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

Sure. There's multiple different components. But you're right, overall, the heightened awareness benefited all of our organization, particularly so in our direct-to-consumer channel. Just that awareness went up, people are at home, they're shopping online. And so significant sales growth in '21 and '22. And then you really have to look at the different agencies. And a lot of what's driving that is the momentum in our recruiting, in our agent count. So those are going to be leading indicators to what happens to sales thereafter. But fourth quarter was very strong for a couple of our distributions. Liberty on the life side had over 20% growth in Q4 compared to Q4 of the prior year. And a lot of that is same thing you look at the growth in that agent count throughout the year in that fourth quarter was really good. Family Heritage had over a 20% growth year as well. Family Heritage is our division that sells primarily supplemental health business. And early on in the pandemic, people were focused on the life side, maybe not so much on the health side, but their agent growth in recruiting has picked up. And so they've got very good momentum going through the third and fourth quarter. And we really look at this on more of a year-over-year basis than quarter-over-quarter because you are going to get fluctuations. Comparison and comps, maybe part of the story, but you can just kind of see that momentum. But overall, we've grown very well and very proud of where we've been over the last couple of years. And we're predicting or forecasting high single digits or low double-digit growth in Family Heritage and in Liberty. Our agent count grew tremendously at American Income during the pandemic. We went from roughly 7,500 agents, and in 5 quarters, we were over 10,000 agents in that agency. So they're going through a period of digesting that growth, and a little bit of retrenchment and then growing again here. And so again, we anticipate agent growth in American Income for 2023, but have the sales about flat from 2022. There's just some difficult comps in the first 2 quarters of the year for 2022 for American Income. But for Family Heritage and Liberty, we're at high single-digit or low double-digit growth in both of those agencies. And again, we think we can grow, and we've got a history of growing our agent count in all different types of economic cycles, and that's really what's going to drive the growth on the sales side.

And then in direct-to-consumer, I mean, the sales don't -- they seem similar to maybe 2019 level to some extent. Did you pull forward a lot of sales maybe in -- that otherwise would have occurred in 2022? Or how do you think that's shaping?

No, I think direct-to-consumer really just benefited from that increase in awareness. I mean, our sales went up over 25% without any additional marketing spend during that time frame. So you're right. Now in 2022, it's getting back to about 2019 levels, and we anticipate about the same for 2023. The significant change that's happened though is the shift in the mix of that business. Previously it was roughly about 55% was from a digital channel, it's up to about 70% now. And if you think about what's changed with the consumer behavior is consumers are much more likely to go online, get more comfortable with that method. And that's part of the shift that we're seeing. The other thing is that we've deliberately scaled back some of our traditional circulation, the cost of, as we might imagine, paper, postage, printing, all of those on the manual side of the house, the costs have gone up. And so those -- and we measure our profitability down at the marketing campaign level. And so for those marketing campaigns that were on the margin, we've scaled back our circulation. And so we continue to pivot and invest in the digital. It's a lower acquisition activity, but the mail in the direct-to-consumer side there also very much supports it all because those are still brand impressions. They still generate leads that we use in our agency. So it all works together because what we do know is that a customer may ultimately buy through 1 channel, but was first exposed to Globe Life in a different channel. So we've got a lot of sophistication and modeling around where should we invest across all our different channels to optimize total sales.

So along those lines of channels versus products, when you think about the growth for the next 5 years, I'm sure you see opportunities in both Life and Supplemental Health. But can you talk about like the total addressable market, where things are underpenetrated, where -- which products you see and which channels will dominate the sort growth story?

Sure. So we're focused on really that middle market and there's a huge addressable market in there is that over 50% of that population doesn't have insurance and another significant percent is underinsured. So we feel like there's plenty of opportunities in that market. And it's really not a product issue in the form of we have the right products, we believe, for that market. They're looking for an affordable basic protection life product or basic protection supplemental health product. So we really don't have designs on growing the organization by introducing new products or changing our product mix. It's really that organic growth of being able to continue to invest in our agency and our agency force, grow that agent count, like I talked about earlier about where we were from 2019 through '22, and that's how we're going to continue to grow the sales of the company. And we believe that there continues to be a vast undertapped market here. We don't have a lot of competition. We go to market with exclusive agent force that they only represent us, only distribute our products. And so we're very much in control of managing the margins and the profitability of that. And we like the products that we have because they're simple and easy to understand for the consumer. They're also simple and easy to understand for this agent recruiting process I talked about. We recruit agents that don't have experience. And so the simpler and the more basic that product is, it's really easy from a training, onboarding a new agent perspective.

All right. Can we talk about the asset portfolio -- We've, I think, that's a pretty weak hand raise there. Here you go, go for it...

I would guess, going from 11,000 to 15,000 agents might be one of the faster periods of growth in the company's history. And I don't know if productivity and kind of vintaging of those folks you brought on is something to keep in mind as we think about kind of go-forward premiums and sales growth trends?

It is -- I mean traditionally, what we see is periods of high growth follow with a little bit of stagnation and flattening out and then periods of growth again. If you think about what's happening is when we onboard a lot of agents, they're new in the business, they get up and experience. And as they move into middle management, they're the ones that turn around and then recruit, train and retain that next round of agents. And so it's very much it grows, plateaus and grows again. So that's why we really think it's important to look at agent count over an annual over an annual basis versus quarter-to-quarter because you're getting those fluctuations. And so that's why American Income, as an example, grew tremendously in '20 and '21, and it's kind of flattened out here and we anticipate growth again as we start getting that retrenchment. So there is a little bit -- because of that tremendous amount of growth, a little bit of attrition that was a little bit higher than what we normally experienced even though we were still growing on the recruiting side, bringing new agents in. And so really now it's about a focus on retention and retaining those agents that we've recruited so they can continue to grow in the future.

All right. So can we pivot a little bit to the asset portfolio? I'm looking at some stats. Portfolio average rating A-, so over 50% of the portfolio is rated BBB. Very little below investment grade. Is that positioning? Is that generally the corporate sensibility about where you should be? And how do you think about your positioning if there is a credit event in the future?

Sure. Yes, the BBB space has been where Globe Life has really lived on from an investment perspective over a really long period of time. And really did start, as Matt was kind of talking about the type of asset types of policies that we sell, remember, are really long-dated fixed -- it's a fixed amount that we're insuring. So you have fixed liabilities that are looking at when we sell a policy. You're looking at having an amount that's going to be payable out there 20, 30, 40 years down the road. So from an investment policy perspective, we're looking to say, we need to invest in fixed rate, fixed maturity obligations in order to give us the most surety of what our future cash flow is going to be to satisfy those future obligations. Historically, that's always been in that BBB space. When we look at -- we're looking at what's a risk-adjusted capital adjusted return. So we know with BBB is. We tend to have a little bit higher capital charge, but we make sure that we're getting paid for that versus if we were investing in a AA or A or whatever the case may be. Now to your point is that, more recently, I mean we've been higher on a BBB side, and it's been coming down here over the last few years and with 3% below investment grade and about 51% BBBs, I mean, the below investment grade is the lowest that we've had for, I think, this entire millennium. And in a large part, we don't go out and purchase. We only buy new investment-grade securities. So some of that has been that over the last probably 7 quarters, we've really been where we've had -- our upgrades have outpaced any kind of downgrades that we've had within the overall portfolio. So some of that's just been an improvement of the overall economic environment, organizations being able to refinance some of their debt at cheaper rates and that type of thing. We have -- did take some opportunity during 2022 to reposition a portion of the portfolio. We did take about $329 million and really had the opportunity just kind of way the marketplace had played out to take some of the bonds that we had invested in over the past years at some pretty low rates. Reinvest them to get higher yields, and we also improved the overall quality, improved the rating of the portfolio from that perspective and really kind of set us up, if you will, from -- to help positioning for any potential downturns that we might have. And of course, then with some of the higher ratings comes lower capital requirements as well. So we felt there was a really good win-win for us. Historically, we're in for the long run, and we generally feel really good about just the credit of BBBs because we're -- we have -- we've generated a significant amount of underwriting income and underwriting profits and statutory cash flows that we don't have to sell bonds ever to pay a claim. And so we anticipate staying in the bonds that we invest in. We plan on staying there for the long duration. We invest in companies that are -- we would expect to withstand multiple economic cycles over the course of time. So we typically don't have to sell securities. So the improvement in overall quality is a little bit of this repositioning, but we're pretty comfortable with where we're at there and don't really anticipate any major changes in how that plays out. We still intend to invest a significant portion of our securities in -- or new money in that BBB, A- type landscape.

I mean, the intention is to hold the bonds to maturity and they're on the balance sheet as such. Right now, you're sitting on a lot of unrealized losses, no capital charge and we -- but at the same time, you might have some gross capital gains on that portfolio, and -- which creates an opportunity to maybe neutralize a gain with a loss. Do you -- is there any desire in the company to sort of take some loss-making bonds out of the portfolio, reinvestment higher yields right now and move the interest rates prematurely?

Yes. I mean we look at that from a -- making sure that from an economic perspective, that really makes sense. And so we will -- and that is a little bit of what we did here back in 2022. We did have some opportunity to generate some losses. We were able to carry those back from a tax perspective and recover some tax gains that we've had in some prior years. So being able to get those immediate tax benefits kind of works into the economics as we think about does it make sense to do that? That's rare for us to do. We'll do that from time to time if the market kind of sets itself up for that but...

Do you rematch the duration of the instruments you sell -- or do you buy long and just...

In this particular case, given where just kind of rates have gone and this opportunity moving as quickly as rates move up. We did take some opportunity to extend our duration and the maturities out there a little bit. We're always very cognizant of looking at what are -- what is some of that asset liability matching, making sure that we're still properly matched from an overall portfolio perspective.

Can we talk a little bit about the capital return sort of philosophy? Obviously, during the pandemic, there's a lot of uncertainty, which changed the outlook a little bit for temporarily, but we're not in that period right now. Over a 10-year view rather than, just reacting to what's going on, what's the philosophy of the company on how to return capital?

Yes. We -- our first and foremost priority is invest in growing the business. So we spend a significant amount of money each year to put new business on the books. And so whether it be from a commission's perspective, on the sales of new business from our marketing efforts on the direct-to-consumer side. And remember then that all of that kind of flows through statutory. So all those acquisition expenses flow through statutory income. Then -- so after we've made sure that we're investing in those, investing in new technologies, everything else, we look at that statutory income, and we generate $400 million to $500 million of statutory income pretty much each and every year. We'll look at distributing that up to the holding company on an annual basis, make sure we have it up there. That gives us the flexibility to determine, do we have capital needs at any 1 of our insurance companies? We have different insurance entities. So we can -- we may need, one point in time, to kind of shore up capital at 1 organization and maybe not all of them. If there's been, it gives us some opportunity if we have generated some capital losses with some impairments on our bond portfolio, that opportunity to kind of fill those holes. If we don't have the need for capital or if there's no better investment alternatives for the organization, then we'll return that back to the shareholders either in the form of dividends or buybacks. We do believe in having -- we don't have a really big dividend yield. Typically, you kind of look at the total cash flows that we pass back to the outdoor shareholders. Probably about 15% or 20% of that return has been in the form of dividends, historically, over a really long period of time. It's kind of been our philosophy. And then we'll take the remaining cash flows and, historically, have passed that back to the shareholders in the form of buybacks. So...

I mean, obviously, it's not certainly one or the other, but is that backward looking? Or is that forward-looking? Are you like looking at the year ahead, how much business you're thinking you're generating this? How much capital needs hold for the year to come? Or at the end of the year, you say this is how much money we earned and this is how much capital we use, the rest we can give back to the shareholders?

Let's say a lot of it is -- it's a little bit of both. We're looking if there are some capital needs that we might have had from -- as a result of the year that just completed, then we may hold -- we'll hold that back and put that in as need be. We do start off the year kind of having a pretty good sense of our new statutory income, and we'll look at our projections of what those capital needs are. As we tend to pace out our buybacks over the course of the year so that we can see if there's any surprises that come up, if there's a turn in the bond market or something of that effect then we feel pretty comfortable over the course of the year passing that back out. And we can shift gears if we need to throughout the course of the year. We get a lot of questions around just our lower RBC levels, and we kind of managed to [ 300 and 320 ] and tends to be lower than a lot of our competitors. And -- but we don't need the higher capital, but it really fits with the types of products that we sell. And it's a stable, generally risk-averse products and investment portfolio that we have allow us to kind of manage capital at that level. We don't have to have the higher RBC for our ratings. And knowing that we have that consistency of generating a new -- $400 million to $500 million of new capital each and every year gives us great comfort that, again, we can pivot if we need to and move some of that back into the companies.

I know that you comfortably think that your shares will be worth more in the future than they are today. But that doesn't mean your ROIC calculation might not be different depending on when share repurchase makes sense or maybe a special dividend might be. How do you think about ROIC on share repurchases based on where it is at a given point of time?

We always want to make sure that the returns that we have on our buybacks are exceeding our cost of equity and cost of capital. So we want to make sure that they're positive from that perspective. We tend to then also really look at intrinsic value. What we have is an internal view of intrinsic model that we've been following since the '80s when our buyback program really started in full force, and taking a view on what we think our current book value is the value of that along with present value of future profits...

How was that tracked over time? I mean if you start taking that '80s and, you actually said, well, 5 years from now, here, we think we're -- has it been a pretty consistent the predictor of this intrinsic value model?

We -- it has been pretty good over time. And as we kind of think about our intrinsic value, there's been a pretty steady growth from our ability to continue to grow that book of business each and every year. We try to think of it on a fairly conservative manner. So we are very cognizant, and we want to be really careful that we aren't with the buybacks, buying back at share prices that we think are dilutive to our shareholders. And there's been some times when we were -- over the years where we've had to think about it, at least the conversation came in on, does this continue to make sense? Does a special dividend or something of that effect would that make more sense? We haven't reached the point to where we did do that, but...

There's a catch-22, a special dividend, it seems to signal that returning cash seems to a better value than [indiscernible] the business stock. I would point out, we had on here earlier a couple of high-growth companies. And we think about ROI, progressive, American Financial Group, Berkley, a bunch of companies that have received high valuations, that do periodically return very high special dividends and the shareholder return over the long term has been very, very attractive for shareholders. The problem is that there's a signal when you get off that buyback portion and say that we're going to do it this way, that you potentially judge for overall.

Yes.

Well, I appreciate the time up here on what that you had good means to say, I hope everyone had a chance to absorb everything and having a good day. We got a couple more sessions, I think there might be a cocktail party, which I know is people like cocktail parties. So thank you very much for your time. And I appreciate all your help, guys. Thank you, everybody from Globe Life.

Thanks.