Globe Life Q4 2022 Earnings Results & Report

Globe Life EPS Results

• Actual EPS: $2.24
• Consensus EPS: $2.17
• Beat/Miss: Beat by +$0.07
• One Year Ago EPS: $1.70
• EPS Beat Rate: 3 of last 8 quarters

Globe Life Revenue Results

• Actual Revenue: $1.32 billion
• Expected Revenue: $1.33 billion
• Beat/Miss: Missed by -$11.12 million
• YoY Revenue Growth: +2.00%

Globe Life (NYSE:GL) (NYSE: GL) is an insurance holding company that provides individual life and supplemental health insurance products through a network of wholly owned subsidiaries. Its offerings are designed primarily for middle-income households and include term and whole life insurance, mortgage protection coverage, accident and supplemental health insurance, Medicare supplement policies, and annuities.

The company markets its products through several distribution channels, including exclusive and independent agency networks, direct-to-consumer sales, and workplace or union-affiliated programs. Its principal insurance businesses operate under brands such as Globe Life, American Income Life, Liberty National, Family Heritage Life, and United American.

Globe Life traces its history to 1900 and was formerly known as Torchmark Corporation before adopting the Globe Life name in 2019. The company is headquartered in McKinney, Texas, and primarily serves customers across the United States through its insurance subsidiaries and sales organizations.

Globe Life Q4 2022 Earnings Call Transcript

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.

Presentation

[Operator]

Welcome to the Globe Life Fourth 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. This can be done by pressing star 1 on your telephone keypad to register your question. If you require assistance at any point, please press star 0 and you will be connected to an operator. Now I'd like to hand the call over to your host today, Mr. Stephen Mota, Investor Relations Director. Please go ahead, sir.

[Stephen Mota, Investor Relations Director at Globe Life]

Thank you. Good morning, everyone. Joining the call today are Frank M. Svoboda and J. Matthew Darden, our Co-Chief Executive Officers, Thomas P. Kalmbach, our Chief Financial Officer, Michael C. Majors, our Chief Strategy Officer, and R. 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-K, and any subsequent forms 10-Q on file with the SEC. Some of our comments may also contain non-GAAP measures. Please see our earnings release and website for discussion of these terms and reconciliations to GAAP measures. I will now turn the call over to Frank.

[Frank M. Svoboda, Co-CEO at Globe Life]

Thank you, Stephen Mota, 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. If there are any issues with connections, please bear with us. Matt Darden and I would like to quickly take this opportunity to thank Gary L. Coleman and Larry M. 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. To the results of the quarter. In the fourth quarter, net income was $212 million or $2.14 per share, compared to $178 million or $1.76 per share a year ago.

[Frank M. Svoboda, Co-CEO at Globe Life]

Net operating income for the quarter was $221 million 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 31st was $64.01, up 9% from a year ago. It is encouraging that our return on equity, excluding unrealized gains and losses for the fourth quarter, was 14.3%, reflecting the lessening impact of excess life claims on our operations.

[Frank M. Svoboda, Co-CEO at Globe Life]

In the life insurance operations, premium revenue for the fourth quarter increased 3% from the year-ago quarter to $754 million. For the full year 2022, premium income grew 4%. 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 million, up 45% from a year-ago. The increase in margin is due primarily to improved claim experience.

[Frank M. Svoboda, Co-CEO at Globe Life]

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. In health insurance, premium grew 4% to $324 million, and health underwriting margin was up 1% to $82 million. 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 million for the quarter, up 12% from a year ago.

[Frank M. Svoboda, Co-CEO at Globe Life]

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% a year ago. In 2023, we expect administrative expenses to be up approximately 3% and be around 6.9% of premium, due primarily to higher IT and information security costs. 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 fourth quarter marketing operations.

[J. Matthew Darden, Co-CEO at Globe Life]

Thank you, Frank. First up is American Income Life. The American Income Life, life premiums were up 5% over the year-ago quarter to $381 million, and life underwriting margin was up 27% to $130 million. The higher underwriting margin is primarily due to improved claims experience and higher premium. In the fourth quarter of 2022, net life sales were $70 million, down 6% from a year-ago quarter. The decline in sales resulted from reduced agent count and agent productivity. The average producing agent count for the fourth quarter was 9,243, down 3% from the year-ago quarter and down 2% from the third quarter.

[J. Matthew Darden, Co-CEO at Globe Life]

The decline from the 3rd quarter to the 4th quarter 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 the 4th quarter into the beginning of this year. We've also started to have some success with our new retention efforts. I believe the agency compensation adjustments we have made to emphasize recruiting and retention will help continue this momentum. I am optimistic regarding the long-term growth potential of this agency division. At Liberty National, life premiums were up 4% over the year-ago quarter to $82 million, and life underwriting margin was up 74% to $21 million.

[J. Matthew Darden, Co-CEO at Globe Life]

The increase in the underwriting margin is primarily due to improved claims experience. Net life sales increased 24% to $23 million, and net health sales were $9 million, up 14% from the year-ago quarter, due mainly to increased productivity and agent count. The average producing agent count for the fourth quarter was 2,946, up 8% from the year-ago quarter and up 6% compared to the third quarter. 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 million, and health underwriting margin increased 2% to $26 million. Net health sales were up 21% to $22 million due to increased agent count and agent productivity.

[J. Matthew Darden, Co-CEO at Globe Life]

The average producing agent count for the fourth quarter was 1,334, up 12% from the year ago quarter and up 8% compared to the third 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. In our direct-to-consumer division at Globe Life, life premiums were flat over the year ago quarter to $238 million, but life underwriting margin increased from $12 million to $39 million. The increase in underwriting margin is primarily due to improved claims experience. Net life sales were $31 million, down 9% from the year ago quarter due to declines in circulation and response rate. This sales decline is consistent with our expectations.

[J. Matthew Darden, Co-CEO at Globe Life]

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. There's 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 in 16% higher in 2022 than in 2019.

[J. Matthew Darden, Co-CEO at Globe Life]

At United American General Agency, health premiums increased 5% over the year ago quarter to $137 million, and health underwriting margin increased 1% to $20 million. Net health sales were $20 million, down 25% compared to the year ago quarter, 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.

[J. Matthew Darden, Co-CEO at Globe Life]

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.

[Frank M. Svoboda, Co-CEO at Globe Life]

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 million, 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 million, up 6% from the year-ago quarter. 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.

[Frank M. Svoboda, Co-CEO at Globe Life]

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. Regarding investment yield. In the fourth quarter, we invested $239 million in investment-grade fixed maturities, primarily in the financial, municipal, and industrial sectors. We invested at an average yield of 6.10%, an average rating of A, and an average life of 21 years. We also invested $104 million 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.

[Frank M. Svoboda, Co-CEO at Globe Life]

For the entire fixed maturity portfolio, the fourth quarter yield was 5.18%, up 1 basis point from the fourth quarter of 2021, and up 1 basis point from the third quarter. As of December 31st, the portfolio yield was 5.19%. Regarding the investment portfolio. Invested assets are $20 billion, including $18.3 billion of fixed maturities at amortized cost. Of the fixed maturities, $17.8 billion are investment-grade with an average rating of A-minus. Overall, the total portfolio is rated A-minus, same as a year ago. Our investment portfolio has a net unrealized loss position of approximately $1.8 billion 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.

[Frank M. Svoboda, Co-CEO at Globe Life]

We have the intent and, more importantly, the ability to hold our investments to maturity. Bonds rated triple B are 51% of the fixed maturity portfolio, down from 54% from a year ago. While this ratio is in line with the overall bond market, it is high relative to our peers. 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 triple B 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. Below investment-grade bonds are $542 million, compared to $702 million a year ago. The percentage of below investment-grade bonds to fixed maturities is 3%.

[Frank M. Svoboda, Co-CEO at Globe Life]

This is as low as this ratio has been for more than 20 years. In addition, below investment-grade bonds plus bonds rated triple B are 54% of fixed maturities, 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. Over the course of last year, we sold approximately $359 million of fixed maturities with an average rating of triple B and reinvested the proceeds in higher-yielding securities with an average rating of A-plus.

[Frank M. Svoboda, Co-CEO at Globe Life]

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 million in fixed maturities at an average yield of 5.5%, and approximately $310 million in commercial mortgage loans and limited partnership investments with debt-like characteristics at an average cash yield of 7%-8%.

[Frank M. Svoboda, Co-CEO at Globe Life]

As we've said before, we are pleased to see higher interest rates as this has a positive impact on operating income by driving up net investment income with no impact on our future policy benefits, since they are not interest sensitive. I will turn the call over to Tom for his comments on capital, liquidity, and LDTI. Tom?

[Thomas P. Kalmbach, CFO at Globe Life]

Thanks, Frank. In the fourth quarter, the company purchased 490,000 shares of Globe Life Inc. common stock for a total cost of $56 million at an average share price of $115.01, and ended the fourth quarter with liquid assets of approximately $91 million. For the full year, we spent approximately $335 million to purchase 3.3 million shares at an average price of $100.90. The total amount spent on repurchases included $55 million of parent company liquidity. In addition to the liquid assets of the parent, the parent company will generate additional excess cash flows during 2023.

[Thomas P. Kalmbach, CFO at Globe Life]

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. We anticipate the parent company's excess cash flow for the full year will be approximately $410 million-$450 million, 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 than were received in 2022.

[Thomas P. Kalmbach, CFO at Globe Life]

As previously noted, we had approximately $91 million in liquid assets as compared to the $50 million or $60 million of liquid assets we've historically targeted. With the $91 million of liquid assets plus $410 million-$450 million of excess cash flows expected to be generated in 2023, we anticipate having $500 million-$540 million of assets available to the parent in 2023. Of which we anticipate distributing approximately $80 million-$85 million 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 repurchases provide the best return or yield to our shareholders over other available alternatives.

[Thomas P. Kalmbach, CFO at Globe Life]

Thus, we anticipate share repurchases will continue to be the primary use of parent's excess cash flow after 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 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 million and $400 million of share repurchases will occur during the year. With regard to capital levels at our insurance subsidiaries.

[Thomas P. Kalmbach, CFO at Globe Life]

Our goal is to maintain our capital levels necessary to support current ratings. Globe Life targets a consolidated company action level RBC ratio in the range of 300%-320%. 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 C two. Given the consistent generation of strong statutory gains from insurance operations and given our product portfolio, these new factors will simply result in an even stronger capital adequacy at our target RBC ratios.

[Thomas P. Kalmbach, CFO at Globe Life]

I'd like to provide you a few comments related to the impact of excess policy obligations on fourth quarter results. Overall, fourth quarter excess policy obligations were in line with our expectations. In the fourth quarter, the company incurred approximately $5 million 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. 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. As the number of COVID deaths has moderated, so has the number of deaths from other causes.

[Thomas P. Kalmbach, CFO at Globe Life]

In the fourth quarter, the impact of excess non-COVID life policy obligations were generally in line with our expectations at about $6 million. For the full year, the company incurred approximately $49 million of COVID life policy obligations related to approximately 243,000 U.S. COVID deaths, an average of $2 million per 10,000 U.S. deaths. In addition, we estimate non-COVID claims resulted in approximately $69 million of higher policy obligations for the full year. The $118 million 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. Based on the data we currently have available, we estimate incurring approximately $45 million of total excess life policy obligations from both COVID and non-COVID claims in 2023.

[Thomas P. Kalmbach, CFO at Globe Life]

We estimate that the total reported U.S. deaths from COVID will be approximately 105,000 at the midpoint of our guidance. Finally, with respects to earnings guidance for 2023. As noted on prior calls, the new accounting standard related to long duration contracts is effective January 1st, 2023. From this point forward, we'll report 2023 results and guidance under the new accounting requirements. I will do my best to bridge the gap as there are many changes with these new requirements.

[Thomas P. Kalmbach, CFO at Globe Life]

We are projecting net operating income per share will be in the range of $10.20-$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. 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 2022 and 2023. In addition to the lower LDTI 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.

[Thomas P. Kalmbach, CFO at Globe Life]

We estimate the after-tax impact of implementing the new accounting standard results in an increase in 2023 net operating income in the range of $105 million to $150 million. 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 % of premium. The largest driver of the increase is lower amortization of deferred acquisition costs, or DAC, 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 DAC.

[Thomas P. Kalmbach, CFO at Globe Life]

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 holder benefits reported in 2021 and 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. Life obligations as a percent of premium will be in the range of 40.5%-42.5%. This is consistent with the average life policy obligation ratio over the last five years.

[Thomas P. Kalmbach, CFO at Globe Life]

Health obligations as a percent of health premium will be in the range of 50%-52%. This is about 3%-4.5% lower than 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%-21.5%, approximately 8%-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%-38%, and health underwriting margins as a percent of premium in the range of 28%-29%.

[Thomas P. Kalmbach, CFO at Globe Life]

Offsetting the increases in underwriting income will be a reduction to excess investment income due to the elimination of interest accruals on DAC balances that historically have reduced net required interest. In 2022, interest on DAC balances was approximately $260 million. In 2023, this will be 0 under the new standards, as compared to between $275 million and $285 million 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 and 2022 under the new requirements. We anticipate that required interest in 2023 will be in the range of $910 million-$920 million.

[Thomas P. Kalmbach, CFO at Globe Life]

With respects 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 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 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 $1.3 billion-$1.4 billion.

[Thomas P. Kalmbach, CFO at Globe Life]

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

[J. Matthew Darden, Co-CEO at Globe Life]

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

[Operator]

Thank you very much, sir. Ladies and gentlemen, as a reminder, if you wish to ask any audio questions, please press star 1 on your telephone keypad and just make sure your mute function is not activated to allow your signal to reach your equipment.

[Operator]

Our first question is coming from Jimmy Bhullar from JP Morgan. Please go ahead, sir.

[Jimmy Bhullar, Managing Director and Senior Equity Analyst at JPMorgan]

Hey, good morning. 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 the higher inflation?

[J. Matthew Darden, Co-CEO at Globe Life]

Yeah. 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 and paper. What we're seeing on the consumer side, as I'd 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. 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 gonna make sure that each one of those mailings and all of our campaigns are profitable. 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.

[J. Matthew Darden, Co-CEO at Globe Life]

I do wanna 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.

[Jimmy Bhullar, Managing Director and Senior Equity Analyst at JPMorgan]

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

[Frank M. Svoboda, Co-CEO at Globe Life]

Yeah. Jimmy, I think, you know, with respect to the lapse levels, I mean, you're right. The fourth quarter did really trend favorably, you know, versus the third quarter. While they're still higher than 2020 and 2021, we're actually back to, in the fourth quarter, around the lapses, the persistency levels, you know, pretty much where they were in the fourth quarter of 2019. I, you know, looking forward, I think is that for the most part, we do think they'll trend back here to pre-pandemic levels during 2023. Probably a direct to consumer, we'd probably see those maybe sticking around at slightly higher lapse rates than what we've had pre-pandemic, not that significantly.

[Frank M. Svoboda, Co-CEO at Globe Life]

Liberty, for the most part, first year lapses back to pre-pandemic levels as well.

[Jimmy Bhullar, Managing Director and Senior Equity Analyst at JPMorgan]

Okay, thanks. If I could just ask one more. On LDTI, obviously, it's affecting the timing of income, GAAP income. It doesn't really change the underlying economics. 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 years, it would actually have a negative impact on your results. 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? Do you see that happening in the next, like, three, four, five years or so?

[Frank M. Svoboda, Co-CEO at Globe Life]

Yeah. You know, Jimmy, we did take a look. I think this is the same question that you had asked last year-

[Jimmy Bhullar, Managing Director and Senior Equity Analyst at JPMorgan]

Yeah. Yeah.

[Frank M. Svoboda, Co-CEO at Globe Life]

for the last quarter as well.

[Jimmy Bhullar, Managing Director and Senior Equity Analyst at JPMorgan]

Last quarter.

[Frank M. Svoboda, Co-CEO at Globe Life]

Did take a look at that. Actually, you know, for that DAC amortization to turn around, it takes, it's 20, 30 years out there in the future, before we end up actually, you know, where it's, you know, the amortization under the LDTI ends up being greater than what we would have anticipated, under, historical GAAP. It's actually a long ways out there.

[Jimmy Bhullar, Managing Director and Senior Equity Analyst at JPMorgan]

Okay. Thank you.

[Operator]

Thank you, Sir. We'll now move to Erik Bass calling from Autonomous Research. Please go ahead.

[Erik Bass, Senior Equity Research Analyst at Autonomous Research]

Hi. Thank you. It looks like recruiting's 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 through at American Income yet. I realize the fourth quarter can have some noise with the holidays, was hoping you could 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.

[J. Matthew Darden, Co-CEO at Globe Life]

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. Obviously, it's gonna 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, went from approximately 7,500 agents to over 10,000. Our attrition has been a little bit higher here in the recent quarters than what we would like. These programs that we've put in place, seem to be working. We've got some, while it's still early indications that there's been a turnaround in our retention as well as recruiting efforts at American Income.

[J. Matthew Darden, Co-CEO at Globe Life]

We're positive where that's headed from a 2023 perspective, as was noted, really feel like that is in our control because we do have strong agent growth at our C two other agencies. Not really impacted by environmental factors, but really believe this is in our control to maintain.

[Erik Bass, Senior Equity Research Analyst at Autonomous Research]

Thank you. Appreciate all of the color you gave on the LDTI impacts. Just quick question. When do you expect to release kind of an updated financial supplement with recast financials?

[Thomas P. Kalmbach, CFO at Globe Life]

Yeah, we would do that along with our first quarter results is our intended plan at this point.

[Erik Bass, Senior Equity Research Analyst at Autonomous Research]

Got it. Yeah, I guess we said we shouldn't expect that in advance, so we should kind of model based off of the numbers you walked through on the call.

[Thomas P. Kalmbach, CFO at Globe Life]

Exactly. Yeah. When we, you know, talk again after first quarter, we'll have quite a bit of detail around impact on the various distribution channels and lines of business. That'll be the time to talk more about those details.

[Erik Bass, Senior Equity Research Analyst at Autonomous Research]

Got it. Thank you.

[Frank M. Svoboda, Co-CEO at Globe Life]

Yeah. One of the things, Erik, we have to be a little bit careful about is, you know, we can't be releasing some of the numbers on the restated 21 and 22 until those actually get audited. We get into a little bit of a timing, especially around the first quarter. As Tom said, that's, you know, we really tend to be able to provide more of the detail on that, as we said later on.

[Erik Bass, Senior Equity Research Analyst at Autonomous Research]

Got it.

[Operator]

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

[Ryan Krueger, Managing Director and Senior Equity Research Analyst at KBW]

Hi. Thanks. Good morning. I guess I appreciate all the LDTI guidance. My first question is actually ex-LDTI. I think last quarter's guidance, which was ex-LDTI, had a $9.35 midpoint. If we back out the LDTI impact this quarter, it looks like it's the midpoint's more like $9.20. Just curious if you can give us any perspective on kind of why that ex-LDTI guidance seemed to come down a little bit.

[Thomas P. Kalmbach, CFO at Globe Life]

Yeah, Ryan, it's Tom. The, yeah, we'd say that the midpoint more like $0.925, so drop about by about $0.10. Really the main drivers there are the lower premium growth that we had previous that we mentioned. Then, we are, you know, seeing a little bit higher lead costs and agency expenses impacted by inflation, you know, as travel starts increasing and as meetings start increasing and we have some additional training and recruiting costs that we're incurring. We just had that tick up a bit. Then as I mentioned also, a higher cost on debt given the higher cost for commercial paper, just the rates are a bit higher.

[Thomas P. Kalmbach, CFO at Globe Life]

Given the share repurchase program, just a slightly higher share count than what we had previously estimated in our prior guidance work.

[Ryan Krueger, Managing Director and Senior Equity Research Analyst at KBW]

Great. Thanks.

[Thomas P. Kalmbach, CFO at Globe Life]

One thing I'll just.

[Ryan Krueger, Managing Director and Senior Equity Research Analyst at KBW]

The fourth. Oh, go ahead.

[Frank M. Svoboda, Co-CEO at Globe Life]

I'll just say one thing I'd just add on that is, you know, with the higher share count, you know, it wasn't from the amount that we were anticipating, but just with the higher share price that we're at this current time versus where 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.

[Ryan Krueger, Managing Director and Senior Equity Research Analyst at KBW]

Good. Then on the free cash flow guidance of $410-$450, is there some drag in that still from COVID and non-COVID excess claims that occurred in 2022? I'm trying to think about if there would be a further bounce back as we, you know, go beyond 2023 to a more normalized level.

[Thomas P. Kalmbach, CFO at Globe Life]

Yeah. The way that we think about that is, you know, In 2022, we had combined COVID, non-COVID of about $118 million. In 2023 we expect about $45 million. 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.

[Ryan Krueger, Managing Director and Senior Equity Research Analyst at KBW]

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

[Thomas P. Kalmbach, CFO at Globe Life]

Exactly. Yep.

[Ryan Krueger, Managing Director and Senior Equity Research Analyst at KBW]

Okay, great. Thank you.

[Operator]

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

[John Barnidge, Managing Director and Senior Research Analyst at Piper Sandler]

Thank you very much. My question is around direct to consumer in the mailings. Things like increased postage and paper costs 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?

[J. Matthew Darden, Co-CEO at Globe Life]

Yes. As I'd mentioned, we're really focused on growing our internet and electronic media inquiries in which results in additional applications in sales. That's been the offset as that has, as I mentioned in my comments, continued to grow and is much more a significant part of the business than it was just even 3 or 4 years ago. 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. Overall, those dynamics are going on. You know, 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.

[J. Matthew Darden, Co-CEO at Globe Life]

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.

[John Barnidge, Managing Director and Senior Research Analyst at Piper Sandler]

Great. Thank you. 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? Just trying to dimension if, further away that from the pandemic portion, if that degrades.

[Michael Majors, Chief Strategy Officer at Globe Life]

For 2023 you mean?

[John Barnidge, Managing Director and Senior Research Analyst at Piper Sandler]

Yes, correct. Thank you.

[Michael Majors, Chief Strategy Officer at Globe Life]

Yeah. Yeah. For 2023, we expect a little bit higher COVID deaths in the first quarter than we would for the third, second, third and fourth quarter. That's, you know, we do kinda think that'll be front-loaded a little bit during the course of 2023.

[John Barnidge, Managing Director and Senior Research Analyst at Piper Sandler]

Great. Thank you.

[Michael Majors, Chief Strategy Officer at Globe Life]

Yeah.

[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.

[Andrew Kligerman, Managing Director at Credit Suisse]

Good morning. First question is around American Income and, you know, completely understand kind of 2023 being a 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'll take longer?

[J. Matthew Darden, Co-CEO at Globe Life]

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. It takes time to get these new agents onboarded, trained, and producing. Obviously, the longer they've been here, the more effective they are from a production perspective. That's why you'll see in our guidance is 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 that will drive that longer term growth on the sales side in 2024.

[J. Matthew Darden, Co-CEO at Globe Life]

We also anticipate opening 3-5 offices in American Income over this next year, that too will set us up for good growth in 2024. 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. We do that throughout our history. 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 to specific activities and behavior that we're trying to influence. I just wanted to clarify that overall, our compensation and acquisition costs are gonna be consistent with what we've experienced in the past.

[Andrew Kligerman, Managing Director at Credit Suisse]

Super helpful. Shifting over to the Health Lines, particularly United American, with sales down 25%, I think that was due to pressures not only in MedSup, but also, like, Medicare Advantage gaining share. You know, 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. As I look at United American down in the agency channel, I'm wondering, you know, A, where is the competition coming from? I guess it's just, you know, where is the competition coming from as I kinda think the players seem to be getting more disciplined.

[J. Matthew Darden, Co-CEO at Globe Life]

Yeah. 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 gonna, you know, chase the sales, so to speak. 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. So we anticipate that some of that will abate as we move forward. Mike, do you wanna add anything to that? You've been running this area for quite some time.

[Michael Majors, Chief Strategy Officer at Globe Life]

Yeah. I think, you know, while there may have been some that have pulled back, I mean, overall, we are seeing movement into Medicare Advantage Plans. You know, in this, in this line of business, there's big carriers or small carriers. You know, the cost of entry is low because it's not a capital-intensive business. I couldn't speak to, you know, 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, you know, the current economic environment could contribute to that. I would assume that people are, you know, more willing now to give up the benefits of a Medicare Supplement plan that doesn't have provider network restrictions or referral requirements to go to a cheaper managed care.

[Michael Majors, Chief Strategy Officer at Globe Life]

As Matt said, you know, we've been in this business since Medicare started in the 1960s. We've seen these swings back and forth over the years, so it's not really usual or surprising. You know, we're gonna maintain that disciplined approach. Matt said it's to protect our margins. It's also to protect our customers. You know, we wanna 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, you know, have the right price and have reasonable rate increases. The other thing to remember is as we price this business, the price we have in our new business is the same as our renewal.

[Michael Majors, Chief Strategy Officer at Globe Life]

It's not like we can go in and have lower new business prices, 'cause if we were to do that would impact the profitability of our in-force block, you know, which is the United American block, around $500 million. Again, you know, this, it's something that we've seen before, and, it's, yeah, not particularly surprising.

[Andrew Kligerman, Managing Director at Credit Suisse]

Just a little further clarification on that. You're seeing the competition across agencies and online, and is there any interest on the part of Globe Life in terms of kind of transitioning to more Medicare Advantage products as opposed to MedSup?

[R. Brian Mitchell, General Counsel at Globe Life]

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

[Andrew Kligerman, Managing Director at Credit Suisse]

Absolutely. In terms of distribution competitors, is it pretty much across agency and online? With that, you know, is Globe likely to pivot more to Med Advantage as opposed to historically being in the MedSup area?

[R. Brian Mitchell, General Counsel at Globe Life]

Matt, do you wanna take that?

[Matt Darden, Co-CEO at Globe Life]

Sure.

[R. Brian Mitchell, General Counsel at Globe Life]

Do you wanna? Okay.

[Thomas P. Kalmbach, CFO at Globe Life]

Let me start. I'll see. We don't have plans to pivot into the Medicare Advantage area. I think the competition is coming from all paths. 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-driven business, so. Mike, you wanna add to that?

[Michael Majors, Chief Strategy Officer at Globe Life]

Sure. I think, you know, Medicare Advantage, you know, we don't use networks for one. That would be something we'd have to... That'd be a big change for us. It's just, you know, it's not a line of business that we've been in, and I know we considered a long time ago. You know, at one time we were in the Part D plan, which is similar, and we, you know, we exited that. It's something that we wouldn't wanna do. It's really, I think, harder for smaller players to do that and to get involved with either Medicare Advantage or Part D. I don't think that undertaking would make sense for us.

[Andrew Kligerman, Managing Director at Credit Suisse]

Seems like a thoughtful approach as usual.

[Operator]

Does that answer your question, Mr. Kligerman?

[Andrew Kligerman, Managing Director at Credit Suisse]

Absolutely. Thank you.

[Operator]

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

[Mark Hughes, Managing Director and Senior Equity Research Analyst at Truist]

Thank you. Excuse me. Good morning. Is there anything about 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 change over time so that there's a natural acceleration or deceleration perhaps as time goes by, that will impact your kind of trend line growth rate in future years?

[Thomas P. Kalmbach, CFO at Globe Life]

Yeah, 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. To the extent that there 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, you know, the first year capitalized expenses as well as future renewal capitalized expenses. Under the new method, we're only allowed to, as we capitalize, we are forced to change the amortization rate upon each additional capitalization. For our AIL line of business, we do have some renewal commissions that we capitalize.

[Thomas P. Kalmbach, CFO at Globe Life]

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 2 things. One is, you know, 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 being amortized. 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. 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.

[Thomas P. Kalmbach, CFO at Globe Life]

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.

[R. Brian Mitchell, General Counsel at Globe Life]

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, you know, from time to time, I would expect, you know, once this kind of gets reset, then that the general level of growth rates should be, you know, somewhat similar.

[Mark Hughes, Managing Director and Senior Equity Research Analyst at Truist]

Okay, great. Thank you very much.

[Operator]

Thank you, Mr. Hughes. Ladies and gentlemen, once again, if you have any questions or follow-up questions, please press star one on your telephone keypad. 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. Mota, for any additional or closing remarks.

[Stephen Mota, Investor Relations Director at Globe Life]

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 this conference. Thank you much for your participation. You may now disconnect. Have a good day.

Participants

Executives

• Stephen Mota, Investor Relations Director
• J. Matthew Darden, Co-CEO
• R. Brian Mitchell, General Counsel
• Matt Darden, Co-CEO

Analysts

• Frank M. Svoboda, Co-CEO at Globe Life
• Thomas P. Kalmbach, CFO at Globe Life
• Jimmy Bhullar, Managing Director and Senior Equity Analyst at JPMorgan
• Erik Bass, Senior Equity Research Analyst at Autonomous Research
• Ryan Krueger, Managing Director and Senior Equity Research Analyst at KBW
• John Barnidge, Managing Director and Senior Research Analyst at Piper Sandler
• Michael Majors, Chief Strategy Officer at Globe Life
• Andrew Kligerman, Managing Director at Credit Suisse
• Mark Hughes, Managing Director and Senior Equity Research Analyst at Truist