Globe Life Inc. (GL) Earnings Call Transcript & Summary

Hello, and welcome back to the Annual Bank of America Insurance Conference. We're broadcasting here from One Bryant Park in New York City. If you're dialed in on Veracast, you can always ask me questions to ask our speakers. And our speakers here, it's Globe Life. We're really honored here. We have a whole host of people helping us out. We got Co-Chairman and CEOs, Gary Coleman and Larry Hutchison; CFO, Frank Svoboda; and Chief Strategy Officer, Matt Darden here. And I'm going to get into my questions. But again, you can also ask me questions through the Veracast app, and I would encourage you to do so. I think that some people on the line are familiar with Globe Life, others not. So we're going to sort of work our way in. But thank you, gentlemen, for joining today. We really appreciate your time.

Can you talk a little bit -- I mean, explain how Globe's 3 agency businesses differ? I think that some people think about Globe Life -- of course, that's an overarching brand. What are the brands that you guys represent and the differences between those 3 things to give people an idea -- a taste of your product arsenal.

Joshua, before we start there, I'd like to read our forward-looking statement.

Please do.

Comments may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our 2020 10-K, the subsequent Forms 10-Q on file with the SEC. Some of our comments may also contain non-GAAP measures. Please see our earnings releases and website for discussion of these items and reconciliations to GAAP measures. Joshua, before I answer your question, why don't we have Gary give kind of an overview of Globe Life, our business model and how we operate. And I'll go through the 3 agencies. Gary?

Yes, Larry. I want to give just a little background regarding our business model because it differs quite a bit from other life insurers that you all may be familiar with. We operate in the middle-income market, selling basic protection life insurance with supplemental health products. And we market those products through distribution that we control. And by controlling our distribution, we're able to control our costs and maintain strong underwriting margins from which we annually generate the cash flows necessary to fund our current operations. But it also provides excess cash, which we annually return to our shareholders. We like the middle-income market because it is a large, underserved market. It has great growth potential and very little competition. Most life companies are operating in a smaller or higher income market where there is much competition for customers and agents. And we just don't face that kind of competitive pressure in the middle-income market. As I mentioned, we control our distribution, which consists of exclusive agencies and our direct-to-consumer operation. And I might remind people that our agents sell only for us. So with that background in mind, I'll turn it back to Larry to give more insight into how our agencies operate.

Josh, we do have 3 distinct agencies, American Income, we have Liberty National and Family Heritage. They're very different, but they're also very much alike. They -- as Gary said, they operate solely in the middle-income market. They really focus on basic protection life insurance and supplemental health insurance policies. They sell through a needs-based presentation, and they operate exclusively through independent contractors under the agency owners, middle management and the agents. Let's talk for a moment about each company. Our largest company or our largest agency, rather, is American Income. American Income operates throughout the U.S. and Canada. It has approximately 95 agency owners and over 9,000 agents. Its focus is basic protection life insurance. At the core of its operation is its relationship with labor. We have a 60-year relationship with labor. If we unionized agency force and unionized home office for American Income and we get most of our initial leads from that labor relationship. We have endorsements from the nationals and many of the locals. And so 25% of our sales come from that union market. We also have referrals from those union sales. That accounts for the other 75% of our sales. And then you have some nonunion business, which is through associations and other affinity groups. It has a history of growth. We've doubled the size of the agency since 2012. We've been adding 3 to 5 new agency offices on an annual basis. Our second largest agency is Liberty National Life Insurance Company. Liberty National traditionally operated in the Southeast. And today, it operates throughout the U.S. It's very different from American Income that its focus is life and supplemental health insurance policies. Its main focus is in the worksite market. That's approximately 70% of its sales today. The other 30% are individual life. Again, its growth has been terrific. Since 2012, we've doubled the size of the agency for us. And we'll continue to have growth as we increase our middle management. We open new offices. The smallest and most recent acquisition of our agencies is Family Heritage Life. We acquired the company in 2012. When we acquired the company it had approximately 700 agents. Today, it has over 1,200 agents. Now it operates with 25 agency owners. It really operates in nonurban areas. It sells a return-of-premium supplemental health product. It's what you can see, the 3 agencies are very distinct in terms of their niches in the market, but they're much alike in terms of their structure and how they operate.

And so I mean, obviously -- you very much -- you cultivate a distribution sales force to sell this product, but over time, direct consumer is becoming an increasing way of engaging with customers. How does direct-to-consumer fit into your selling proposition? What does it mean for your agents or distributed products for a very long time? And can we talk about the future of how that's going to evolve, you think, in an industry with changing distribution conditions?

Well, direct-to-consumer, it has a history of evolution. They were originally founded in the 1960s, had been under experiment with the idea that you could sell through the mail. And that really grew and grew until 1985 through the advent of analytics. The company really expanded its footprint with direct mail and the volumes have increased over time, but today, we have over 250 million pieces or 230 million, 250 million pieces a year that are in the direct mail operation. And there's a lot of analytics that determine that volume. Depending on our response rates and modeling, that determines what the volume is of that mail. In 1995, we had another channel, which is our insert media, and that's also goes through the mail, but we insert life offers through coupons, through bank statements, through any kind of a billing process. That's been very successful. Our third channel is the Internet. We began to experiment with the Internet in 2006. At that time, it was 2% or 3% of our business. Today, the Internet represents over 50% of our business. Of course, the last channel we added is our inbound call unit. And what we found that we put our 800 number on the Internet with all of our direct mail and insert pieces. About 20% of our customers who didn't want to talk to an agent before they make that final buying choice, we've also found is that while the Internet is the fastest-growing channel for connected and that there's a general advertising effect and we're not sure exactly where the customers first became aware of direct-to-consumer, maybe on the mail, but they made that final buying decision on the Internet. In terms of the agency, it's not any kind of a threat to the agency. Our markets are underserved. There's not an overlap between agency sales and direct-to-consumer. In fact, direct-to-consumer supports our agency operation. It provides leads, provides analytics, and, of course, there's a general advertising effect. As you have over million pieces of insert and mail, it's certainly a branding effect for the agency. So when they call customers today, certainly the customers are aware of Globe Life. In terms of its future, it also can grow. We'll continue our modeling, our analytics. We have the attribution studies to see where we best spend our marketing dollars. And of course, as the Internet continues to expand, this is an efficient way to expand those sales.

Is there a sophistication difference on the product that can be sold by an agent versus a product that can be sold directly?

They're both basic insurance products. The face amount of the direct-to-consumer is generally a lower face amount than in the agency. But the customer base is really the same as the middle-income market, and it's really a consumer preference of how they want to buy their insurance, either through an agent or through direct-to-consumer.

And so let's shift to talk about the agency side and agency recruitment. Obviously, that's a multiyear, multi-decade story. But we've just run through a pandemic. And what did that do for recruitment efforts? And now that we're coming out on the other side, what does that mean for recruitment overall?

Well, the pandemic has been an opportunity to both recruit and sell, but Matt Darden is on. He's in charge of our recruiting. Matt, why don't you take that question?

Thanks, Larry. As far as the pandemic and the early days of the pandemic, there were, as you might recall, a lot of people looking for other opportunities as businesses shut down, furloughs happened, et cetera. And then later on in the pandemic, people are looking for and questioning what are they doing from their life choices perspective and career perspective. So we found opportunities in both of those phases and have been able to grow the agency count during that time frame. What we find is, over a period of time, the sources of recruiting and where we give -- those leads change over a period of time, and we're always adjusting where that happens. So our agency owners out in the field are primarily responsible for recruiting and training new agents, and they're always evaluating new resources. And so what we've seen is different opportunities come along that are effective in different time frames depending on the economic cycle that we're in.

And we know that recruitment effort a little bit. I mean I think in the past, you've talked about the middle management layer as being essential to having a successful recruitment agency outreach. Can you talk about the role of that middle management layer and how successful you are at putting people in those roles to help you recruit at the entry-level point in time?

Sure. We are growing our middle management. And so it's not necessarily putting people in those roles, but they're growing into those roles because when we recruit, we're recruiting to a career path and a lot of our agents ultimately desire to become agency owners some days. We, of course, have agents that also are interested in just being in career sales. But primarily, we're recruiting to a career path. And so after you've been in the agency for a while, you move up into that middle management and your activity turns from just pure selling to recruiting and training new agents. And so the more -- that's a big piece of your job. The more agent count that we have in that middle management enables us to grow even more because their primary job is often recruiting new agents and training them and getting them successful.

And what is your inventory? Go ahead.

Josh, I was just going to add one quick thing to that. I just want to clarify. When we do talk about the middle management, that is within the individual agencies themselves. So when we think about American Income, the individual agents owners, of course, are independent of -- independent contractors themselves. And the middle management is within those agencies. And then from a home office perspective, of course, we're just providing support and tools and different tools like that, that could help them in their recruiting efforts and that type of thing.

Do you currently have a total inventory of potential middle managers? Or do you need to be developing them in order to reach your recruitment goals at this point?

It's a continual process where as we recruit in new agents, they spend a period of time learning how to sell and then, ultimately, they start learning how to recruit. And back to your question on what's changed during the pandemic is what we see becoming more effective in the latter half of the pandemic has been that personal recruiting. And so this is where an agent goes out and identifies an individual versus people coming to the opportunity from a job board or things like that. And so the pipeline is really just always that middle management growth. It's a continual process where we're bringing agents in, training them and then moving them after a period of time from an experience perspective and capability perspective into that middle management so that they can focus more on recruiting new agents and growing their agent count.

And just to remind investors, I see plenty on the line, if you want to ask a question, type it into the Veracast. There should be -- I don't know, but a slot there. Send it over to me and I can ask the question. So continuing along this line, when we think about the agents who you've recruited over the past 24 months, is there anything different about their talent development? Was it an accelerated talent development? Is there -- are they behind the curve? Has the pandemic created a different set of learnings that have developed the newest recruits in a different sort of way?

I'll start on that answer.

Well, during...

Go ahead. Matt, I would start that answer to say that COVID's biggest impact is that virtual sales and virtual recruiting have really accelerated with the advent of COVID. Prior to COVID, any recruiting, any sale was in-house, in the office. And once COVID hit, we quickly switched to virtual recruiting, virtual sales. I think that one of the advantage of virtual recruiting is the agency job is a much better job. Don't have the travel involved. You can be more productive. You can have more presentations because you're not having travel time. It's better and that you're working nights and weekends. You can make 2 or 3 presentations, have the rest of the evening. So I think the reality is that COVID has really helped the agency think about how they recruit, how they train. And it's much easier to train in a virtual method. I think the other thing that's driven this is the customer, the consumer, whether it's to recruit the customer, they really changed. They are accepting virtual sales or virtual presentations versus pre-COVID. Matt, I'm sorry to interrupt you. Go ahead.

Larry, I was going to add to that is that it's also expanded our geography of recruiting because before in a -- prior to the virtual environment, people had to come into an office and interview in a traditional form. Now with virtual is our agency owners can expand their footprint throughout the state as an example and recruit those individuals that may not have been willing to drive an hour or 1.5 hours or even further in for an interview. So our geographic expansion from a recruiting perspective has very much expanded outside of our traditional geographic footprint due to the virtual enablement. The other thing that, that's enabled too is our agents are licensed on a per-state basis is that we see agents also getting licensed in adjacent states because they can now work leads virtually. To Larry's point, a lot of these sales are occurring in a virtual environment. And so the next appointment for an agent is as near as the next phone call away versus having to travel to all of those different appointments. So the pandemic and the virtual activities that we've implemented in the organization have greatly expanded our agents' ability to be effective from a time frame perspective. And so that's really what we see as a big difference between now and prepandemic of how our agents do their business.

And so if we think about this as a time line from the recruitment moment to the education period, to being productive, to being truly a contributor to the organic growth of the company, this period of recruitment that you've done, when do you expect it to show up in terms of the revenue boost from these most recent hires?

Matt, go ahead.

I would say that it always -- it shows up pretty quick because our whole business model is built around recruiting agents and getting them up and trained as quickly as possible. This is a 100% commissioned job. And so the more effective we are at getting an agent and train and producing, the more effective they will be at continuing in the career. And so we know the quicker that, that happens, the more longevity we're going to have with that agent. What we see with the virtual environment is, again, it's easier to train agents in a virtual environment because they simply join a Zoom call and observe a presentation. Before, they had to go to different appointments and ride along with another more experienced agents. So an agent productivity from a number of agent count perspective shows pretty quick. Now when you have periods of high growth for our agent count, as you might imagine, agents with 6, 12, 18, 24 months of experience are able to produce more on a per activity basis than agents that have only been here 6 months just because they're more experienced. But they start contributing right away. And then the longer that they're here from a tenure perspective, then the more effective they are from a productivity with their activity.

And so, I mean, this is that -- one side is the production side. And there's also, I guess, the demand side. How has COVID changed demand? Are people having a greater sense of their own mortality, and therefore, they're more interested in the product than they might have been? Is it the same? Has the pandemic created an opportunity to start a conversation for producers in a way that wasn't there 2 years ago?

Josh, I think that customer base has always understood the need for life insurance. I think what COVID did was make people act on that and an understanding of that need. We see that in 2 areas. One is persistency. We've had better persistency since 2020. We've also seen an increase in demand. That's across the channels. That's direct-to-consumer, SME agencies. So I think there is an understanding now that COVID is probably here to stay. And it's a virus that we'll continue to have different variants. So I think it's raised the awareness of the need for life assurance, and people act on it. And I think also people understand they need to keep their life insurance for the long term.

So I guess that's going to transition into COVID claims. There's a number of questions I have about the post-COVID world or the COVID endemic world. The first question, I guess, is actuarial tables. Does the product need to be repriced with an assumption of a certain mortality from COVID? And given that we're figuring this out in real time, do we know what endemic COVID mortality is with enough confidence that we can price the product correctly?

Yes. Josh, I think as we think about COVID and the long-term impact, it's really hard to tell. And it's really I would say too early at this point in time to determine what that endemic state might look like. When you think about it, there may be some higher COVID deaths, but are there maybe fewer flu deaths or are there -- or death from pneumonia or some other natural causes? Flu and pneumonia typically hit the ages that are over 65, and that tends to be the same ages that COVID has had an impact on. So I think it's -- as time goes on and better vaccines get developed and we end up with better therapeutics, clearly, there's always the potential that an endemic state may not be really that many additional deaths. But so as we think about it from a tables and how it impacts our pricing, at Globe, we utilize our own experience. We've been selling essentially the same product to the same segment of the population for over 50 years. So -- and when we think about the impacts of COVID, we really have to take a look at all of the causes of death at a more holistic manner. What is the impact on flus and heart disease and all those other types of causes of death in addition to COVID and really seeing those long-term trends. As we thought about it, it's going to take really several years to get enough data on those level of deaths and how those are changing and whether or not from a long-term perspective we actually see more favorable mortality or not. At the end of the day, I really don't think in a pure endemic stage and if there's 15,000, 20,000, 50,000 additional deaths from COVID, given that there's probably some impact on other deaths overall, I don't really anticipate it probably being a real material event for the industry or for Globe Life specifically.

That is you're saying -- so if we -- I mean, I guess that's for endemic COVID. Look obviously, you've taken some -- you've paid some benefits early in the very best sense for people who have died during the pandemic, who maybe would have died later, but also those people tend to have high percentage of comorbidities, I suppose.

Yes. I ...

Go ahead. Go ahead.

Well, let's say -- I mean, I think that the big question is are there -- one side of the argument that is you've had the COVID deaths. It's -- those were people with comorbidities, older ages, so isn't there going to be better mortality in the future? That's always possible. But then again, what we don't know yet, and it's just a little bit too early to tell, is what impact is there on those individuals who weren't receiving the level of care that they needed perhaps during the pandemic. They weren't getting to the hospital. They weren't going to see the regular doctor. Clinics were shut down, et cetera. And so whether there'd be no care or delayed care, there's potential that there's some worsening health environment out there as well as what they made -- calling long COVID. Individuals who had COVID survived, but maybe they've got some lingering health problem because of that. I think, it's again, a little bit too early to tell, and we'll have to see what impact that has overall on the health of the population.

And I don't want to put words in your mouth or ask you to put numbers to it. But in a general sense, can we say that a modest improvement in persistency and a modest improvement in mortality for the remaining book can in long term meaningfully offset the upfront loss that have been paid for COVID deaths that were unexpected? I mean, is that reasonable? Even if we look over a 10- or 15-year view, it may be the case that the COVID losses were not a material long-term impact on what would have otherwise been the financial performance of the company.

Yes. I think that's reasonable to say. And when you really think about it, persistency there especially is -- the good part about persistency from a long-term perspective is, obviously, you have a higher base of premium that you're continuing to collect each and every year. So we're very pleased with the level of additional persistency and the impact that that's had on our premium income. And I think over the long term, that will continue to be beneficial for us.

And I guess, similarly, it feels like there's elevated attritional mortality alongside COVID. Maybe that's failure to hospitalize or other things is driving that. Perhaps COVID plus some other symptoms came through, really COVID wasn't the key contributor to the mortality and whatnot. Is there a view -- and maybe you can tell me if I'm wrong -- that currently attritional mortality is elevated, but that will probably pass as we get past the pandemic part of the COVID period into the endemic? Are we currently in elevated levels of normalized loss as well?

Yes. We are seeing elevated levels of non-COVID-specific causes of death that we do think are related to the overall pandemic. You mentioned whether it's getting delayed care or not having access to care at all, that we're seeing it specifically is in some of the heart disease, neurological, maybe on Alzheimer's. We've seen periods of elevated around cancer and lung disease as well. And so we do anticipate that those will probably stick with us for a little period of time, but we do think that, overall, if -- assuming the COVID settles down into, I'm going to say, a more normal state, we really would anticipate that over time that the other causes of death would tend to revert back to a more normal level as well. It may be a little bit delayed past what we're seeing from COVID deaths, but we do think it will normalize.

I have a question coming in from the audience. And the question is, are there any geographies where you are underpenetrated, where growth could come more easily from appointing more agents?

American Income, we operate throughout the U.S. and Canada, so there's not really a question of underpenetration. I think particularly with 80% of our sales being virtual, we're not worried about underpenetration with the agents. Certainly, we have room to expand the Liberty National, Family Heritage. While they operate nationally, they're such a large market, we could double and triple the number of agents and offices and not have adequate penetration. Really, our growth is dependent upon growing our distribution.

Sorry, your growth is dependent on what distribution? The career distribution, did you say?

Really to grow our 3 agencies, it's really about growing our distribution. It's not product-driven. We have such an underserved market. There's no limit to the amount of growth we can have with the number of agents and number of agency owners.

Okay. So let's talk about interest rates and how the product has been priced over the past 10 or 20 years, whether you've been raising price to compensate for interest rate over time. Now, maybe interest rates are moving in the wrong direction or the other direction, I should say. And does that mean that at a 4-year, 10-year, the price of the product changes very much? Or is it really very little interest rate sensitivity to how you're thinking about the value of this product?

Josh, interest rates certainly have an impact. And over the past 10 to 20 years, as rates have declined, we have repriced our products a few times. But I think one thing you can see is that interest rates aren't the only factor involved. And we also -- also involved in pricing is our assumptions for mortality, persistency, policy acquisition and administration expenses. So we monitor these assumptions on a regular basis. And -- like I said, we've made some changes, and we've done that in order to maintain our profit margins. We are encouraged to see the higher interest rates. That will help us in maintaining our current rates. But I think one thing that's important for people to remember about Globe Life, so it's a real advantage for us. Being in that middle-income market where there's little competition, we don't face competitive pressures for rates. And that's especially true in our agency business, which comprises 75% of our insurance sales. So yes, we had to deal with interest rates, but it's really an advantage for us that we're not having to also deal with competitive pressure when setting our rates.

And I guess it's sort of adjacent. Obviously, we have some LDLTDI (sic) [ LDTI ] accounting changes coming up. In terms of, a, what's the impact given deferred commissions on your balance sheet? And b, is there an impact on interest rates as they go up that LDTI accounting would affect your P&L and balance sheet differently than otherwise would under current accounting?

Well, the difference is going to be -- and Frank can go in more details later. But the difference is we're no longer going to create interest on deferred acquisition cost asset. Which means going forward with the asset itself and the related amortization of the asset will not be impacted by interest. So going forward, it's really not going to be impacted by changes in interest rates.

And one thing I would just note on there, Josh, is that the balance that's on the balance sheet as of the transition date really does get frozen. And so from then, it's a matter of that future expense where in the past, there's always some component of that interest. And so changes in interest rates could have some impact on that going forward. You just -- as Gary said, you just won't see that component of that amortization.

Makes sense. And then shifting gears, a little more capital return. I mean, you have a very long-term stable business and a much lower-than-peer common stock dividend yield. That's obviously intentional. How do you guys think about capital management? And what would be the view of buybacks versus dividends that might encourage you to lift that dividend yields a little more? You could have done in the past, but you haven't. So you must have thought about it. Where does that break down in terms of your mind?

Well, Josh, I think capital management is really an important part of our business model. And one reason is that each year, our large and profitable in force block of business generates substantial cash. So -- and our strategy on the cash is, one, to use the cash needed to fund our current operations, secondly, to maintain capital levels. But after doing that, we have substantial excess cash in our -- each year, and we endeavor to return that to the shareholders through dividends and share repurchases. And just to give you a little history. Over the years, about 15% to 20% of that annual cash flow has gone for dividends. And during that period -- a long period of time, we've maintained a dividend yield of around 1%. And we use -- generally use the rest of the cash -- excess cash to -- for share repurchases. And the reason we weighted heavily towards share repurchase is, one, that we think it gives the shareholder a better return; and secondly, we like the flexibility of being able to redeploy cash that we're going to use for share repurchases if a better alternative is the M&A activity or something becomes available. As far as changing that, this is not a new strategy at Globe Life. We began our share repurchase program in 1986. And since then, we used the majority of the excess cash for share repurchases for the reasons I just mentioned. And over the last 36 years, we've used almost $9 million (sic) [ $9 billion ] of cash to repurchase 82% of the outstanding shares. And going forward, I believe we will continue to devote more to share repurchases. Yes, there could be other alternatives. We can change that. But for the most part -- and I guess one final thing is when we're buying back shares, we're buying back below what we think the intrinsic value of the company is. If the share price ever got to the point when we were at or exceeding that intrinsic value, I think then we would devote that excess cash to dividends.

And then one other capital question. I mean you have a very stable business year-to-year. I don't know what the rating agency views, but it seems to me like you could afford a greater debt to capital leverage than some other companies in the life space that you are grouped with by everyone generalizing what life is. But you guys I think slightly lower than peer debt to capital. Could you increase the amount of debt in your balance sheet? Would you -- maybe you want more capital profitability. How you come upon where you are on a debt-to-cap basis?

Yes. Josh, if you look back over time, and we've been pretty consistent with our debt/cap ratios somewhere in the mid-20%. We've really liked being in that 23% to 27% range. We kind of are -- depending on the situation that our debt levels pretty much stick within that range. And that comfortably meets us within the rating agency expectations. And so there -- it gives us some capacity. It gives us some flexibility if we're at the top end of that range, clearly, to have -- to be able to access the debt markets if need be for an acquisition or if there are additional capital needs that we need to fund at our insurance operations. So it's been a range -- that 23% to 27% has been the range that we've had for quite a number of years and that we're very comfortable with, from an ability to -- again, to kind of have that right balance of managing our operations as well as keeping the rating agencies happy. We fund our buybacks through excess cash flow, as Gary mentioned. I get the question from time to time, does it make sense to increase in order to take out some leverage and buy back some shares? Yes, it's a nice short-term impact. But I think over the long term, we'd like seeing ourselves in that debt/cap range that we're currently in.

Well, we are out of time. And I know you have a busy day meeting with investors today. I want to thank you for being here, and we'll certainly be in touch, and I'll pass any feedback on from investors towards you. Be well, and Allstate's next everybody, but let's say thank you to the Globe Life team.

Thank you, Josh.

Thanks, Josh.

Take care. Bye-bye.