Globe Life Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2022

Key Takeaways

  • Leadership Succession: Globe Life appointed Frank Svoboda and Matt Darden as co-CEOs effective January 1, 2023, while founders Gary Coleman and Larry Hutchison shift to Co-Chairmen roles, supporting a seamless transition and long-term growth strategy.
  • Strong Q3 Operating Results: Net operating income reached $211 million or $2.15 per share, up 21% year-over-year, with life underwriting margin up 28% driven by improved claims experience and book value per share (ex-unrealized losses) up 9% to $62.01.
  • Robust Earnings Guidance: For fiscal 2022, net operating income per share is guided at $8.00–$8.20, and for 2023 at $9.00–$9.70 (15% growth midpoint), with new LDTI accounting expected to boost 2023 net operating income by $105 million–$130 million.
  • Investment Income Upside: With higher interest rates, excess investment income is expected to grow 10%–12% in 2023 on a per-share basis, and portfolio yield climbed slightly to 5.18% at quarter end despite unrealized losses.
  • Sales and Expense Pressures: American Income Life saw a 5% decline in average agents due to higher attrition, direct-to-consumer life sales fell 13% amid inflation and postal cost hikes, and administrative expenses are projected to rise 11% in 2022.
AI Generated. May Contain Errors.
Earnings Conference Call
Globe Life Q3 2022
00:00 / 00:00

There are 13 speakers on the call.

Operator

Hello, and welcome to the Q3 2022 Globe Life Inc. Earnings Call. My name is Jess, and I'll be your coordinator for today's event. For the duration of the call, your lines will be on listen only. However, there will be the opportunity to ask questions.

Operator

To register your question at any time. I will now hand over to your host, Mike Majors, to begin today's call. Thank you.

Speaker 1

Thank you. Good morning, everyone. Joining the

Speaker 2

call today are Gary Coleman and Larry Hutchison, our Co Chief Executive Officers Frank Svoboda, Our Chief Financial Officer Matt Darden, our Chief Strategy Officer and Brian Mitchell, our General Counsel. Any 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. Please see our earnings release and website for a discussion of these terms and reconciliations to GAAP measures.

Speaker 2

I'll now turn the call over to Gary Coleman.

Speaker 3

Thank you, Mike, and good morning, everyone. Before we get into the 3rd quarter results, I want to note our separate announcement yesterday that Frank Saboda and Matt Darden have been appointed as Co CEOs effective January 1, 2023. Barry and I will continue to serve as Co Chairman's Board. We are very pleased to hand the reins over to Frank and Matt. You may recall that in April of this year, we appointed them to the newly created titles of Senior Executive Vice President Jazz.

Speaker 3

To reflect their significant contributions in leadership. As noted in the announcement, Frank and Matt bring a vast range of experience and skill sets to the company. Yesterday's announcement is the conclusion of a long planned succession strategy that is the result of a thoughtful and deliberate process undertaken by the Board. We believe this outcome best positions Globe Life for the next chapter of growth and value creation, while ensuring that our executive leadership structure continues in a way that allows us to best serve all our stakeholders, including our employees, agents, Policyholders as well as our shareholders. Larry and I, along with the Board, look forward to this transition.

Speaker 3

And with that, I'd like to begin the discussion of the 3rd quarter results. In the 3rd quarter, net income was $187,000,000 Or $1.90 per share compared to $189,000,000 or $1.84 per share a year ago. Net operating income for the quarter was $211,000,000 or $2.15 per share, An increase of 21% from a year ago. On a GAAP reported basis, Return on equity was 11.2% and book value per share is $44.56 Excluding unrealized losses on fixed maturities, return on equity was 13.1% and book value per share Is $62.01 up 9% from a year ago. In the life insurance operations, premium revenue increased 4% from the year ago quarter to $755,000,000 Life underwriting margin was $208,000,000 Up 28% from a year ago.

Speaker 3

The increase in margin is due to improved claims experience. For the year, we expect Life premium revenue to grow around 4.5%, and at the midpoint of our guidance, We expect underwriting margin to be up around 23%, due primarily to a decline in COVID and excess mortality for the full year. In health insurance, premium revenue grew 7% to $319,000,000 and health underwriting margin was up 4% to $80,000,000 For the year, we expect health premium to grow around 6%. At the midpoint of our guidance, we expect underwriting margin To be up around 5%. Administrative expenses were $75,000,000 for the quarter, Up 10% from a year ago.

Speaker 3

As a percentage of premium, administrative expenses were 7% Compared to 6.6% a year ago. For the full year, we expect administrative expenses to be up around 11% And be around 6.9 percent of premium due primarily to higher IT and information security costs, employee costs And the addition of the Globe Life Benefits division. I will now turn the call over to Larry for his comments on the Q3 marketing operations.

Speaker 4

Thank you, Gary. I would like to echo your comments about the appointments of Frank and Matt as the next co CEOs of Globe Life. Frank and Matt have worked closely with Gary and me over the past several years and helped develop and execute the company's strategy. We have a report that will ensure the Co CEO structure continues to best serve Globe Life's employees, agency owners, agency force, Policyholders and shareholders look forward to working closely with Gary, Frank and Matt over the coming weeks To help facilitate a seamless transition, looking at the quarter, at American Income Life, life premiums were up 6% for the year ago quarter to $378,000,000 and life underwriting margin was up 16% to $128,000,000 Higher underwriting margin was primarily due to improved claims experience. In the Q3 of 2022, net life sales were $76,000,000 up 4%.

Speaker 4

The average producer in Asia count for the 3rd quarter was 9,477, down 5% from the year ago quarter And down 2% from the 2nd quarter. Producing agent count at the end of the 3rd quarter was 9,441. Decline in average agent count resulted from higher than expected attrition. While agent count is down, I am confident regarding the long term growth potential of this agency. Regardless of economic conditions, American income will grow over time because we sell coverage The customers in a vastly underserved market really need and generate sustainable agency growth over the long term Because we have more than 60 years of experience with American Income Distribution and its products.

Speaker 4

As As we have said before, agency growth is typically a stair step process. It's best to compare agent counts over multiple years to evaluate agency growth. International life premiums were up 5% over the year ago quarter to $82,000,000 and life underwriting margin was up 17% to $19,000,000 Increase in underwriting margin is primarily due to higher premium and improved claims experience. Net life sales increased 2% to $19,000,000 and net health sales were $7,000,000 Up 5% from the year ago quarter, mainly to increased agent count. The average producing agent count for the 3rd quarter Was 2,784, up 3% from the year ago quarter and up 3% compared to the 2nd quarter.

Speaker 4

The recent agent count of Liberty National ended the quarter at 2,852. We're pleased by the continued growth of Liberty National. Family Heritage Health premiums increased 6% year over quarter to $92,000,000 And health underwriting margin increased 1% to $25,000,000 Net health sales were up 14% to $22,000,000 Due to both increased agent count and agent productivity, the average producing agent count for the 3rd quarter It was 1233, up 7% from the year ago quarter and up 5% compared to the 2nd quarter. I previously indicated that Family Heritage would concentrate on recruiting and we are seeing the results from those efforts. The producing agent count at the end of Quarter was 1302.

Speaker 4

We continue to be encouraged by the sales and recruiting trends at Family Heritage. Our direct to consumer division of Globe Life, life premiums were up 1% for the year ago quarter to $243,000,000 And life underwriting margin increased from $12,000,000 to $39,000,000 The increase in underwriting margin is primarily due to improved claims experience. Net Life sales were $29,000,000 down 13% from the year ago quarter due to lower response rates Jess. 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. As I have mentioned in previous calls, Sales in this division are impacted by the record inflation we are seeing.

Speaker 4

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've also had to reduce our circulation and mailings Jeff. As increases in postage of paper cost impede our ability to achieve a satisfactory return on investment for specific marketing campaigns. At United American General Agency, health premiums increased 13% over the year ago quarter to $134,000,000 And health underwriting margin increased 12% to $20,000,000 Net health sales were $13,000,000 Up 11% compared to the year ago quarter. I'll now provide projections based on trends we are seeing and knowledge of our business.

Speaker 4

We expect the producing agent count for each agency at the end of 2022 to be in the following ranges: American Income Life, a decline of 4% to a decline of 1% Virgin National, an increase of 3% to 7% Family Heritage, an increase of 13% to 22%. Net life sales included in our guidance are as follows. America Income Life for the full year 2022, an increase of 8% to 12%. For the full year 2023, relatively flat. It is difficult to predict sales activity this early, but it is a tough comparable for the next year Due to the very strong sales we've had the last few years, Liberty National for the full year 2022, An increase of 6% to 8% for the full year 2023, a high single digit increase.

Speaker 4

Directed consumer for the full year 2022, a decrease of 17% to a decrease of 13%, The full year 2023 relatively flat. These life sales are projected for 2023 And are incorporated into our projections of a 4% to 5% growth in total life premiums for the full year 2023. Net sales included in our guidance are as follows. Liberty National for the full year 2022, An increase of 6% to 8% for the full year 2023, a high single digit increase Family Heritage for the full year 2022, an increase of 11% to 13%. For the full year 2023, High single digit growth.

Speaker 4

United American individual Medicare supplement for the full year 2022, a decrease of 14% To a decrease of 8%. For the full year 2023, low single digit growth. I'll now turn the call back to Gary.

Speaker 3

Thanks, Larry. We will now turn to the investment operations. Excess investment income, Which we define as net investment income plus required interest on net policy liabilities and debt was $56,000,000 down 5% from the year ago quarter. On a per share base, reflecting the impact of our share repurchase program, excess investment income was down 2%. For the full year, we expect excess investment income to decline between 1% 2%, but to be up around 3% on a per share basis.

Speaker 3

After 3 consecutive years of declining excess investment income, we expect to see growth in 2023 of 10% to 12%, Due primarily to the impact of higher interest rates on the investment portfolio. Regarding investment yield, in the 3rd quarter, we invested $431,000,000 in investment grade fixed maturities, Primarily in the financial and municipal sectors. We invested at an average yield of 5.56%, an average rating of A and An average life of 18 years. We also invested $21,000,000 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.

Speaker 3

For the entire fixed maturity portfolio, the 3rd quarter yield was 5.17%, Down 4 basis points from a year ago, but up 1 basis points from the end of the second quarter. As of September 30, the portfolio yield was 5.18%. Invested assets were $19,800,000,000 including $18,200,000,000 of fixed maturities and amortized costs. Of the fixed maturities, dollars 17,600,000,000 are an investment grade with an average rating of A-. Overall, the total portfolio is rated A-, same as a year ago.

Speaker 3

Our investment portfolio has a net unrealized loss position of approximately $2,200,000,000 due to the higher treasury rates and spreads. We're not concerned with the unrealized loss position as is primarily interest rate driven. We have the intent and more importantly, the ability to hold our investments to maturity. Bonds rated BBB are 52% of the fixed Jeff. While this ratio is in line with the overall bond market, it is high relative to our However, we have little or no exposure to higher risk assets such as derivatives, equities, residential mortgages, CLOs and other asset backed securities.

Speaker 3

We believe that the BBB securities that we acquire Provide the best risk adjusted, capital adjusted returns to in large part our ability to hold the securities to maturity Regardless of fluctuations in interest rates or equity markets. Low investment grade bonds were $543,000,000 Compared to $782,000,000 a year ago, the percentage of low investment grade bonds to fixed maturities is 3%. This is as low as this ratio has been for more than 20 years. Global investment grade bonds plus bonds rated BBB Our 55% of fixed maturities, the lowest ratio has been in 8 years. Overall, we are comfortable with the quality of our portfolio.

Speaker 3

During 2022, we have executed some minor repositioning of The fixed maturity portfolio to improve yield and quality. In the last two quarters, we sold approximately $324,000,000 of fixed maturities With an average rating of BBB and reinvested the proceeds in higher yielding securities with an average rating of A plus Because we primarily invest long, a key criterion utilized in our investment process is that an issuer must have the ability to survive multiple cycles. We believe we're well positioned not only to withstand market downturn, but also to be Opportunistic and purchase higher yielding securities in such a scenario. I would also mention that we have no direct investments in Ukraine or Russia and do not expect any material impact to our investments And multinational companies that have exposure to these countries. At the midpoint of our guidance, for the full year 2022, we expect to invest approximately $1,400,000,000 And fixed maturities have an average yield of 5.1 percent, approximately $200,000,000 in limited partnership investments With debt like characteristics at an average yield of 7.9%.

Speaker 3

Also at the midpoint of our guidance, we Jeff. The yield on the fixed maturity portfolio to be around 5.16% for the full year in 2022 And 5.19 percent in 2023. While the expected increase is just 3 basis points, It is noteworthy and encouraging as this will be the first time we have seen the portfolio yield increase since 2,008. As we said before, we are pleased to see higher interest rates as this has a positive impact on operating income by driving up net investment income With no impact on our future policy benefits since they are not interest sensitive. Now before turning to Frank to review the financials, we want to invite Matt to say a few words.

Speaker 5

Thank you, Larry and Gary for the kind comments. As the Chief Strategy Officer, I have a deep understanding of our marketplace and an appreciation for the operations and teams driving the success of Globe Life. I'm humbled to be chosen as one of the next co CEOs of Globe Life along with Frank. I believe we bring a strong and well rounded approach That will help deliver on our value creation objectives for the long term. While we will continue to adapt to change and modernize our operations, I'm a firm believer in Globe's unique business model, and I'm excited to continue the successful execution of our strategy.

Speaker 5

I look forward to sharing more as we progress throughout next year. Frank? Yes. Thanks, Matt.

Speaker 6

I am excited to work with Matt Jess. As we engage more deeply together in Globe Life Strategies, both financial and operational, and to capitalize on the many opportunities we have for continued growth. I'm confident that our collective knowledge of the business and its functions will help continue Globe Life's success and history of shareholders value creation. I share Matt's view on our business model. It has served the company very well over the years, and I firmly believe that it provides us the best opportunity To succeed in the future.

Speaker 6

I look forward to hitting the ground running as co CEO and to getting even more involved in the business through the transition period And beyond. Now looking at the quarter, let me spend a few minutes discussing our share repurchase program, available liquidity And capital position. In the Q3, the company repurchased 564,000 shares of Globe Life Inc. Common stock At a total cost of $56,000,000 at an average share price of $99.43 For the full year through September 30, we have utilized approximately $279,000,000 of cash to purchase 2,800,000 shares At an average price of $98.46 The parent ended the 3rd quarter with liquid assets of approximately $141,000,000 Down from $318,000,000 in the prior quarter. The decrease is primarily due to the redemption in September Of the $300,000,000 outstanding principal amount of our 3.8% senior notes.

Speaker 6

In addition to these liquid assets, the parent company will generate additional excess cash flows during the remainder of 2022. The parent company's excess cash flow as we define it results primarily from the dividends received by the parent from its subsidiaries less the interest paid on debt. We anticipate the parent company's excess cash flow for the full year will be approximately $360,000,000 Of which approximately $32,000,000 will be generated in the Q4 of 2022. 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 in 2021, plus the nearly 15% growth in our exclusive agency sales, Both of which resulted in lower statutory income in 2021 and thus lower cash flows to the parent in 2022.

Speaker 6

Taking into account the liquid assets of $141,000,000 at the end of the 3rd quarter, plus $32,000,000 of excess cash flows Jeff. We will have approximately $173,000,000 of assets available to the parent for the remainder of the year, Out of which we anticipate distributing approximately $20,000,000 to our shareholders in the form of dividend payments. The remaining amount is sufficient to support the targeted capital within our insurance operations and maintain the share repurchase program For the remainder of the year. As noted on previous calls, we will use our cash as efficiently as possible. We still believe that share repurchases provide the best return or yield to our shareholders over other available alternatives.

Speaker 6

Jeff. 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 To fully fund new insurance policies, expansion and modernization of our information technology and other operational capabilities And acquisition of new long duration assets to fund their future cash needs. As discussed on prior calls, 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 potential capital needs.

Speaker 6

And should there be excess liquidity, we anticipate the company will return such excess to the shareholders. In our earnings guidance, We anticipate approximately $415,000,000 will be returned to shareholders in 2022, including approximately $335,000,000 Through share repurchases. With regard to the capital levels in our insurance subsidiaries, Our goal is to maintain our capital at levels necessary to support our current ratings. Globe Life targets a consolidated company action level RBC ratio in the range Of 300% to 320%. For 2021, our consolidated RBC ratio was 3 15%, Providing approximately $85,000,000 of capital over the amount required at the low end of our consolidated RBC target of 300%.

Speaker 6

During 2022, the NAIC is adopting new RBC factors related to longevity and mortality risks, Also known as C2 factors. While the longevity risk factors that primarily relate to life contingent annuities will have little impact on our Jeff. The higher mortality factors will apply to our products and will increase our company action level required capital by approximately $30,000,000 For about 5% of our required capital. We believe the conservative statutory reserve levels held for our life insurance products Jeff. These new factors will simply result in even stronger capital adequacy at our target RBC ratios.

Speaker 6

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, the parent company does have sufficient liquid assets available Should additional capital be required to maintain our targeted levels. Now I'd like to provide a few comments related to the impact In the 3rd quarter, the company incurred approximately $7,600,000 of COVID life claims related to approximately 40,000 U. S. COVID deaths occurring in the quarter as reported by the CDC. However, these incurred claims were fully offset by favorable true up of COVID life claims incurred in prior quarters.

Speaker 6

Based on the additional clients' payment data we now have available, we estimate that our average cost per 10,000 U. S. Deaths in the 3rd quarter Was approximately $1,900,000 down from the $2,800,000 average cost previously estimated on our last call. Consistent with the shift in COVID deaths toward older ages in recent quarters. Year to date through September 30th, We have incurred approximately $44,000,000 in COVID life claims on approximately 215,000 U.

Speaker 6

S. COVID deaths as reported by the CDC For an average of $2,000,000 per 10,000 U. S. Deaths. This average cost is similar to the average cost of our COVID life claims in 2020 Jess.

Speaker 6

And our average cost per 10,000 U. S. Deaths. The net COVID life claims reported in the 3rd quarter We're not significant overall or at any of the individual distributions. As stated on prior calls, We also continue to incur excess deaths as compared to those expected based on pre pandemic levels from non COVID causes, Including deaths due to lung disorders, heart and circulatory issues and neurological disorders.

Speaker 6

We believe the higher level of mortality we have seen is due in large part to the pandemic. As the number of COVID deaths has moderated, So has the number of deaths from other causes. In the Q3, we estimate that our excess non COVID life policy obligations We're approximately $15,000,000 down from $28,000,000 in the 2nd quarter. For the full year, We anticipate that our excess life policy obligations will be approximately $70,000,000 or around 2% of our total life premium. Substantially all of these higher obligations relate to the direct to consumer channel.

Speaker 6

With respect to our earnings guidance for 2022, We are projecting net operating income per share will be in the range of $8 to $8.20 for the year ended December 31, 2022. Dollars 8.10 midpoint is consistent with the guidance provided last quarter. For the full year and at the midpoint of our guidance, we now estimate we will incur approximately $50,000,000 of COVID life claims. This estimate assumes approximately 35,000 U. S.

Speaker 6

COVID deaths in the 4th quarter at an average cost per 10,000 deaths Of approximately $1,900,000 While our estimated COVID losses are lower than we previously anticipated, Our estimate of total excess claims from all causes of death has remained largely consistent with last quarter. For the year ending December 31, 2023, excluding the impact of the adoption of the new LDTI standard, We anticipate that our guidance that our excess mortality will be substantially reduced from 2022 levels. Still very early and levels of claims activity in the Q4 could influence our views. At the midpoint of our guidance, we estimate total excess obligations Will be around 1.5 percent of life premium, down from approximately 4% expected in 2022. This includes an estimated $20,000,000 related to COVID, which we currently anticipate will exist in an endemic state through 2023.

Speaker 6

Due to the reduced impact of excess mortality in 2023, we anticipate our life underwriting margins, Again, before any impact of the new LDTI accounting to grow in the 13% to 17% range And be approximately 27% to 29% of life premium. Driven by the anticipated growth in life underwriting margin And the favorable impact of higher interest rates on excess investment income noted by Gary. We estimate our 2023 net operating earnings will be in the range $9 to $9.70 under current accounting guidance, representing 15% growth at the midpoint of the range. As noted on prior calls, we will adopt on January 1, 2023, the new LVTI accounting guidance relating to long duration contracts. Under the new standard, we expect our GAAP earnings will be higher in 2023 than what would be reported under existing guidance.

Speaker 6

The largest driver of the increase is lower amortization of deferred acquisition costs or DAC Jess. Under current guidance, due to changes in the treatment of renewal commissions, the treatment of interest on DAC balances, The updating of certain assumptions and the methods of amortizing deck. Due to the treatment of deferred renewal commissions in our captive agency channels, We do expect that acquisition costs as a percent of premium will increase slightly in the 1st few years after adoption. In addition to the changes affecting the amortization of DAC, the new guidance changes the manner in which policy obligations are determined. Under the new guidance, life policyholder benefits reported for 2021 2022 Will be required to be restated to reflect the new guidance and are expected to be significantly lower in those years than under the current guidance Due to the treatment of COVID life claims and other fluctuations in claims experienced as well as changes in assumptions in those years, This is expected to result in slightly higher policy benefits as a percent of premium In 2023 than what would otherwise be expected under current guidance.

Speaker 6

Overall, we currently Estimate that the changes required from the adoption of the new LVTI guidance will increase 2023 net operating income after tax In the range of $105,000,000 to $130,000,000 almost all of which relates to the lower amount of DAC amortization. Of course, 2022 is not yet complete and actual sales, claims experience and other events in the Q4 this year could impact our assumptions And projected impact of 2023 results. Going forward, fluctuations in experience and changes in assumptions will result in changes in both Jeff. With respect to changes in the balance sheet and AOCI, We noted last quarter that 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 instrument yields with the effects of the change to be recognized in AOCI, A component of Shareholders' Equity. Upper medium grade fixed income instrument yields generally consist A single A rated fixed income instruments that are reflective of the currency and tenor of the insurance liability cash flows.

Speaker 6

The expected impact of the adoption of the new guidance at the transition date for January 1, 2021 Will be an after tax decrease in AOCI of $7,500,000,000 to $8,500,000,000 Since that time, our weighted average discount rate has increased and we estimate that the after tax impact on AOCI at September 30, 2022, all else being equal, but using current discount rates as of end of the 3rd quarter, Would be only approximately $1,000,000,000 to $1,600,000,000 While the GAAP accounting changes will be significant, It is very important to keep in mind that changes impact the timing of when our future profits will be recognized and that none of the changes will impact our premium rates, The amount of premiums we collect nor the amount of claims we ultimately pay. Furthermore, it has no impact on statutory earnings, The statutory capital we are required to maintain for regulatory purposes or the parent's excess cash flows Jess. Nor will it cause us to make any changes in the products we offer.

Speaker 5

As such,

Speaker 6

the accounting change will in no way modify the way we think about or manage our business. Before I turn the call back to Larry, I want to once again thank Gary and Larry for their many years of service Jess. While both of them have been part of these earnings calls for a number of years, I would be remiss If I did point out that Gary has participated in every earnings call since February of 1995, A string of 112 straight quarters, truly impressive. It has been a pleasure working with both of them And I think they have done a remarkable job.

Speaker 4

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

Operator

Please ensure your line is unmuted locally as you will be advised when to ask your question. The first question comes from the line of Jimmy Bhullar from JPMorgan. Please go ahead.

Speaker 7

Hi, good morning. And before I get into my questions, I just want to say, Gary and Larry, it's been nice working with you guys. I was going to say happy retirement, but I guess that's not appropriate. And good luck, Frank and Matt as well. So I had a question first on just the recruiting and retention environment with the sort of tight labor market.

Speaker 7

And we saw your agent count actually, that American income was down. But should we assume that it's going to be challenging to grow the agent count In the near term, if the labor market does remain tight.

Speaker 4

Jimmy, I don't think it's really tight labor market. American Income actually had a strong recruiting quarter. It had 6% growth in recruits over the prior year. What we had were higher terminations than expected. To address as restructuring compensation and middle management bonuses to address agent retention.

Speaker 7

I I think

Speaker 4

the other factor here is that if you look at the other 2 agencies, they've had growth in the agency this year. The other two agencies have had growth in the middle management. For the year, middle management is projected at Family Heritage to increase by 5% to 8%, 3% to 6% at Liberty National, But middle management will be flat at American Income. It's really not economic conditions or the labor market that affects recruiting. It's really the real drivers of recruiting.

Speaker 4

Of course, the company develops middle management. We open new offices. We provide better technology Sales support for the field.

Speaker 7

And then on sales and direct response, can you talk about what's driving The weakness there and what your outlook is?

Speaker 4

I'd say the weakness there has really been inflation. As we've talked about in the past, The sales levels, if they are dependent on our circulation, our mailings and the Internet traffic, If you look for the year, our expectation is that insert media decrease 6% to 10%, Circulation will decrease about 9% to 10%, Internet inquiries are flat to up 3%, and Mailing volumes are down 8% to 11% for 2022. This really is a result of inflation. We've had an increase in the cost of paper and increase in the cost of postage And those increases affect the above items that I referred to Because you don't have the return on investment for the lower producing segments of that business. I think it will is inflation Pleasure is hopefully and with the recession, higher interest rates as we see the costs stabilize, I would expect that sales would Also stabilized in 2023.

Speaker 7

Okay. And just lastly, for Frank on LDTI, Obviously, there's a benefit because of amortization that you mentioned on earnings in the near term. How should we think about when that benefit becomes More of a headwind in the sense that if you like it there versus your normal amortization expense Jess. Under the new accounting rules, the amortization expense would be higher. Is that like in the next like if you just frame like next 5 to 10 years or Longer or shorter than that?

Speaker 6

And Jimmy, I'm not sure if at what point it actually becomes a strain Because as we start putting on new business and you start thinking about the treatment of renewal commissions, We know that it's going to be probably an increase in that DAC amortization percent as a percentage of premium Somewhere maybe 0.5% a year for the 1st few years As some of that as we started having to capitalize the renewal commissions and getting that into the stream, but then as we start putting on new business and that has Lower initial commissions that are getting capitalized, there will be a point that it will start to stabilize. I don't have right now when exactly when that will be or if we actually get to the point to where it's, if you will, worse than Jess. Current guidance.

Speaker 7

But it should like I think as we look into future years and some of the in force runs off, the tailwind at a minimum should Abate, right? Even if with growth, it never becomes a headwind.

Speaker 6

At some point, that seems logical. Just not sure exactly if that's At this point in time, we haven't gotten quite far enough along to see where that really if that will occur or if it even will occur yet.

Speaker 7

Okay. All right.

Speaker 6

Thanks. We should be able to get some more guidance on that. If we get a little bit further along on this and kind of really finalize our 22 and start to look a bit longer, we can take a look at that.

Speaker 8

Okay. Thanks.

Operator

Next question comes from the line of Wilma Burdiss from Raymond James. Please go ahead.

Speaker 9

Hi, this is Wilma. Congratulations to the co CEOs. Actually, my first question is, Is there could you provide some rationale behind keeping the COSIO structure with Gary and Larry retiring?

Speaker 6

Yes. Matt and I can touch on that. The arrangement has worked out really well We believe for Globe Life and the teamwork that Gary and Larry have been able to demonstrate And then really the structure that they put together here from an executive management team at Globe Has been set up very well under them and it really seemed logical for us to be able to maintain that existing structure In order to maintain that continuity going forward, so it's something that Matt and I had really talked about With our willingness and ability to really work together, the thought that it's really in the best interest of the organization to make That structure continues to work.

Speaker 5

Yes. Frank, I was going to say it continues with the existing management structure that's in place,

Speaker 9

Jess. The other question about So it seems like the capital position at the end of the year is going to be pretty high, especially with no I need to put capital in the subs for the C2 charges. So is that I think the current guidance implies about $55,000,000 of share repurchases in 4Q. So should we expect a higher number?

Speaker 6

Yes. We are anticipating right now at the midpoint of our guidance at Yes, dollars 55,000,000 $56,000,000 in that range. We will take a look at where there are a few moving parts, the C2 charges Being one of them. Also, we haven't completed yet our Q3 statutory financial statements. So We'll rely on those to kind of get a better sense of where our actual statutory income and capital will be at the end of the year.

Speaker 6

If it does turn out that we don't need any additional amount of capital as of the end of the year, I would anticipate Potential some of that could come out before the end of the year. If not, would anticipate it coming out in 2023.

Operator

Okay. Thank you. Next question comes from the line of John Branagh from Piper Sandler. Please go ahead.

Speaker 1

Thank you very much and congrats again as well. My first question, on the lapse activity, Continue to increase and I know we're going back to probably the pre COVID experience. Can you maybe dimension is it inflationary or recent product? Maybe as an example, is laps activity for Jeff. 2021 sold product higher than 2018 2019 sold product was in the 1st and second years after sale?

Speaker 1

Thank you.

Speaker 3

Excuse me. What we're seeing is we're seeing a slightly higher lapse rate when compared To the 20 eighteen-twenty 19 period, they're quite a bit higher when you compare it to 2020 to 2021, but those 2 years or we had very, very favorable lapse rates. That was unusual. We think that Well, we know that the higher lapse rates are primarily in policy years 1 through 3. Once we get past that, The lapses are either at or near the historical levels.

Speaker 3

We think one reason for that is people that bought Policies in 2020, 2021 with COVID, now less than they may think they don't need the coverage. We think that's certainly a factor. But also we think inflation is having some impact as well. But if we look back in the past history, we look back into 20 ten-twenty eleven period when it was a down economy, we We had a little bit of a spike and lapses there, but it didn't last long. This spike isn't as much as what we experienced back then.

Speaker 3

And we think too at some point that we get back to what we call normal lapses. I will say at the midpoint of our guidance For 2023, we assume that over the course of the year that we will move back to What we would call historical levels of lapsation. We don't know for sure if that's our best guess at this point.

Speaker 1

That's fantastic color. And then my follow-up question, can't help but notice that As it relates to the 2023 guidance, it's initially $0.70 wide, a year ago it was initially 0.80¢ wide, how should we be thinking about this narrowing in light of maybe the pandemic being endemic? And then within that, with the LDTI guide, are you wanting us to maybe model towards that or just have an understanding around the parallel guidance? Thank you.

Speaker 6

Yes. With respect to kind of the range, we did bring it in a little bit from where we were at this point in time last year. Do you feel there's a little bit better certainty around COVID and some of the impacts of COVID and feel a bit more comfortable with it being an endemic state and what the And feel a bit more comfortable with it being in an endemic state and what the impact of that really may mean. Still some fluctuation. We still left a little wider if you will than We've had in some years in the past pre COVID, again kind of recognizing some of the uncertainty around New variants and such that potentially could pop up.

Speaker 6

With Back to the LDTI, the range kind of that $105,000,000 to $130,000,000 after tax is really more intended to be Kind of our estimate at this point in time, more in the middle, if you will, of the range. There's still a lot of moving parts, but wanted to give some sense To all on what we kind of see as being that net income impact for 2023, we don't really anticipate that Broadening the range that we need to have. And so that variability, if you will, That I have from the impact of the LVTI, we think that that will really be will fit within that overall range that we provided under the That's under the old guidance.

Speaker 1

Thank you.

Operator

Next question comes from the line of Eric Bass from Autonomous Research. Please go ahead.

Speaker 1

Hi, thank you. I was hoping you

Speaker 10

could talk about what you're assuming for 2020 Three free cash flow and what your guidance assumes for share repurchases next year.

Speaker 6

Yes. We Jeff. It's still a little bit early with respect to coming up with our excess Jess. Cash flows for next year, we do anticipate them being a little bit or our share repurchases anyway at the midpoint of our guidance Being a little bit higher than where we were this year. If you recall that as I noted earlier, we had about $360,000,000 Overall of excess cash flows before our shareholder dividends, we had around $80,000,000 of shareholder dividends here in 2022.

Speaker 6

So after that was like $280,000,000 that's essentially available for buybacks in 2022. We do anticipate our statutory earnings in 2020 will be higher. And at the end of the day, Having share buybacks, probably a little bit north of where we were this year.

Speaker 10

Got it. Thank you. And I guess should we think of, I As your kind of COVID claims normalize and sales get to serve a more normal growth cadence that Your free cash flow should kind of on a lagged basis get back to kind of where it had been previously over the next couple of years?

Speaker 6

Yes, I think that's fair to say. We would anticipate clearly as the would appear we've got one more year here of Normalization, if you will, of the COVID claims and we would expect next year to be lower than what we had anticipated this year. So I do anticipate that excess cash flow more normalizing at that point in time.

Speaker 10

Got it. Thank you. And then if I could just ask one on the investment or excess investment income, I think you're guiding to 10% to 12% growth next Jess, I was hoping to get a little bit more color on the driving pieces of that. I think you talked about the portfolio yield being up 3 basis points And I guess maybe a little bit of change in interest expense, but any other moving pieces we should think about?

Speaker 3

Eric, First of all, on the investment income side, we're thinking it will be up around 5% to 6%, And that is because of the higher yields on the fixed maturities, but also higher yields on the long term investments that we have. And that's 5% increase in the past couple of years, we've had about a 3% increase in investment income. So that's definitely a factor. But also on the required interest, this year, I'll be between 4% 5%. We're thinking next year that will be a little bit lower, say the 4% range.

Speaker 3

And also on the interest expense, Interest expense is higher this year because of the negative carry that we had. We'll go back to a more normal increase in interest Jeff. So the higher increase in investment income and the lower increases in required interest and When you add all of that, that's where you come up to the 10% to 12% increase.

Speaker 10

Perfect. Thank you.

Operator

Next question comes from the line of Ryan Krueger from KBW. Please go ahead.

Speaker 11

Hi, thanks. Good morning and congrats to everyone on the succession plan. I just had a few questions on guidance items for 2020 3 that I don't think you had given yet. Can you give us the expected growth in health underwriting margin and health Premiums in

Speaker 6

2023. Yes, Ryan, we anticipate health underwriting The health premiums to be up in that 3% to 5% range and then really anticipate the underwriting margin They're probably being flat to up 2% or 3%. Large part of life, a little lower decrease in the underwriting margin from The increase in premiums is that we have experienced some favorable experience on the health side, Especially Family Heritage, here the last couple of years, we see that normalizing just a little bit. We probably expect Family Heritage to not be quite as high of underwriting margin next year, as it did this year, just kind of coming back on us just a little bit. So we don't see the underwriting margin growing quite as much as the premium.

Speaker 11

Got it. And then, what are you expecting admin expenses to grow in 2023?

Speaker 6

Right now, we're anticipating admin Jess. To grow only around 2% and being around 6.8% or 6.9% of premium, kind of the low Impact the reason for the low growth, if you will, is that with the higher interest rate, our pension expense is also expected to be We'll decrease expected to decrease in 2023 from where it was this year. And so without that, That increase would have been higher.

Speaker 11

Got it. Thanks. And then just one last one. On the life underwriting margin, You've guided to 27% to 29%, and I think that includes 150 basis point drag from excess policy obligations. I guess I would suggest something more like 28 to 30 or even a little bit above that if we fully got if we were fully normalized.

Speaker 11

Jess. I think that's a couple 100 basis points or 200 basis points higher than it was pre pandemic. So just curious if you had any commentary on kind of what's Driven up your normalized margin expectations in the Life business?

Speaker 6

Yes. I mean, I think that's right. I mean, Generally, I would say kind of at the midpoint of all that, it kind of points to around 29%, if you will, under the We didn't have the excess obligations and really kind of the difference is that because of the higher premium That we've had with the favorable persistency and sales growth, premium growth that we had in 2020 2021, our amortization overall As a percentage of that premium is about a percent lower than what it was under pre pandemic level. So that kind of takes us from we're right before the pandemic, we were around 28%, kind of on kind of at the midpoint of that then Absent the excess obligations, kind of points to 29.

Speaker 11

Got it. Thanks a lot.

Operator

Next question comes from the line of Andrew Kligerman from Credit Suisse. Please go ahead.

Speaker 12

Hey, good morning. At least the last minute of the morning. First, big congrats to Matt and Frank, And I'm expecting the continued excellence that we've seen under Gary's and Larry's leadership. So Maybe jumping into the questions and I think following on to what Ryan was asking a moment ago. I'm thinking about the excess non COVID mortality and clarify for me because I might be off, But I think the guidance for the year 2022 was $64,000,000 It appears you've bumped it up to $70,000,000 And then if I look at the $50,000,000 of it in the first half of the year, another $15,000,000 this year In the Q3 rather.

Speaker 12

Then when we get to the Q4, we can only look we're only going to expect about $5,000,000 of excess non COVID-nineteen mortality. And then based on that, And if that's not a lot, let me just get to 23%. You talked about the 1.5% and if $20,000,000 of that is COVID, and that would imply just a mere $28,000,000 of non COVID So it sounds like you're expecting that this kind of Indirect impact from COVID to really subside as we work through next year. So A lot to pack in. Am I right on 22?

Speaker 12

Am I right on 23 number? And do you really expect it will really dissipate As we get through. Thank you.

Speaker 6

Andrew, your numbers are really good. No, you're exactly right in that we had the $15,000,000 We are anticipating around $70,000,000 for the full year is kind of pointing to that $5,000,000 And then It is somewhere in that $25,000,000 to $30,000,000 range, what we kind of anticipate for 2023 on the non COVID excess piece. Really do anticipate in large case just to an expectation right now that COVID is kind of in that endemic state. We've kind of pointed that running maybe 3 times the flu rate, kind of pointed 105,000 deaths or so in 2023. And so that has the impact in our minds of tampering both the COVID losses as well as the non COVID losses down.

Speaker 6

I will also note that we kind of look at the trends of it that out of the $15,000,000 in Q3 About $4,000,000 of that related to some prior quarters. So if we're kind of putting it into kind of the correct quarters, We're really seeing that really good trend coming down from the first half of the year into the second half of the year as we anticipated. So it's good to see that it's right now anyway consistent with what we were anticipating.

Speaker 12

That's great to hear. And maybe just a little bit Of the specifics on American Income, I don't know if you can share it, but just as You try to rectify kind of a and you talk about stair steps. So it felt like this quarter with the drop off in Producer count, it was a step backward. And I think Larry was talking about Jess. Different incentives in terms of retention, is there any color maybe you could provide Around those incentives, just so that we could get a sense of how it might influence The producer count.

Speaker 4

Again, I want to point out that the recruiting was strong quarter over quarter. Actually, it was a 7% increase in the number of recruits. The terminations were a little bit of a surprise, higher than expected. I think that goes hand in hand with the fact that we haven't had mental management growth. So when you change those incentives, you're not increasing compensation, you're shifting compensation to affect behavior.

Speaker 4

What you're trying to do is encourage your middle managers To better train those new recruits and with the better training, there's more activity and the training isn't just trying to sell, but encouraging greater activity with those new recruits and agents. This was greater activity, better training. They make more money because they have higher sales levels and retain more agents. So again, the color is this. If you look at let's compare Family Heritage to American Income, the Q1, they had pretty slow sales as they shifted Some of their compensation there, they had an emphasis on recruiting and developing middle managers.

Speaker 4

They have 5% 5% to 8% middle managers for the year. We had the 13% increase in sales this quarter. American Income, again, has a little bit of a tough comparable because 20% increase in the agency force in 2020 2021. So with the STERIS staff, when you have that kind of A record increase. You expect to have some leveling of recruiting.

Speaker 4

And again, I have every confidence that American Income will grow. The focus will be on developing leadership, developing more middle managers and the growth will come as they develop more middle management.

Speaker 12

So there's some type of a compensation for doing more training, it's a little higher. Is that the takeaway?

Speaker 4

It's not just training, it's really the middle manager is focused on 3 to 4 agents. Those 3 or 4 agents are trained, but they're also encouraged To review the data with respect to those agents, how much how many presentations do they make in a week? What's their monthly average? What's their average premium? And as the middle manager study that data, they know what needs to be addressed.

Speaker 4

Is it a training issue? Is it an activity issue? Is a closing issue. So those are all factors and it really changes Asia by agency. And when we say American Income Has been a little flat in their recruiting or their agent growth.

Speaker 4

Remember, there's 99 offices within American Income. Some of those offices have had outstanding year. They've had good growth. And so again, with the sales leadership is doing American Income. They're identifying those offices that have not done so well and then we'll work with them to provide them data with respect to even the managers, What's the success of those metal managers?

Speaker 4

What's the success of the agents adjust as we go forward? That is Jeff is a constant process as we inspect our training systems, our activity models and out of that comes long term growth.

Speaker 12

I see. So it's just so I'm clear, Larry. So it's not saying, hey, we're going to give you more money if you retain somebody. It's saying, Here's the data, here are the analytics, and here's how you can be more effective. Is that

Speaker 4

And the bonus is not paying more money, it's paying for The correct behavior is pain for success. Got it. It's much like the agent, the agent don't give the agent more money, they have more activity. Asia gets more money as a result of more activity and better sales. So this is much the same principle.

Speaker 4

You're just affecting behaviors, you shift the compensation. Over time, the focus might be on training versus recruiting or might there's just a lot of factors within the agency. So constantly, the agency owners as well as the home office Leadership are looking at what are the behaviors we need to modify and they shift the compensation to increase that behavior.

Speaker 12

Okay. So there is some okay, got you. Perfect. And then just a quick throwaway question. I'm kind of curious On the I mean, the higher inflation affecting direct to consumer paper and postage costs, how much Year over year has that gone up?

Speaker 12

And are there other customer acquisition costs on online Jeff. Going up quite dramatically and maybe you have a percentage there. I'd just be curious if you have some numbers that you might be able At

Speaker 4

the top of my head, I can't tell you what postage increase was percentage of the paper costs. I see it is what I gave is the guidance in terms of where we see mail volume, we saw the insert media volume coming down And the costs are reflected through the analytics. As we do the different campaigns, we look at those costs, we look at the tests And to see a 10% decrease, as example, in mailings, that's a result of the analytics. So that reflects the cost increase in both postage and paper. I guess the response rates out of that is the net effect.

Speaker 4

And really, What you look at is, as you look at the cost of the investment within that campaign, what is the expected response rate? From that, what's the expected issue rate? If you're not meeting those expectations in the test, then you reduce those mailings. So it's not You'll look at postage costs about 5%, therefore we reduce something 5%. It's at the end of that process of the analytics and the campaigns.

Speaker 4

You determine what your volumes are going to be, but only affects what your sales level will be. I want to make the point there too that in direct response, It's not just an issue really of spending more money to increase sales because the profitability of an increase in Sales is a function of the cost of acquiring the business. And so if you spend more money, it's not going to necessarily Indicate higher response rates and the response rate doesn't go up with additional spending. So again, as You think about direct response, I think about that differently than agency. Your acquisition cost is on the front end, not the back end of the sales process.

Speaker 4

So they're constantly using analytics and testing to make sure that we have an added return on that investment.

Speaker 12

Makes sense. Thanks a lot.

Operator

Next question comes from the line of Harm Gallagher from Evercore. Please go ahead.

Speaker 8

Good morning or sorry, good afternoon. Just a few follow-up questions on the non COVID excess. Do you suspect these are mainly long COVID claims? Because I heard your reference heart and lung. And the reason I ask is just In the beginning, I think all the excess non COVID was by most of your peers were being Assume that it was driven by a care deferral, but this doesn't sound like this is really care Jess.

Speaker 8

But just curious if you have a view on that.

Speaker 6

Yes. We don't really have any, nothing to point exactly to what it might I think it's fair that probably some portion of it might be long COVID, if you think about it from a standpoint of complications That arise from having COVID in the first place. We still think there's at least some possibility of there being some delayed care, Deferred Care. Even though you get further down the road, as you say, there's probably less impact of that. But I do think there's probably been just some impact on how one we're thinking about they're getting classified, where there was probably Jeff.

Speaker 6

Whether the our data is based upon when a claim comes in and if it's if the death certificate notes that it's a COVID death And that's what we count as the COVID deaths and where now there may be certain situations where it's more Jeff. The real cause of death is going to the true cause if there was a heart ailment or something like that, that it's getting coded Jeff. Perhaps a little bit differently as well.

Speaker 8

Okay. And then just relatedly, so the $15,000,000 of excess non COVID claims that was about 2 times higher than what you were, I guess assuming were COVID claims this quarter. And I guess for next year, if I heard you correctly in response to Andrew's question, you're assuming $25,000,000 to $30,000,000 of excess non COVID, which is closer to I guess it's a little bit higher Then the COVID assumption, but it's not 2x that. Do you so is the punch line there that you're just assuming this was A bit anomalous that ratio and that you would expect that to the excess non COVID to decline in proportion?

Speaker 6

Yes, I think that's right. I mean, when you look at the full year 2022, we're sitting at about $70,000,000 versus $70,000,000 in non COVID versus $50,000,000 of COVID and then we are looking around that $25,000,000 or so as compared to $20,000,000 of COVID. So that ratio is coming together. In our minds, I mean, they're really independent calculations, but that is No, that relationship is narrowing, I

Speaker 8

guess. Okay. And then just final question. I think you mentioned most of those excess non COVID claims came in direct to consumer. If that's true and I normalize for that, I'd be getting margins north of 20%, which I think is a lot better than the 18% that you had previously spoken to, can you but maybe there's other adjustments there.

Speaker 8

Can you speak to that?

Speaker 6

Yes. I think out of for the total non COVID for direct response, In the Q3, there was still about 5% or so. There was Impact of the non COVID in Q3 for all of the 2022, really looking at around being around 6%. While it was we would have been ex the non COVID in 20 in the 3rd quarter, We would have been at 20%, 21%. And but that's probably again, there's a little bit favorable Amortization that's coming through there as well.

Speaker 6

I think kind of as we look forward thinking about DTC That particular channel, in 2023, we probably think there's still that they're going to have Around a 3% impact of higher excess obligations. And we kind of anticipate Their margins would be somewhere in that 16% to 17% range. So that kind of points to somewhere in that 19% to Yes. 18% let's just say 18% to 20% somewhere in there is what they probably what it would be without some of the excess obligations.

Speaker 8

Got you. So that's getting, we'll say, an outsized benefit on the lower amortization in that segment?

Speaker 6

It's probably overall in that segment, yes, still having another percent Or so Impact. Actually a couple of percentage points from where they were back in pre COVID times. Because we're looking at amortization percentage there in between that 23%, 24% range where if you look back before 2000 Pre COVID years, their amortization percentage was in the mid-twenty 5 percent between 25% to 26%.

Speaker 8

Okay. That's helpful. Thank you.

Operator

There are no further questions in the queue. So I'll hand the call back to your host with some closing remarks.

Speaker 1

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

Operator

Thank you for joining today's call. You may now disconnect your line.

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