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

Hello. Good morning. Welcome to Globe Life. Some of our comments may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to the 10-K and subsequent forms 10-Q on file with the SEC. Some of our comments may also contain non-GAAP measures. Please see earnings releases and website for discussion of these terms and reconciliation to GAAP measures. And now I will turn it over to the management team.

Thank you. Good morning. My name is Matt Darden, Co-CEO, Globe Life. And started here in about 2014 and we recently took over, Frank and I, these roles in January 1st and been with the organization quite some time throughout the operations historically focused on sales, sales support, administration, in those kinds of areas.

Good morning. My name is Frank Svoboda. I'm the other Co-CEO. I've actually been with Globe Life, Torchmark Corp. before that since 2003, with CFO from 2012, up until January 1st. And so been with the organization for quite a while. Good to be here this morning.

Great. We'll start with some questions.

And Tom.

Thanks. Yes, Tom Kalmbach, I'm CFO of the organization. I joined Globe in 2018 as Chief Actuary and transitioned to CFO as of January 1st.

Okay. All right. Well, could you start with discussing the products that you offer in the market you target and give us a sense for how large the market is for basic low face value insurance products and how competitive it is?

Sure. So we offer basic protection, life and supplemental health products. About 70% of our business is on the life side, the other 30% is on the supplemental health side. We really focus on traditional products, so term and whole life and those are distributed through a general agency force. We actually have 3 agency forces that are exclusive to us as well as a direct-to-consumer channel. That direct-to-consumer channel has multiple outlets where we market and distribute product and that's both online, internal call center as well as insert media and traditional mail. All of those activities kind of work together for that direct-to-consumer channel as well as it's also a lead source for our exclusive agency force. As far as market goes, we really target the middle income, lower middle income market. We find that we don't have a lot of competition in that market, as well as there's plenty of opportunity from a sales and expansion perspective. The middle income market is the largest market from a demographic perspective and over 50% of the individuals in that particular demographic don't have life insurance and then probably another around 20%, it's estimated, have -- are under insured. So our opportunities are just limitless in this particular market. And we go to market through this controlled distribution where we are able to control our margins, our cost as well as the way that we distribute the product. So we really don't find that we have a lot of competition in that market. A lot of our competitors focus on more of the high income, larger face policies as well as more financial planning and those kinds of activities where we're really focused on just basic protection, what that consumer needs from just a needs perspective to get over a challenging time, whether it's from a significant health event or the death of a breadwinner and just trying to get that basic protection to pay bills and the like.

And could you talk a little bit about the difference between the distribution channels, you have American Income, Liberty National, Family Heritage, direct-to-consumer and United American?

Sure. So our 3 captive agencies are American Income, Liberty National and Family Heritage. American Income is a union company. The history of that company, the roots are that we market to union-based organizations and employers. Over the years, we've expanded that significantly outside that union base, but it's still a sale that's to the individual. And the growth of that company has come from our expansion into other lead types as well as just referrals and working those relationships at the agent level. It's our largest agency. We have -- approaching almost 10,000 agents in that agency. And like I said, it's historically been union-based, but we've really grown it past that. It's probably about 20% of the business now is union-based and the rest of it is just individual sales. Liberty National is our -- marketed at the worksite. It's supplemental health as well as life and those are distributed in small businesses. We focus on employer groups that are really 10 employees up to 50, sometimes 100. So it's that smaller group of employers that are out there from an employee size base and those are historically cafeteria plan, supplemental benefits at that organization. The third is Family Heritage. That is supplemental health business. It's historically -- is individual products. It's marketed to individuals. Historically, they've done a lot of just working individual leads and doing that from a individual company perspective. Now they've focused really on marketing additionally to small businesses as well. Our direct-to-consumer channel we've been in the direct marketing business for about 40 years plus, so we've got a long history of being able to do that. Obviously, historically, that was in the mail. Now about 70% of that business is from a digital channel and that really grew tremendously during the pandemic era. So in 2019 about 55% of that business was from a digital channel and then just the growth and awareness from a pandemic perspective really pushed that and so about 70% of that business now is from a digital channel. But the mail is still important because that's still generates a significant volume of our leads.

One thing I'll just add, we didn't really -- on the product side, about half of our supplemental health premium is a -- is true MedSup that's written by an independent agency. That's the only piece of our business that where we use true independent agents from a general agency perspective, really just kind of due to the competitive nature there on that MedSup. About half of our supplemental health business is that MedSup and the other half is the return of premium products that are sold by Family Heritage and then the supplemental health for Liberty.

And do you expect the revenue mix to stay around 70% from life insurance and 30% from health or could we expect some shifts over time and maybe talk a little bit about the profitability in those segments as well?

I'll talk about marketing and you talk about profitability.

Sure.

As far as just the mix of business, I think we continue to see that continuing no significant changes in mix. They're both sides of -- the life is growing a little bit faster probably than the overall health business. But from an overall strategy perspective, we intend for right now to keep that mix about the same.

Yes, we really like, you know, really like the life business because, one, it has such a long life for us from a premium flow perspective and then of course, the premiums add to investment income. So versus supplemental health, it's a very -- what we'd like about the supplemental health is, one, just the stability and then it has a little bit better, doesn't have as much capital needs. And so it's a pretty good from a profitability there. The margins that we see on our life business is a little bit greater than what we have on the health business as well as a whole. So we do tend to favor the life from that perspective. So again, it's a little bit higher margin. It's a little -- it generates investment income from the long term as well. But I think to Matt's point, while -- we'd probably -- the life tends to grow a little bit faster, so they could expand a little bit. But we definitely would like to keep that ratio if we can.

Could you touch a little bit on the size of the policies just so that we can put that into context versus competitors?

Sure. So it depends on the distribution, but in general we're $20,000 to $50,000 face. A lot of our distributions, like our direct-to-consumer channel, we don't offer a product higher than $100,000 face value. If you look at us versus the rest of the market is we're very much concentrated in those lower face policies. The average policy issued by the next competitor is more around $250,000 from an average perspective. So we are significantly in that lower market. And that's really just because of the market that we're in and just the needs of the customer base there. So we focus on those lower face policies and in order to be able to do that we have to be able to issue policies and underwrite them on a very cost effective bases on a per unit perspective. So we issued nearly 2 million policies last year and in order to do that you have to have a significant processes to be able to support that number of policies and being able to underwrite that many policies on a cost effective basis. So that's kind of another competitive advantage. We've been doing this for decades. It's hard to replicate that if you're not have experience in this market and understand what the overall claim and persistency experience is going to be.

I agree. It seems very difficult to replicate, so. And maybe talk a little bit about macroeconomic factors. So inflation, COVID, unemployment, gas prices, how those things factor in?

Sure. We get a lot of questions around inflation, unemployment environment. What's really good about our business is it's very resilient through these different economic times. We go back and we look at what was our experience in 2002, 2008 and '09. American Income as an example, we had double digit sales growth in 2002. We had double digit sales growth in 2008 and in 2009 on top of 2008. And a lot of that has to do -- we grow our agency business through recruiting more agents. We're not trying to grow it by having agents be more effective in selling more policies, but it's really just growing that agent base. And we do that from a recruiting perspective. And so we spend a significant amount of time and effort focused on agent recruiting. And another way that we're unique is that we're recruiting people to this opportunity that don't have that experience. They are not licensed or experienced insurance agents. So they come from all walks of life. Many of them don't even have sales experience. And so we have very effective processes of being able to recruit people in, get them trained, get them licensed and get them out selling. So sometimes in recessionary environments depending on what's going on is a fertile opportunity for being able to recruit new agents as people look for other opportunities.

We really aren't recruiting people that are unemployed. I get that question a lot around, how does the unemployment rate affect you? It's really people who are looking for a different opportunity. And so an inflationary environment is an example, people might be stuck in the "Dead end job". And they're looking for how do I make some more money to make ends meet. And our opportunity is it's based on your level of effort, you -- you're not capped in any way from -- it's a commission job, from what you're able to achieve. And so we have, a lot of our agents have come to us from all walks of life, from retail or they worked in a restaurant or you pick it and they were looking for another opportunity. They have that entrepreneurial experience to be able to take on and really kind of ultimately we're recruiting people to own their own agency someday. So they're able to come in, get trained, start recruiting a team and then build up and then they're an agency owner. And so we like that from a resiliency perspective because we can recruit in all different kinds of economic environments. And then we ought to talk about our policyholders and the resiliency there, so.

You want to touch on that Tom?

Yes. Sure. So from a -- in 2021 and 2022 -- 2021-2022, early part of that period, we saw really favorable persistency rates. So people were aware of the pandemic, they were aware of their mortality, right? And so they purchased insurance and they kept their insurance in force. In '22 where we started to see inflation pick up a little bit and the pandemic wane a little bit, we did see a little bit higher lapses than what we had seen certainly over comparable of '21 and -- 2020 and 2021, but also a little bit higher than we'd seen historically. And we think that's a little bit inflation-driven, meaning that people were trying to get -- figure out where their life insurance premiums fit within their budget. And those who were with us a long time, they're actually our seasoned customers and we saw fairly consistent persistency from that group of customers. But those who had purchased recently, we saw a little bit higher lapses and we do think inflation affected that a little bit as well as just as the pandemic became a little bit less deadly that some who bought it, maybe just figured that they might actually use those funds for something else. But in general, our block of business is very resilient from a persistency perspective in economic times. And in the fourth quarter we saw persistency rates very consistent with historical levels, maybe just elevated a little bit on the direct-to-consumer side. But very pleased to see that come back to kind of more normal levels and I think that's consistent with people beginning to normalize operating in a little bit higher inflation environment.

And something I will add to that is, we have -- we do go back and we look at those over time and some of that we really like about our business and Tom mentioned about how resilient it really is. So if you go back to some of those other economic stress periods, whether again, it was early 2000s, 2008, 2010 timeframes, we saw a little bit of a hiccup in our lapse rates, but it's really minor in the big scheme of things and tend to be very temporary and settle back down into normal rates fairly quickly. So that's always -- over the years we've always gotten a lot of comfort that from a macroeconomic perspective that the business is really sticky. We really attribute that to it's very small face, it's very basic products. They're not -- we're not fighting -- our typical premium, average premium kind of ranges anywhere from maybe, you know, $20 a month to $40, $50 -- $50 a month, right? So it's -- you're not competing with, hey, I've got this $500 a month premium that I really want to stick with that or not and that type of thing. So it's just a little bit easier. I'd say real quick that I think the other nice part about our business is all of our benefits are fixed benefits. So our life policies, they don't move depending on what's going on with -- on with the interest rates and equity markets. And so it's -- if we see a high inflationary environment, generally that's leading into higher interest rates which actually did good for us from generation of investment income. So our benefits, our liabilities are really fixed. But we potentially have tailwinds from -- on the interest rate side.

Maybe the one exception to that right is medical inflation on Medicare Supplement.

Right.

And from that perspective we change rates regularly as medical costs change and try to -- we might have a little bit of a timing lag, but we are constantly looking at medical trends and adjusting rates accordingly.

Right.

Maybe talk a little bit about capital management. So share repurchases historically been the major use of capital deployment. But how should we think about other methods of capital deployment such as dividends, M&A? How do those fall to those?

Do you want me to start on that and then... Or do you want to...?

Let me start and...

Okay.

So I think one of the things that's kind of really important to know is that, kind of when we think about capital management, our first priority is to make sure that we're profitably growing the business. So we're investing in, growing the agencies, growing the sales, growing our direct-to-consumer channels and it's only after we've really funded those and the way the statutory income works, all of our acquisition costs on that impact the amount of statutory income that our insurance operations generate and then it's those excess profits, the earnings out of that, that ultimately are distributed up to the holding company. And then once -- at the holding company is where we're looking at that decision of making sure from a capital perspective, all of our insurance operations are fully funded from that perspective, meeting our target RBC ratios. And then kind of looking at are there opportunities out there such as in M&A that would give us a better return to the shareholders than returning the excess cash. So we will look at those M&A opportunities. And then if there aren't opportunities that are available, historically we have returned the vast majority of our excess cash since June. We've been in a share repurchase program since 1986. So we're pretty consistent. We do -- if you go back a long, long period of time, our dividends philosophy is that we want to increase our dividend rate over time and keep it kind of roughly, as a proportion of our total cash return and it's been 15 to 20% of that total pool over a really long period of time. And so the vast majority has come back in share repurchase this.

Yes. Only I'd add Frank is just the consistency of our excess cash flows. So we define those excess cash flows as the dividends for most subsidiaries after investing in the business and after our interest on debt, right. So over the last 10 years, we've ranged from $300 million, roughly round numbers, $360 million to $460 million of excess cash flow back to the parent and return that in the form of dividends or share repurchases, in some cases M&A activity appropriately. So very consistent over that timeframe. And really the lowest in that 10-year period was last year, which was really due to excess mortality related to the pandemic, so.

That gives us a lot of comfort and we know that stability and that availability of cash, excess cash. And I think from an M&A perspective, just touch on that really quickly. We're really focused on an opportunity that doesn't change who we are and what we do, but is a really strategic fit and really provides distribution. But we know that over the long term our business is successful by growing our distribution. And so that's what we're -- if we're interested in having distribution, but we want to have it in our protection-oriented products and basically that can help us to serve this middle and lower middle-income market. So there's not a lot of opportunities there. We don't want to do an acquisition just for the sake of doing an acquisition. We want it to be something that's really strategic for us. And so we have them from time to time, but they don't come around on an annual basis.

Fairly rare.

Yes.

Okay. And so now we've got a pretty new management team. So any changes in strategy or should we see the strategy stay similar?

Sure. We're really focused on just executing our strategy. We like the markets that we're in. We like the product, the risk profile, the profitability profile of our products. And so we just continue to think about how can we organically grow in this marketplace with an eye to M&A to the extent that we find something that is complementary to our skill set in our market. But no significant changes or plan from a strategy perspective. For us it's all about, again, executing in the market. We don't have a lot of competition. We're not getting shopped against by consumer when we're presenting the opportunity in the home or at the work site. And so really, we just want to continue that organic growth, profitable growth with the products that we like from that overall structure perspective.

And I think as Matt and I have talked about it, our areas of investment really around setting that organization up for being a really strong organization 5, 10, 15 years down the road and that's really investments in our human capital and technology. So we're really continuing to look on how do we expand our technology within newer acquisition for supporting our agencies, helping them to get better information to manage their businesses and to be more efficient ultimately if we can. And then same thing on the home office side. And just looking at where can we use it to expand our analytics, of course, and -- but it's a lot of our -- will be our focus in those 2 areas.

And then what do you think investors may be underappreciating about your business model?

I think -- as we get that question from time to time, I think one of the things that tends to be underappreciated is just that long-term stability that we have and the value of the in-force book of business that Globe has. Around 90% of our premium each and every year comes from in-force, our in-force. And so the sales are adding ultimately about 10% of the premium. And so what that gives us is that stability. And so Tom kind of really touched on it on the stability of our excess cash flow, the one starts with dividends from our insurance operations. So we're generating, our insurance operations generate 4 to 5 -- $450 million to $550 million of new statutory income, new statutory capital each and every year. And that's really built on the stable margins that we have and then that stable book of business, that stable premium. And that really feeds the kind of the machine and really allows as we think about capital management and we think about how the investment strategy, knowing that stability in that baseline is just really, I think is a really good feature of our organization, that really is the oil.

I think one thing that I see is underappreciated is you have very consistent sales growth over time as well. So maybe talk a little bit about what you expect this year and in the longer run for sales growth?

Yes. We are -- so we finished -- 2022 was a good year. American Income was up 9%, Family Heritage was double digit as well as Liberty was around 10% sales growth. And so really we look at how is the agent recruiting when we talk about growth in the sales organizations on the agency side, is that truly a forward indicator of sales growth in the future. So we have historically over time and we're anticipating this for 2023, been able to grow in that low single digits or high single digits, excuse me, sometimes low double-digit growth and that's something that we feel like that we can continue over a long period of time. Again, it's focused on we grow our agent count, we've got good momentum on the agent count growth side coming out of the end of 2022 and then as I mentioned on the call, it's a positive momentum here in the beginning of '23. And so that bodes well for sales to come. But we're really not hampered in because we're growing our own agent force. We're not really hampered in, can we sign up more brokers or marketing organizations? We're really growing our own distribution. And I think as I've mentioned earlier, through a long period and history of time we've shown that we can grow that year-over-year. And we get questions around, well, this quarter fluctuation to that quarter. It definitely is not on an every quarter basis there is some volatility and that's why we encourage people to really look at it on a year-over-year perspective. One of the things I would reflect on is 2019, we had approximately 11,000 agents as an organization. We eclipsed 14,000 last year. And so there was a significant amount of growth during the pandemic. And so we're in a period where American Income as an example, which is kind of digesting that growth. They went from 7500 agents to around 10,000 agents in 5 quarters. So you have that tremendous amount of growth. It takes a while to get those new agents up, producing and productive and then move into middle management and then start recruiting again. So there's definitely a life cycle from an agency growth perspective. And so we'll grow tremendously and then we'll kind of digest that growth and then build the base and grow again. But again, we do believe -- are estimating that we can continue to grow in 2023 and beyond.

And I think that kind of goes back to Tom's point as well because you grew the premium base so much during the last couple of years, it's really kind of goes through to the bottom line of the cash flow as well.

Yes, absolutely.

Very strong growth over time. Anything you think we've missed or...

I think maybe just the one thing to maybe touch a little bit on just on the investment portfolio really quick because one of the questions we get a lot is, hey, you're in fixed maturities, a lot of BBB exposure. Why is that, that type of thing. And so I'd just make a quick note that it all starts with our policy. So you have fixed rate, fixed benefit policies that are really long term. So our first and foremost is we're looking at investing long. And historically where are we looking for the best risk-adjusted, capital adjusted returns. And we -- and of course again, we really like fixed benefit, fixed maturity obligations and fixed rate obligations. And that's just historically been in that BBB space. Again, with the stability of our margins and the stability of our cash flows, yes, we understand we'd probably take a little bit of risk there. But over the years it's really worked out well for us. We get paid for taking that additional risk event in that market and we avoid other risky type segments of the investment market. Now we're not in CLOs, structured securities and equities and a bunch of those that create volatility within that. So we're very comfortable with that. And of course, we invest in companies that we think will -- we don't get too worried about the ebbs and flows of the economy because we try to do a lot of due diligence on investing in companies that are there to be there for the long term, so.

You might also talk about RBC because we get some questions around capital levels and the like, or... Tom?

Yes. So we target an RBC ratio of somewhere between 300% and 320%. Last year we finished at the high end of that range at about 321%. And that's actually lower than where many insurance companies operate. But I think that's a function of the risk of our business is, again we sell basic protection life insurance policies that are non-interest sensitive. So we don't have volatile liabilities that whether that be annuity liabilities or UL No-Lapse Guarantee liabilities that are -- we have a small block of annuities that's closed, but no UL No-Lapse Guarantee business. And so the nature of our liabilities is such that we can operate at a lower RBC than some of our competitors. The other is, as I pointed out earlier is the consistent generation of excess cash flow from the subsidiaries that actually is kind of refunding the parent company every year in the tune of $360 million to $460 million each year. So you could think of that as capital generation, self-capital generation for the organization. So rating agencies are very comfortable with where we operate from a 300% to 320% range and we intend to operate in that range going forward. One of the interesting things is, over the last couple of years the NAIC has increased the capital charges on our assets as well as our insurance liabilities. And so if we went back to 2018 time frame, today's capital standards will be more like 340% RBC compared to 2018 standards. So no change in risk, but actually a little bit higher capital levels than what we normally would have thought, 300% to 320% with a $1 million.

And historically, we've had to put in some capital from time to time to show those up. And -- but we've been -- we're very comfortable in our ability to do so. We've historically been able to kind of -- at the holding company, kind of keep our debt ratios in that 23% to 27% range and they were just kind of in the mid-20s and it's been a good spot for us, comfortable for our rating agencies. And historically when we've had -- needed a little bit of capital, we've been able to go out and access from those public markets and finance it that way, still maintain the buyback program.

Well, thank you very much.

All right. Thank you.

Thanks, everyone.