any blocks of business that require increases in future policy benefits to minimum levels.
Does it have a net premium ratio greater than 100% will require a decrease to the opening balance of retained earnings.
As the transition date, we expect this adjustment to retained earnings to be less than $50 million.
Thank you Sir.
I would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please ensure your mute function has been turned off to allow your signal to reach our equipment.
Once again that is star one if you would like to ask a question.
And we'll take our first question from Jimmy Bullard of J P. Morgan.
Hi.
A question first just on the persistency and it seemed like during the pandemic you've benefited from people unwilling to cancel policies and now youre seeing an uptick in that state.
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 defend that make impact fading or.
Are there other reasons that sort of make you concerned about persistency getting worse.
We in fact do enter a recession.
Jimmy there there.
There are several reasons.
It could be causing that.
The slight uptick in lapses.
Yes.
Economy inflation we've.
We've said in the past that.
During periods of inflation, we haven't seen that much impact.
Persistency, but.
Of course this is the.
Hi, its in place than we've had in 40 years, so it's reasonable to think that.
Inflation could be affecting persist, especially in the direct to consumer area.
But also the.
As you know the end of the government Covid relief payments.
Less income in the hands of our policyholders that that could have an impact.
And also we think we're seeing a little bit of impact.
Some insurers dealing like that they don't they no longer need to coverage maybe they bought it at the beginning of the Covid outbreak and now they.
They are saying that our feeling like that they don't need to coverage up it's hard to pinpoint.
You know what what the causes are but.
I do want to emphasize that.
We're not concerned about.
Having adverse persistency heavy getting worse.
What we're saying is it looks like it's getting back towards 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.
Okay and can you talk about the labor market.
And you just your ability to recruit and retain agents.
The fairly tight labor market that we have.
Phil.
While it's been a tough recruiting market sequentially, we did see the producing agent count increase at American income there internationally and family Heritage was more important in the labor market or the components necessary for Asian growth and those remain in place all three agencies.
And new offices in 2022.
Management is projected to grow by 5% to 10% this year.
And we're providing additional shells technology to the agency forces also on a solid economy, Jimmy it's always easier to recruit and retain new agents.
Okay, and then just lastly on any quantified.
Is that what the.
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 million impact from Covid, but.
What were the actual planes and dsos.
The associated reserve releases that led to a negative net result.
Yes, Jimmy as Ed noted, we estimate that our if you will is about $8 $5 million of Covid losses, just relating to that truly related to the Q2 incurred deaths.
And that was about a $9 million $9 $5 million.
Favorable <unk>.
They are true up if you will to the prior period claims.
Thank you and I will say that.
On DTC.
It was about the excess what we had originally projected around $5 $6 million. Ben It was ended up probably be in about two and a half.
Dollars negative if you are net benefit in.
In the quarter.
Thank you.
Moving on to our next question.
Erik bass with autonomous research.
Hi, Thank you I was hoping you could provide a little bit more color on the non COVID-19 mortality experience this quarter, particularly in the direct to consumer block, but 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 a mortality normalizes.
Yeah, Eric in general in the second quarter.
We had.
Originally est.
Estimated about $18 million of total total excess obligations, we ended up with it as I noted about $28 million. So it was about $10 million higher debt.
What what we had anticipated and really all of that was on the non COVID-19 glasses were actually a little bit favorable.
They were high.
Higher 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.
That's what.
With about $10 million of additional claims that were seeing a higher policy obligations.
<unk> incurred in the second quarter relating.
To those non Covid claims so really we're kind of seeing in both of our DTC as well as just organization as a whole you know while we have those favorable.
Developments, if you will on Covid.
Maybe a little bit of a misclassification. If you will with respect to some of the Dod Kobe. Because then we clearly saw the non COVID-19.
Being a little bit higher so.
And whether that stems from.
Just some changes in how that certificates are ultimately getting recorded.
How precise some of those are being or if it's just some of the other factors that just our estimation techniques as little bit hard to tell but.
So a.
A little bit of an offset with the higher not COVID-19 that we saw with the favorable developments on the Covid side.
Okay.
And with respect to overall for the year for DTC.
We do anticipate.
But the non COVID-19, yeah, the excess non COVID-19 clients kind of for the full year, probably be about 2% of premium.
And.
That's usually about 5% of premium.
For the entire year so.
And in total about 45 $45 million 50 around $50 million.
Total access obligations for direct to consumer related to the non COVID-19 causes of death.
Yes.
And probably about 3%.
Yeah about 3% filed related to Covid.
Got it and then from a margin standpoint, I guess looking forward if in a normal environment would you still expect to be.
Sort of I guess, the 17% to 18% margin range for DTC.
28% for life overall.
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-19 and non COVID-19 being around 8% that kind of points around 20, but with some of the favorable persistency that we've.
<unk> had in the past couple of years, our amortization of our of our DAC is a little bit favorable kind of normalize all of that it kind of does bring you back down to that in that 17% to 19% range right around 2018 and 19%.
Got it and 28% sort of for the overall life business is that still reasonable.
That is reasonable yes.
Got it and if I could squeeze in one last quick one for the L. DTI impacts I think you gave the earnings impact on the net income basis would you expect much difference for operating income.
No.
Would be essentially the same you know some of the components of net operating income how we think about excess in 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.
Got it thank you.
And once again, if you would like to ask a question that is star one on your telephone keypad next we will hear from Andrew <unk> of credit Suisse.
Good morning.
So just to kind of follow on.
Excess non Covid claims.
About $28 million this quarter.
Did I recall correctly.
We're expecting about 60.
$4 million of excess non pulpwood for the year is that is that correct.
That's correct.
And that's what you were previously Frank.
Hi.
So even though you had.
$10 million more than that.
I think thats.
More than anticipated this quarter are you still standing by that.
<unk> guidance of $64 million and if that's the case can you just I guess youre just kind of.
Supporting that.
Excess non COVID-19 mortality is going to gradually dissipate it will still be there, but you will continue.
See that subside as that is that right.
That is correct over the course of the year that we do anticipate that.
The additional impact of that'll be lessened than what we've seen in the Q1 and Q2, but we have kept the overall view of about $64 million, but what we've done there Andrew as we've increased our expectations of what portion of that is related to so the increases that we that we've seen on the non COVID-19 causes of death, but truly.
Happened is that we've that's been offset by decreases at our there's excess obligations related to lapses and so as our persistency.
You know as the lapses has ticked up then.
And then some of those excess reserves that we weren't carrying had been released and are effect. The effect of that is offsetting the higher non COVID-19 claims kind of keeping our total year approximately the same.
Got it and nothing.
Nothing lead you to believe in 'twenty, three or 2024.
Assuming and hoping that COVID-19 dissipates that this excess non COVID-19 will will be a problem.
Yeah, but 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 it relationships that are higher non COVID-19 losses.
And the Seawell relationship these higher non COVID-19 losses have to the actual timing of the COVID-19 deaths and we've actually seen a really strong relationship between the COVID-19 deaths, especially with its hard circulatory and the neurological disorders and more recently the lung disorders.
And so given those strong relationships that we have been seeing whether we have seen over the course of this pandemic and with the declining COVID-19 deaths.
I think that gives us a level of comfort that as you know that those that the excess non COVID-19 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 though is the point that they should be higher than the long term and that.
They eventually should gravitate back to normal more normal levels.
Okay.
And then just lastly on amortization you gave some really good reasons inflation.
Thanks, Andrew.
Given the environment we're in.
I guess.
Expectation that we can kind of see the elevated lapses, particularly in direct to consumer over the foreseeable future.
Yes.
Well.
Yeah, I think from bi.
What we're seeing.
What we're anticipating in the midpoint of our guidance is that we are expecting the the level of lapses.
<unk>.
To be more towards more normal levels.
It's always possible and DTC that they could.
Mike you know continue to be a little bit elevated were really pretty comfortable on the exclusive agencies given the nature of the touch points with the with our agents.
You know that that persistency will just kind of more vehicles.
Normal levels, but that's in our guidance of what we've got for the remainder of the year, we do anticipate that there'll be consistent with pre COVID-19 levels.
Yes, Andrew I would add that.
We have seen the.
More of the increases in the labs as we have seen in policy policies in the last two to three years.
And.
If you go out policies had been on the books longer.
We haven't seen as much of an increase in the labs right. So.
And that gets back to what we talked about earlier, maybe that some of the policies that we sold in the last three years people are thinking they don't need that coverage anymore.
So at this point.
Especially looking out at the.
Policies available books longer.
We don't see anything to indicate that.
Having a major shift and that's going to continue to do well.
Obviously, we'll continue to monitor but so far it's.
It's more of the lapse rates moving back to where they were.
In the 2019.
Period.
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 the year are you getting a little more encouraged by what Youre seeing here too.
And you thought three months ago.
Great question.
Yes, we are encouraged we're seeing more.
I guess, Kevin just looking for the opportunity.
What we've seen is a changing economy.
Recruiting has actually increased.
The second quarter and through current date.
You do is convert more of those agents have more of those are crucial producing agents and we see that happening theres always a lag between recruiting and producing agents.
So I think on the third quarter, but the increase in recruiting we saw in the second quarter should carry through in the next quarter correctly at American income.
American income position is also more attractive 85% of.
Our sales or sell virtual.
The cost of gasoline with with inflation.
There is a need to I guess work or produce business at the same time, you can work from home and at lower expression. So I think the opportunity of American income is much better than it was pre COVID-19.
Thanks, so much.
And next we'll hear from John Barnidge of Piper Sandler.
Thank you. My first question you had previously talked about a 20% increase in average premium.
How did that trend in <unk> 'twenty, two just trying to dimension if the consumers maybe pulling back on that size of policy costly.
Okay.
Well I'll address it from an agency standpoint, if you're talking about the average premium for sale.
When we say Raj that increase processed three agencies, so at American income family Heritage.
And then our Liberty National unit, the average premiums increase.
It's driven sales as the increase in productivity of average premium and also the percentage of Asia severity business.
Sure Shannon the Asia Couch, the average age of accounts were fairly flat quarter over quarter.
We added agents.
Second quarter digital sales.
Family Heritage more than the other two agencies.
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, we had a substantial increase.
In the fourth quarter I think what Youre seeing there is a return to normal in terms of the worksite market, that's helping the average premium increase productivity agents so that market also.
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 a changing business cycle.
I appreciate you know triple B portfolio is targeted for multiple sectors, but can you talk about maybe plants or <unk>.
We underwrite for potential credit rating changes in the weather opera news to Opportunistically, maybe trim some of the Triple BS.
Well we.
We have done some of that in.
In the second quarter.
We did a slide repositioning.
Portfolio.
We sold $185 million worth of Bob.
Bonds.
That's about 1% of the portfolio.
These are bonds that we didn't have credit concerns regarding but.
Market conditions were such that.
That we could sell these bonds.
<unk>.
And reinvested.
We had higher grade bonds.
And.
What we did is we.
Reinvested the proceeds in.
We sold Triple B bonds reinvested in double AA bond.
Muni bonds.
We also.
Kris to earnings because we reinvested at a higher yield and with the higher quality.
So.
Reduces our required capital.
A win win all the way around.
This is.
This is an example of how we from time to time, we'll take advantage of situations, where we can improve the quality.
But with that.
We feel good about the quality of the portfolio.
Through the last three years.
Yeah.
<unk>.
Added more.
This will bonds that are in the double a category.
As I mentioned earlier our.
Sure.
Ratio of Triple B and below investment grade bonds.
Equities is lowest it's been in 10 years.
And also we feel good about it.
The issues that we've had on the books for a while during the pandemic companies bolstered our balance sheets.
So.
You know going forward.
We feel like our portfolio quality will hold up oil.
Thank you.
Yes.
And Thomas Gallagher of Evercore ISI has our next question.
Hi.
Our first question is the $28 million of elevated non COVID-19 excess that you referenced.
Was any of that related to prior period catch up from <unk> and if so how much of that.
$28 million would have been Q2 versus Q.
Yes, it was.
About $10 million of that really did relate to a catch up from Q from Q1.
And that was pretty much primarily a direct to consumer.
Gotcha. So if we were look at kind of a normal margin in direct to consumer we should probably be adding that 10 million back from a run rate perspective.
Yeah, I think that'd be right.
Okay.
You also referenced on direct to consumer some of the expenses like shipping costs et cetera has gone up making it less attractive.
If that was the case how did how did you respond to that did you just scale back in mailings.
Did you change pricing at all what was the response to that.
I think I wouldn't agree with that statement is less attractive.
Primary directory spots.
Yes.
Acquisition expenses occurred prior to the sale is contractually agencies, where at the time of the sale you incur the acquisition expense. So if you think of.
Direct to consumer.
We determined our mail answering affirmative answer media based on our analytics, which was based on tests that we do.
As we see lower response rates.
Are we in.
Lower issue premium.
I suppose offers we've lowered the volume of those mailings for what were the volume with the insert media.
So it's really maintaining.
A return on investment with its adequate for.
For that particular campaign.
Choose during the year.
Yes.
30, 40, 50 campaigns going on so each one is measured independently.
So we adjust that.
Continually to see response rates on our first.
For premium paid in response to the applications received and that's how we determine what the volumes are going to be.
Based on what we've seen in analytics to date.
We expect direct to consumer we're going to have a reduction in.
In our mail age this year of about 9%.
Sure.
Circulation decreases erasure, neither whether a share for 2022.
Yes, 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 is to increase the investment in response to the results we're seeing those campaigns.
Got you that's.
That's helpful color and then just the final one for me on L. D Ti.
So.
It's kind of interesting you had meaningful.
Positive from a GAAP operating earnings perspective, but.
At least upon.
The initial balance sheet implementation date looking back to when rates are lower.
It would have resulted in globe, having a negative book value.
Given given the size of the adjustment to OCI.
And I realize that's a lot less now with where rates are I think you said the transition impact is all the way down.
Only.
$2 four to $3 2 billion as of June 30th So that clearly a lot less of an impact but any any.
Any initial sense, just given those two kind of large impacts.
Positive on.
Income statement.
You know 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 I think every other company has said this won't impact capital adequacy at all but it's the fact that that could have resulted in a negative book value.
So Tom let me correct as of 12, 31, 20, <unk>, which would be the balance sheet that we'd be restating it the transition date.
Our total equity is reported was about $8 $8 billion at that point in time. So the adjustment that we're anticipating right now won't take us into a into a negative.
It will still be kind of at the midpoint of that range would point to something around $1 billion of positive GAAP equity.
As of that transition date.
That being said that's still a significant decline.
A significant decline in the reported equity, which you say again is related to these market adjustments relating to.
That debt market rates at that point in time being significantly below.
The average portfolio yield to our average portfolio yields around five 8%.
It was around that.
So.
The average.
Probably closer to about 3%.
It moves around with the curve an end of.
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 12 31 'twenty up to the current time as we kind of said you know if that helps to it won't be as significant I think that's one of the reasons and just.
You know that that we.
You'll look at ALC, I am not being a really a <unk>.
<unk> measure two to evaluate the company on.
Because there is so much that its interest rate driven.
And it will change over time with respect to the rating agencies.
You don't we don't we don't anticipate any issues at this point in time, given the nature of it doesn't change 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 add statutory earnings.
Generation perspective so.
But.
You know as as we continue to have further discussions with all of them will be able to provide more input on that.
As time goes on and they are able to absorb not only what theyre seeing from arc from our company, but as well as other.
Others in the industry.
Okay. Thanks for the color.
Thank you.
Our final question will come from Ryan Krueger of K B W.
Yeah.
Hi, Thanks, I just had a I did have one more follow up on that with DTI.
The increase in GAAP earnings of $120 million to $145 million annually is that something that you would expect to be.
Relatively stable for the over the intermediate term.
I think you had mentioned over over time it will the clients. If you could just give a little more color there.
Yeah, we do anticipate in the near end.
The intermediate term that it would be relatively stable.
It kind of will increase over time is that the new rules will require us to as we continue to pay deferral renewal commissions those will increase increased some of our amortization with the with respect to new business as we put that new business on the books and just in future periods on existing <unk>.
As well, so, but but that'll be.
You'll take a while for some of that to make a real meaningful impact as well.
Got it and then on the the increase to 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.
Yes.
Yes, it'd be more of a one time increase to required capital for the most part.
You know that we'll have to we'll have to.
Taking into 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 shouldnt have a meaningful impact on a going forward basis.
Okay got it thank you.
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.
Alright. Thank you for joining us. This morning, those are our comments and we will talk to you again next quarter.
Sure.
That does conclude today's conference we do thank you for your participation you may now disconnect.
Okay.
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