Globe Life Q4 2022 Earnings Call Transcript

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Provided by Quartr
February 2, 2023

Key Takeaways

  • Globe Life delivered Q4 net operating income of $221 million or $2.24 per share, up 32% year-over-year, with a GAAP return on equity of 12.3% and a 14.3% ROE excluding unrealized gains and losses.
  • For 2023, the company expects net operating income of $10.20–$10.50 per diluted share, life premium growth of about 4%, health premium growth around 3%, and administrative expenses to rise roughly 3%.
  • Adoption of the new LDTI accounting standard will reduce deferred acquisition cost amortization by 8–9.5% of premium over five years, boost underwriting margins, but eliminate approximately $260 million of annual DAC interest income.
  • Agency operations saw mixed trends: American Income Life’s agent count fell 3% in Q4 but recruiting and retention initiatives are gaining traction, while Liberty National and Family Heritage reported agent growth of 8–12%.
  • The investment portfolio yielded 5.19% at year-end with $20 billion invested and an A- rating; despite $1.8 billion of unrealized losses, management plans to hold securities to maturity to capture higher interest rates.
AI Generated. May Contain Errors.
Earnings Conference Call
Globe Life Q4 2022
00:00 / 00:00

There are 10 speakers on the call.

Operator

Welcome to the Globe Life 4th Quarter 2022 Earnings Call. My name is George. I'll be your coordinator for today's event. Please note this conference is being recorded and for the duration of the call, your lines will be in listen only mode. However, you will have the opportunity to ask questions at the end of the call.

Operator

I'd now like to hand the call over to your host today, Mr. Stephen Moda, Investor Relations Director. Please go ahead, sir.

Speaker 1

Thank you. Good morning, everyone. Joining the call today are Frank Svoboda and Matt Darden, our Co Chief Executive Officers Tom Kalmbach, Our Chief Financial Officer Mike Majors, our Chief Strategy Officer and Brian Mitchell, our General Counsel. Some of our comments or answers to your questions may contain Forward looking statements that are provided for general guidance purposes only. Accordingly, please refer to our earnings release, 2021 10 ks and any subsequent Forms Reconciliations to GAAP measures.

Speaker 1

I will now turn the call over to Frank.

Speaker 2

Thank you, Stephen, and good morning, everyone. Before getting started, I want to let you know that due to the ice storms in the DFW area, we are doing this call from multiple locations. So if there are any issues with connections, please bear with us. Vinhmad and I would like to quickly take this opportunity to thank Gary Coleman and Larry Hutchison once again and acknowledge their accomplishments as Globe Life's Co CEOs over the last 10 years, including 2022, another good year for Globe Life. Now to the results of the quarter.

Speaker 2

In the Q4, net income was $212,000,000 or $2.14 per share Compared to $178,000,000 or $1.76 per share a year ago. Net operating income for the quarter Was $221,000,000 or $2.24 per share, an increase of 32% from a year ago. On a GAAP reported basis, return on equity was 12.3% and book value per share was $49.65 Excluding unrealized losses on fixed maturities, return on equity for the full year was 13.4% And book value per share as of December 31 was $64.01 up 9% from a year ago. It is encouraging that our return on equity, excluding unrealized gains and losses for the Q4 was 14.3%, reflecting the lessening impact of excess life claims on our operations. In the life insurance operations, Premium revenue for the Q4 increased 3% from the year ago quarter to $754,000,000 For the full year 2022, premium income grew 4%.

Speaker 2

Growth in premium income was challenged Due to the lower sales growth we've seen this year, primarily in our direct to consumer channel, in addition to the impact of foreign exchange rates on our Canadian premiums at American Income. In 2023, we expect Life premium to grow around 4%. Life underwriting margin was $212,000,000 up 45% from a year ago. The increase in margin is due primarily to improved claim With respect to anticipated underwriting income, as we've talked about on prior calls, underwriting margin will be calculated differently Under the new LDTI accounting rules and is expected to be substantially higher due to the changes required by the new accounting standards. Tom will discuss the expected impact of LDTI in his comments.

Speaker 2

In health insurance, Premium grew 4% to $324,000,000 and health underwriting margin was up 1% to $82,000,000 For the full year 2022, premium grew 6%. In 2023, we expect health premium revenue to grow around 3%, Lower than 2022 due to lower premium growth in our United American general agency operations. Administrative expenses were $78,000,000 for the quarter, up 12% from a year ago. As a percentage of premium, Administrative expenses were 7.2% compared to 6.7% a year ago. For the year, administrative expenses were 7% of premium Compared to 6.6% for 2023, we expect administrative expenses to be up approximately 3% And be around 6.9 percent of premium due primarily to higher IT and information security costs.

Speaker 2

Higher labor costs are expected to be offset by a decline in pension related employee benefit costs. I will now turn the call over to Matt for his comments on the Q4 Marketing Operations.

Speaker 3

Thank you, Frank. First step is American Income Life. At American Income Life, life premiums were up 5% over the year ago quarter to $381,000,000 And life underwriting margin was up 27% to $130,000,000 The higher underwriting margin is primarily due to improved claims experience and higher premium. In the Q4 of 2022, net life sales were $70,000,000 Down 6% from a year ago quarter. The decline in sales resulted from reduced agent count and agent productivity.

Speaker 3

The average producing agent count for the 4th quarter was 9,243, down 3% from the year ago quarter And down 2% from the 3rd quarter. The decline from the Q3 to Q4 is consistent with typical seasonal trends. The decline in average agent count from a year ago is due to higher than expected attrition throughout 2022 as we have previously discussed. While the agent count declined from a year ago, I am encouraged as we have seen positive recruiting momentum over the latter part of Q4 into the beginning of this year. We've also started to have some success with our new retention efforts.

Speaker 3

I believe the agency compensation adjustments we have made to emphasize recruiting and retention We'll help continue this momentum. I am optimistic regarding long term growth potential of this agency division. At Liberty National, life premiums were up 4% over the year ago quarter to $82,000,000 And life underwriting margin was up 74% to $21,000,000 The increase in the underwriting margin It's primarily due to improved claims experience. Net life sales increased 24% to $23,000,000 And net health sales were $9,000,000 up 14% from the year ago quarter due mainly to increased productivity and agent count. The average producing agent count for the Q4 was 2,946, up 8% from the year ago quarter And up 6% compared to the Q3.

Speaker 3

Liberty continues to build on the momentum that's been generated over the past year and is well positioned for future growth. At Family Heritage, health premiums increased 7% Over the year ago quarter to $94,000,000 and health underwriting margin increased 2% to $26,000,000 Net health sales were up 21 percent to $22,000,000 due to increased agent count and agent productivity. Average producing agent count for the Q4 was 1334, up 12% from the year ago quarter And up 8% compared to the 3rd quarter. As we've discussed before, there was a shift in emphasis last year to recruiting and middle management development. This has paid off nicely as we continue to see positive trends at Family Heritage.

Speaker 3

In our direct to consumer division at Globe Life, life premiums were flat over the year ago quarter to $238,000,000 but 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 $31,000,000 Down 9% from the year ago quarter due to declines in circulation and response rate. This sales decline is consistent with our expectations. As we have mentioned in previous calls, direct to consumer marketing is one facet of our business that has been impacted by the current inflationary environment. We've had to pull back somewhat on circulation and mailings as increases in postage and paper costs impede our ability to achieve satisfactory return on our investment for specific marketing campaigns.

Speaker 3

There is an offset to this as we continue to generate more Internet activity, which has lower acquisition costs than our direct mail marketing. Today, electronic sales are approximately 70% of our business Compared to 54% in 2019, I'm also encouraged to see some resiliency here as the average premium per issued policy has increased each year for the last several years and was 16% higher in 2022 than in 2019. At United American General Agency, health premiums increased 5% over the year ago quarter to $137,000,000 And health underwriting margin increased 1% to $20,000,000 Net health sales were $20,000,000 down 25% And this decline is due primarily to the market dynamics we saw throughout 2022, including aggressive pricing by competitors on certain Medicare Supplement Products and a Consumer Movement to Medicare Advantage. Projections. Now based on the trends that we are seeing and our experience with our business, we expect the average producing agent count trends For 2023 to be as follows: American Income Life, high single digit growth Liberty National, low double digit growth Family Heritage, high single digit growth.

Speaker 3

Net life sales trends for the full year 2023 are expected to be as follows: American Income Life, relatively flat Liberty National, high single digit to low double digit growth Direct to consumer, relatively flat. Net health sales trends for 2023 are expected to be as follows: Liberty National, a high single digit to low double digit increase Family Heritage, a high single digit increase United American General Agency, low single digit growth. I will now turn the call back to Frank.

Speaker 2

Thanks, Matt. We'll now turn to the investment operations. Excess investment income, which for 2022, we defined as net investment income, Less required interest on net policy liabilities and debt was $63,000,000 up 7% from the year ago quarter. On a per share basis, reflecting the impact of our share repurchase program, excess investment income was up 10%. Net investment income was $254,000,000 up 6% from the year ago quarter.

Speaker 2

On a per share basis, net investment income was up 9%. With the adoption of LDTI in 2023, we will begin viewing excess investment income as net investment income Less only required interest. For the full year 2023, we expect net investment income to grow approximately 5% as a result of the favorable rate environment. With respect to required interest, it will be substantially higher than reported in 2022 as a result of changes relating to the adoption of LDTI. As mentioned previously, Tom will further discuss LDTI in his comments.

Speaker 2

Now regarding investment yield. In the 4th quarter, we invested $239,000,000 Investment grade fixed maturities, primarily in the financial, municipal and industrial sectors. We invested at an average yield of 6.10 percent, an average rating of A and an average life of 21 years. We also invested $104,000,000 in commercial mortgage loans and 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 2

For the entire fixed maturity portfolio, The 4th quarter yield was 5.18%, up one basis point from the Q4 of 2021 And up one basis point from the Q3. As of December 31, the portfolio yield was 5.19%. Now regarding the investment portfolio. Invested assets are $20,000,000,000 including $18,300,000,000 The fixed maturities and amortized cost. For the fixed maturities, dollars 17,800,000,000 are investment grade with an average rating of A-.

Speaker 2

Overall, the total portfolio is rated A- same as a year ago. Our investment portfolio has a net unrealized loss position of approximately $1,800,000,000 due to the higher current market rates on our holdings than book yields. We are not concerned by the unrealized loss position as it is mostly interest rate driven. We have the intent and more importantly, the ability to hold our investments to maturity. Bonds rated BBB are 51% of the fixed maturity portfolio, down from 54% from a year ago.

Speaker 2

While this ratio is in line with the overall bond market, it is relative high relative to our peers. However, we have little or no exposure to higher risk assets such as derivatives, equities, residential mortgages, CLOs and other asset backed securities. We believe that the BBB securities that we acquire provide the best risk adjusted, Capital adjusted returns due in large part to our ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets. Low investment grade bonds are $542,000,000 compared to $702,000,000 a year ago. The percentage of below investment grade bonds to fixed maturities is 3%.

Speaker 2

This is as low as this ratio has been for more than 20 years. In addition, below investment grade bonds plus bond rate BBB are 54% of fixed maturity, the lowest ratio it has been in 8 years. Overall, we are comfortable with the quality of our portfolio. 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. During 2022, we executed some repositioning of the fixed maturity portfolio to improve yield and quality.

Speaker 2

Over the course of last year, we sold approximately $359,000,000 of fixed maturities with an average rating of BBB and reinvested the proceeds in higher yielding securities with an average rating of A plus Overall, we believe we are well positioned not only to withstand a market downturn, but also to be opportunistic and purchase higher yielding securities in such a scenario. I would also mention that we have no direct investments in Ukraine or Russia and do not expect any material impact to our investments in multinational companies that have exposure to these countries. At the midpoint of our guidance for the full year 2023, we expect to invest approximately $940,000,000 in fixed maturities At an average yield of 5.5 percent and approximately $310,000,000 in commercial mortgage loans and limited partnership investments with debt like characteristics at an average cash yield of 7% to 8%. As we've said before, we are pleased to see higher interest rates 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 I will turn the call over to Tom for his comments on capital, liquidity and LDTI.

Speaker 2

Tom?

Speaker 4

Thanks, Frank. So in the Q4, the company purchased 490,000 shares of Globe Life Inc. Common stock for a total cost of $56,000,000 at an average share price of $115.01 and ended the Q4 with liquid assets of approximately $91,000,000 For the full year, we spent approximately $335,000,000 To purchase 3,300,000 shares at an average price of $100.90 The total amount On repurchases included $55,000,000 of parent company liquidity. In addition to the liquid assets of the parent, The parent company will generate additional excess cash flows during 2023. The company's excess cash flows as we define it Results primarily from the dividends received by the parent from its subsidiaries less the interest paid on debt.

Speaker 4

We anticipate the parent company's excess cash flow for the full year will be approximately $410,000,000 to $450,000,000 and is available to return to its shareholders in the form of dividends and through share repurchases. This amount is higher than 2022, Primarily due to lower COVID life losses incurred in 2022, which will result in higher statutory income in 2022 as compared to 2021, Thus providing higher dividends to the parent in 2023 that were received in 2022. As previously noted, we had approximately $91,000,000 of liquid assets As compared to the $50,000,000 or $60,000,000 of liquid assets we have historically targeted, with the 91,000,000 dollars of liquid assets plus $410,000,000 to $450,000,000 of excess cash flows expected to be generated in 2023, We anticipate having $500,000,000 to $540,000,000 of assets available to the parent in 2023, of which we anticipate distributing approximately $80,000,000 to $85,000,000 to our shareholders in the form of dividend payments. As noted on previous calls, we will use our cash as efficiently as possible. We still believe that share provide the best return or yield to our shareholders over other available alternatives.

Speaker 4

Thus, we anticipate share repurchases By the parent company from our insurance operations is after our subsidiaries have made substantial investments during the year to issue new insurance policies, Expand and modernization of our information technology and other operational capabilities as well as to acquire new long duration assets To fund their future cash needs. The remaining amount is sufficient to support the targeted capital levels within our insurance operations and maintain the share repurchase program for 2023. In our earnings guidance, we anticipate between 360,000,000 And $400,000,000 of share repurchases will occur during the year. Now with regard to capital levels at our insurance subsidiaries. Our goal is to maintain our capital levels necessary to support current ratings.

Speaker 4

Globe Life targets A consolidated company action level RBC ratio in the range of 300% to 3 20%. For 2022, since our statutory financial statements are not yet finalized, our consolidated RBC ratio is not yet known. However, we anticipate the final 2022 RBC ratio will be near the midpoint of this range without any additional capital contributions. As noted on the previous call, the new NAIC factors became effective in 2022 related to mortality risk, also known as C2. Given the consistent generation of strong statutory gains from insurance operations And given our product portfolio, these new factors will simply result in even stronger capital adequacy at our target RBC ratios.

Speaker 4

Now I'd like to provide you a few comments related to the impact of excess policy obligations on 4th quarter results. Overall, Q4 excess policy obligations were in line with our expectations. In the 4th quarter, The company incurred approximately $5,000,000 of COVID life claims related to approximately 31,000 U. S. COVID deaths Occurring in the quarter as reported by the CDC and was in line with expectations.

Speaker 4

We also incurred 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. We believe the higher level of mortality we have seen is due in large part to the effects of the pandemic. So as the number of COVID deaths has moderated, so has the number of deaths from other causes. In the Q4, the impact of excess Non COVID life policy obligations were generally in line with our expectations at about $6,000,000 For the full year, the company incurred approximately $49,000,000 of COVID life policy obligations related to approximately 243,000 U. S.

Speaker 4

COVID deaths, an average of $2,000,000 per 10,000 U. S. Deaths. In addition, we estimate Non COVID claims resulted in approximately $69,000,000 of higher policy obligations for the full year. The $118,000,000 combined impact of COVID and higher non COVID policy obligations was around 4% of total life premium in 2022, down from approximately 6% in 2021.

Speaker 4

Based on the data we currently have available, We estimate incurring approximately $45,000,000 of total excess life policy obligations from both COVID and non COVID claims in 2023. We estimate that the total reported U. S. Deaths from COVID will be approximately 105,000 at the midpoint of our guidance. Finally, with respect to earnings guidance for 2023.

Speaker 4

As noted on prior calls, The new accounting standard related to long duration contracts is effective January 1, 2023. From this point forward, we'll report 2023 results and guidance under new accounting under the new accounting requirements. I will do my best to bridge the gap as there are many changes with these new requirements. So we are projecting net operating income per share We'll be in the range of $10.20 to $10.50 per diluted common share for the year ending December 31, 2023. The $10.35 midpoint of our guidance is lower than what we had indicated last quarter when including the impact of LDTI adoption.

Speaker 4

The reduction is primarily due to a reduction in the expected impact from the adoption of LDTI as we get more information And have refined our assumptions and estimates impacting both 20222023. In addition to the lower LDPI impact, We anticipate slightly lower premiums, higher customer lead and agency expenses as well as higher financing Costs, which are reflective of higher short term yields than previously anticipated. We estimate the after tax impact Implementing the new accounting standard results in an increase in 2023 net operating income in the range of $105,000,000 We are still in the process of determining the full 2022 results under the new standard. Once finalized, it could affect the 2023 estimated results. Going forward, fluctuations in experience and changes in assumptions will result in changes in both future policy obligations And the amortization of DAC as a percent of premium.

Speaker 4

The largest driver of the increase is lower amortization of deferred acquisition costs

Speaker 2

or DAC

Speaker 4

than under the prior accounting standard due to the changes in the treatment of renewal commissions, the elimination of interest on DAC balances, The updating of certain assumptions and the methods of amortizing debt. Due to the treatment of deferred renewal commissions on amortization In our captive agency channels, we do expect that acquisition costs as a percent of premium will increase slightly over the next few years. In addition to the changes affecting the amortization of DAC, the new accounting standards changes how policy obligations are determined. Under the new standard, Life policy up life policyholder benefits reported in 2021 2022 will be required to be restated to reflect the new requirements and will include the impact of unlocking and updating prior assumptions. For 2023, absent any assumption changes, we expect the following impacts.

Speaker 4

Life obligations as a percent of premium will be in the range of 40.5% to 42.5%. This is consistent with the average life policy obligation ratio over the last 5 years. Health obligations as a percent of health premium We'll be in the range of 50% to 52%. This is about 3% to 4.5% lower And the average health policy obligation percentage over the last 5 years. For the life and health lines combined, Commissions, amortization and non deferred acquisition costs as a percent of premium will be in the range of 20% to 21.5%, Approximately 8% to 9.5% lower than the recent 5 year averages, the resulting life underwriting margin as a percent of premium Are expected to be in the ranges of 37% to 38% and Health underwriting margins as a percent of premium in the range of 28% So, offsetting the increases in underwriting income will be a reduction to excess investment income The elimination of interest accruals on DAC balances that historically have reduced net required interest.

Speaker 4

In 2022, Interest on DAC balances was approximately $260,000,000 In 2023, this will be 0 Under the new standards as compared to between $275,000,000 $285,000,000 of interest accruals on DAC under historical GAAP that we would have anticipated. In addition, required interest Will change due to the changes in reserve balances at transition and restated balances in 2021 2022 under the new requirements. We anticipate that required interest in 2023 will be in the range of $910,000,000 to $920,000,000 With respect to changes in AOCI, we noted in the past few quarters that under the new accounting standard, There is a requirement to remeasure the company's future policy benefits each quarter, utilizing a discount rate that reflects the upper medium grade fixed income instrument yield And affects the changes with the effects of the change to be recognized in AOCI, a component of shareholders' equity. The upper medium grade fixed income yields generally consist of single A rated fixed income instruments that are relative reflective of the currency and tenor of the insurance liability cash flows. As of year end 2022, Had the new accounting standard been in place, we anticipate the after tax impact on AOCI would have decreased reported equity In the range of $1,300,000,000 to $1,400,000,000 While the GAAP accounting changes will be significant, It's very important to keep in mind that the changes impact the timing of when future profits will be recognized and that none of the changes will impact our premium rates, The amount of premium we collect nor the amount of claims we ultimately pay.

Speaker 4

Furthermore, it has no impact on the statutory earnings, The statutory capital we are required to maintain for regulatory purposes or the parent's company's excess cash flows nor will it cause us to make any changes in the products we offer. Those are my comments.

Speaker 2

I'll now turn it over to Matt.

Speaker 3

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

Operator

Thank you very much, sir. Our first question is coming from Jimmy Bhullar from JPMorgan. Please go ahead, sir.

Speaker 5

Hey, good morning. So I had a question first on direct response sales. They've been weak for the last several quarters. Wondering how much of it is a reduction in your part on mailings and circulations versus just weak consumer demand with higher inflation?

Speaker 3

Yes, it's really on the distribution side. As we've talked about in the past, scaling back our Mailings and other print media, it's associated with the higher cost these days of the postage in paper. What we're seeing on the consumer side, as I mentioned in my comments, is actually the sale Amount on a per policy basis, the premium amount for each sale is actually going up slightly. So that would indicate to me that It's really more of a reduction of that cost in the amount of things that we're distributing, Because we are really going to make sure that each one of those mailings and all of our campaigns are profitable. And that's what the benefit is of switching more of our distribution over time to more of the electronic media side versus the sales side.

Speaker 3

But I do want to remind everyone that the all of these channels work together and what the mail does support And drive activity to our other channels such as the call center as well as just online.

Speaker 5

Okay. And then maybe with the economy and inflation overall, there had been concerns about policy retention And it seems like lapses are now still to historical levels, but do you expect that they'll go up above where they were pre pandemic?

Speaker 2

Yes. Jimmy, I think with respect to the last level, I mean, you're right. The 4th quarter did really trend favorably versus the 3rd quarter. While they're still higher than 202021, we're actually back to in the Q4 around the lapses, the Persistency levels pretty much where they were in the Q4 of 2019. So looking forward, I think is that for the most part, We do think they'll trade back here to pre pandemic levels during 2023.

Speaker 2

Probably a direct to consumer We'd probably see those maybe sticking around at slightly higher, higher lapse rates than what we've had pre pandemic, but not that significantly. And Liberty for the 12 stars 1st year lasted back to pre pandemic levels as well.

Speaker 5

Okay. Thanks. And if I just ask one more on LDTI, obviously, it's affecting the timing of income, GAAP income. It doesn't really change the underlying economics. But Do you and I'm assuming that had you not been growing if you don't grow the business at some point in the next several It would actually have a negative impact on your results, but how do you think about with normal growth, could you reach a Point where LDTI goes from being a tailwind to a drag on your results.

Speaker 5

Do you see that happening in

Speaker 2

the next like 3, 4, 5 years or so?

Operator

Yes. Jimmy,

Speaker 2

we did take a look. I think this is the same question that you had asked last year or last The quarter as well.

Speaker 5

Last quarter.

Speaker 2

And did take a look at that. And actually, for that DAC amortization to turn around, it takes it's 20, 30 years out there in the future Before we end up actually where it's the amortization under the LDTI Ends up being greater than what we would have anticipated under historical GAAP. So it's actually a long ways out there.

Speaker 5

Okay. Thank you.

Operator

Thank you much, sir. We'll now move to Eric Bass calling from Autonomous Research. Please go ahead.

Speaker 1

Hi. Thank you. So it looks like recruiting has turned nicely at Liberty and Family Heritage and you're starting to see the growth in the agent count there, but it hasn't come American Income yet. I realize the 4th quarter can have some noise with the holidays. So we can just talk more about the trends you're seeing In both recruiting and retention and what steps you're taking to improve those at American Income in 2023?

Speaker 3

Yes. As we had mentioned in the past, there's been some adjustments to the incentive side of the compensation At American Income, those went in very late in the year and then obviously it's going to continue through 2023. We are seeing, it's in the early stages, but we are seeing some positive development there. We had, as a reminder, a significant increase in our agent count During the pandemic, we went from approximately 7,500 agents to over 10,000. And so our attrition has been a little bit higher here in the recent quarters Then what we would like in these programs that we've put in place seem to be working.

Speaker 3

We've got some While it's still early, early indications that there's been a turnaround in our retention as well as recruiting efforts at American Income. So we're positive where that's headed from a 2023 perspective and As was noted, really feel like that is in our control because we do have strong agent growth at our 2 other agencies and so not really impacted by environmental factors, but really believe this is in our control to Maintain.

Speaker 1

Thank you. And then appreciate all of the color you gave on the LDTI impacts. And just Quick question. When do you expect to release kind of an updated financial supplement with recast financials?

Speaker 4

Yes. We would do that along with our Q1 results as our intended plan at this point.

Speaker 2

Got it.

Speaker 1

So, I guess, we shouldn't expect that in advance, so it Kind of model based off of the numbers you walked through on the call.

Speaker 4

Exactly. Yes. When we Talk again after Q1, we'll have quite a bit of detail around impact on the various distribution channels and lines of business. So That'll be the time to talk more about those details.

Operator

Got it.

Speaker 6

Thank you.

Speaker 2

Yes. One of the things, Eric, we have to be a little bit careful about is we can't Be releasing some of the numbers on the restated 2021 and 2022 until it actually get audited. So we get it into a little bit of a timing, especially around the Q1. So As Tom said, that's we're really intend to be able to provide more of the detail on that, as we said later on.

Operator

We'll now move to Mr. Ryan Krueger calling from KBW. Please go ahead, sir.

Speaker 6

Hi, thanks. Good morning. I appreciate all the LVT I got it. My first question is actually XLBTI. I think last quarter's Guidance, which is ex LVTI, had a 9.35% midpoint.

Speaker 6

If we back out the LVTI impact this quarter, it looks like it's The midpoint is more like 920. So just curious if you can give us any perspective on kind of why that ex LVTI guidance seem to come down a little bit?

Speaker 4

Hey, Ryan. It's Tom. The and we'd say that the midpoint more like $9.25, so drop by about $0.10 And really the main drivers there are the lower premium growth that we had previous that we mentioned. And then we are You're seeing a little bit higher lead costs and agency expenses impacted by inflation. Travel starts increasing and as meetings Start increasing and we have some additional training and recruiting costs that we're incurring.

Speaker 4

We just had that tick up a bit. And then as I mentioned also, higher cost on debt given the higher cost for commercial paper, just the rates are a bit higher. And then given the share repurchase program, just slightly higher share count than what we had previously estimated in our prior guidance work.

Speaker 6

Thanks. And then I'll just support go ahead.

Speaker 2

I'll just say one thing I'd just add on that is with The higher share count, it wasn't from the amount that we were anticipating, but just the higher with the higher share price that we're At this current time versus what we were back on at the time of the last call, obviously, we're just getting fewer shares purchased with the same amount of dollars.

Speaker 6

Good. And then on the free cash flow guidance of $410,000,000 to $450,000,000 is there Some drag in that still from COVID and non COVID access claims that occurred in 2022. I'm trying to think about If there would be a further bounce back as we go beyond 2023 to a more normalized level?

Speaker 4

Yes. The way that we think about that is Last year, we had combined in 2022, we had combined COVID, non COVID of about $118,000,000 and in 2023, we expect about $45,000,000 So kind of the difference between those two should result in higher statutory earnings in 2023, which would therefore lead to higher dividends to the parent in 2024.

Speaker 6

Okay. So the difference between those 2 and then tax affected would be basically additive to free cash flow in 2024?

Speaker 4

Exactly. Yes.

Speaker 6

Okay, great. Thank you.

Operator

Thank you very much, sir. We'll now move to John Barnidge calling from Piper Sandler. Please go ahead.

Speaker 7

Thank you very much. My question is around Direct to consumer in the mailings, things like increased postage and paper cost is more of a secular trend. Are there areas that can be developed beyond just mailings that can be incorporated into the direct to consumer marketing efforts?

Speaker 3

Yes. And as I had mentioned, we're really focused on growing our Internet and electronic media Inquiries in which results in additional applications and sales. And so that's been the offset as that has As I mentioned in my comments, continue to grow and is much more a significant part of the business than it was just even 3 or 4 years ago. So really that's the offset as we've declined based on profitability in our models, the direct mail Operation, we've offset that with an increase on the electronic side. So overall, those dynamics are going on, but If inflation, depending on how that market dynamic plays out over the next several quarters, we will continue to adjust Throughout the year based on the returns that we're seeing in the profitability.

Speaker 3

So overall, we want to make sure that we're maintaining Our profitability targets on each of these campaigns and we're flexible enough that we can adjust that throughout the year as market conditions warrant.

Speaker 7

Great. Thank you. And a follow-up question. I know the indirect mortality is in the COVID estimate. Is that you anticipate tapered over the year or is present in equal levels throughout the year?

Speaker 7

Just trying to You mentioned if further away that from the pandemic portion that degrades.

Speaker 4

For 2023, you mean?

Speaker 7

Yes, correct. Thank you.

Speaker 4

Yes. So for 2023, We expect a little bit higher COVID deaths in the Q1 than we would for the 2nd, 3rd and 4th quarter. So that's we do kind of Thanks. That will be front loaded a little bit during the course of 2023.

Speaker 7

Great. Thank you.

Operator

Thank you very much, sir. Next question will be coming from Mr. Andrew Kligerman calling from Credit Suisse. Please go ahead sir. Your line is open.

Speaker 8

Good morning. First question is around American Income and completely understand kind of 2023 being kind of a digestion period of Having 10,000 producers, as you go into this new incentive strategy, just Different initiatives. Do you think in 2024, and I know it's early for guidance, but is there reason to believe you'll kind of Get back on track to that kind of mid single digit producer growth, maybe Mid upper single digit sales growth. I mean is there any reason to believe you can't get there in 2024 that maybe it will take longer?

Speaker 3

No, that's a great question as we do believe we can get back there. As a reminder, Agent count and average agent count for the quarters is a leading indicator and it takes time to get these new agents onboarded, Trained and producing and then obviously the longer they've been here, the more effective they are from a production perspective. And so That's why you'll see in our guidance as we have growth projected on the agent count side, but the sales are lagging out a little bit And more toward flat. We do believe that we can get to middle management growth in 2023. It will drive that longer term growth on the sales side in 2024.

Speaker 3

We also anticipate opening 3 to 5 offices in American Income over this next year and that too will set us up for good growth in 2024. And I also wanted to just clarify, when we talk about compensation adjustments, there's 2 primary components to the compensation For agents, one is just the base commission on sales and then we also have incentive based compensation that's targeted at specific behavior. And we do that throughout our history. So, when we talk about changing the compensation, we're really not changing the total amount of compensation That is in our overall pricing and profitability targets, but really we're targeting 2 specific activities and behavior that we're trying to influence. So I just wanted to clarify that overall, our Compensation and acquisition costs are going to be consistent with what we've experienced in the past.

Speaker 8

Super helpful. Shifting over to the health lines, particularly United American, With sales down 25% and I think that was due to pressures not only in Med supp, but also like Med Advantage gaining share. We look at a number of companies, the online players, some of them are subs of the other insurers we cover. And Many of them seem to be pulling back in that kind of online Medicare Advantage Product. And so as I look at United American down in the agency channel, I'm wondering, A, where is the competition coming from?

Speaker 8

And Yes. I guess it's just where is the competition coming from as I kind of think the players seem to be getting more disciplined?

Speaker 3

Yes. I'll say what we saw throughout 2022 was just more aggressive pricing by certain competitors And we're focused on maintaining our profitability targets and underwriting margins in this area and We're really not going to chase the sales, so to speak, but and we are also seeing and experiencing a movement toward Medicare Advantage Plans as well. I'll say that we've been in this business since the program started and we've seen these market dynamics happen Over time, and so we anticipate that some of that will abate as we move forward. But Mike, do you want to add anything to that? You've been running this area for quite some time.

Speaker 9

Yes. I think while there may have been some that have Pulled back, I mean, overall, we are seeing movement into Medicare Advantage plans. And in this line of business, there's big carriers or Small carriers, the cost of entry is low because it's not a capital intensive business. So I couldn't speak to which are particularly pulling back or not, but overall, there is a move on the group side and individual side to Medicare Advantage Plans. I think the current economic environment could contribute to that.

Speaker 9

I would assume that people are More willing now to give us the benefits

Operator

of a

Speaker 9

Medicare supplement plan that doesn't have provider network restrictions or referral requirements We go to a cheaper managed care.

Operator

As Matt

Speaker 9

said, we've been in this business since Medicare started in the 60s. We've Seeing these swings back and forth over the years, so it's not really usual or surprising. We're going to maintain that disciplined approach. That said, It's to protect our margins. It's also to protect our customers.

Speaker 9

We want to avoid having higher than necessary renewal rate increases. We've never been The lowest cost provider here, we think that's fair to the customer to have the right price And have reasonable rate increases. And the other thing to remember is, at that price of this business, The price we have on our new business is the same as our renewal. So it's not like we can go in and have lower new business prices because if we were to do that, that would impact Profitability of our in force block, which is the United America block around $500,000,000 So Again, it's something that we've seen before and not

Speaker 5

that they quite surprising.

Speaker 8

And just to kind of A little further clarification on that. So you're seeing the competition across agencies and different lines. And is there any interest on the And is there any interest from the health care advice in terms of kind of transitioning to more Medicare Advantage products as opposed to what's up?

Speaker 9

I'm sorry, there was a lot of background noise. Can you repeat that?

Speaker 8

Absolutely. So in terms of Distribution competitors, is it pretty much across agency and online? And then with that, is Globe Likely to pivot more to Med Advantage as opposed to historically being in the Med supp area.

Speaker 9

Matt, do you want to take that or do you want to? Sure. Okay. Let me start.

Speaker 3

I'll say, We don't have plans to pivot into the Medicare Advantage area. I think the competition is coming from I'll pass. We do have a little bit of our sales that are online as well. So we do see the competition In the pricing in the agency and online channels, a bulk of our sales are in the Agency

Speaker 8

and business. So

Speaker 9

Mike, do you

Speaker 6

want to add to that?

Speaker 9

Sure. I think the Medicare Advantage, We don't use networks for 1, that would be something we have to that'd be a big change for us. And it's just It's not a line of business that we've been in. And I know we considered a long time ago, at one time we were in the Part D plan, which is similar. And we exited that and it's something that we wouldn't want to do.

Speaker 9

It's really, I think, harder for smaller Players to do that and to get involved with either Medicare Advantage or Part D, and I don't think that undertaking would make sense for us.

Speaker 8

Looks like a thoughtful approach as usual.

Operator

Does that answer your question, Mr. Kligerman?

Speaker 8

Absolutely. Thank you.

Operator

Thank you very much, sir. We'll now take a question from Mr. Mark Hughes, calling from Chulist. Please go ahead, sir.

Speaker 7

Yes, thank you. Excuse me, good morning. I don't know if you touched on

Speaker 5

the

Speaker 1

Is there anything about

Speaker 7

the LDTI accounting standard that impacts your growth on a go forward basis? You obviously get a nice EPS benefit This year, but just the timing and the emergence of profitability, is it a change over time so that there's a natural Acceleration or deceleration perhaps as time goes by that will impact your And a trend line growth rate in future years?

Speaker 4

Yes, I'll answer that one. Probably the one thing, as we think about the implementation of LDTI is, the treatment of future Deferrals of renewal commissions. So to the extent that there are a portion of renewal commissions are deferred, the new rules require us now to In historical GAAP, we would look at all anticipated future renewal commissions and determine an amortization rate That was an average that was needed to amortize both the 1st year capitalized expenses as well as Future renewal capitalized expenses. Under the new method, we're only allowed to As we capitalize, we're only we are forced to change the amortization rate upon each Additional capitalization. And so for our AIL line of business, we do have some renewal commissions that we capitalize.

Speaker 4

And we had kind of talked last quarter that for the block, we'd expect kind of a 50 basis point increase in amortization. That's really driven by Two things is one is we have a mix of business where we don't have any DAC on some of the business. And on the other business we have DAC that is being amortized. So as the block that we don't have any DAC on where we fully amortize with as that runs off, The average amortization rate goes up. But the other is that as we get new renewals, commissions that are deferred On AIL, we'll see the amortization rate tick up a little bit.

Speaker 4

In aggregate, we'd see probably that amortization rate tick up around 20 to 30 basis points over the next few years and then kind of even out and that increase would diminish over time as we put new business on the books.

Speaker 2

And Mark, the one thing I would just add to that is I think really other than that and other than assumption changes that might Come through from time to time, I would expect once this kind of gets reset, then that the general level of

Operator

Thank you, Mr. Hughes. We do not appear to have any further questions at this time, gentlemen, I'd like to turn the call back over to you, Mr. Motive, for any additional or closing remarks.

Speaker 1

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

Operator

Ladies and gentlemen, that will conclude today's conference. Thank you so much for your participation. You may now disconnect. Have a good day.

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