Globe Life Inc.

Good day and welcome to the first quarter 2022 earnings release conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mike Majors, Executive Vice President, Administration and Investor Relations. Please go ahead, sir.

Thank you. Good morning, everyone. Joining the call today are Gary Coleman and Larry Hutchison, our co-chief executive officers, Frank Svoboda, our chief financial officer, and Brian Mitchell, our general counsel. Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our earnings release, 2021 10-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 Gary Coleman.

Thank you, Mike, and good morning, everyone. In the first quarter, net income was $164 million, or $1.64 per share, compared to $179 million, or $1.70 per share, a year ago. Net operating income for the quarter was $170 million, or $1.70 per share. an increase of 11% per share from a year ago. On a GAAP-reported basis, return on equity was 8.5%, and book value per share is $69.16. Excluding unrealized gains and losses on fixed maturities, return on equity was 11.5%, and book value per share is $59.65, up 10% from a year ago. In our life insurance operations, premium revenue increased 7% from a year ago to $755 million. Life underwriting margin was $150 million, up 10% from a year ago. The increase in margin is due primarily to increased premium. For the year, we expect life premium revenue to grow around 6%, and at the midpoint of our guidance, we expect underwriting margin to grow around 23%. due primarily to an expected decline in COVID-like claims. In health insurance, premium grew 8% to $317 million. And health underwriting margin grew 10% to $79 million. The increase in underwriting margin is due primarily to increased premium and improved claims experience. For the year, we expect health premium revenue to grow 6% to 7%, And at the midpoint of our guidance, we expect underwriting margin to grow around 5%. Administrative expenses were $73 million for the quarter, up 10% from a year ago. As a percentage of premium, administrative expenses were 6.8% compared to 6.6% a year ago. For the full year, we expect administrative expenses to grow 10% to 11%, and be around 6.9% or premium. That's due primarily to higher IT and information security costs, employee costs, a gradual increase in travel and facility costs, and the addition of the GloBlock benefits division. I will now turn the call over to Larry for his comments on the first quarter marketing operations.

Thank you, Gary. At American income, life premiums were up 10% over the year-ago quarter to $370 million, and life underwriting margin was up 13% to $111 million. The higher premium is primarily due to higher sales in recent quarters. In the first quarter of 2022, net life sales were $85 million, up 23%. The increase in net life sales is due to increased productivity plus a gradual improvement in issue rates as some challenges in underwriting, such as staffing and speed of obtaining medical records and other information are resolving. The average producing agent count for the first quarter was 9,385, down 5% from the year-ago quarter and down 2% from the fourth quarter. The producing agent count at the end of the first quarter was 9,543. We are confident American income will continue to grow. The aging count was trending up the last several weeks of the quarter. We also have seen improvement in personal recruiting, which generally yields better candidates and better retention than other recruiting sources. In addition, we've made changes to the bonus structure designed to improve agency middle management growth. At Liberty National, life premiums were up 7% over the year-ago quarter to $81 million, and life underwriting margin was up 35% to $13 million. The increase in underwriting margin is primarily due to improved claims experience. Net life sales increased 7% to $17 million, and net health sales were $6 million, up 6% from the year-ago quarter due to increased agent productivity. The average producing agent count for the first quarter was 2,656, down 3% from the year-ago quarter and down 2% compared to the fourth quarter. The producing agent count at Liberty National ended the quarter at 2,687. We've introduced new training systems to help improve agent retention and updated our sales presentations to help agent productivity. We are pleased with the continued growth at Liberty National. At Family Heritage, health premiums increased 7% over the year-ago quarter to $90 million, and health underwriting margin increased 9% to $24 million. The increase in underwriting margin is due to increased premium and improved claims experience. Net health sales were up 19% to $19 million due to increased agent productivity. The average producing agent count for the first quarter was 1,100, down 14% from the year-ago quarter, and down 8% from the fourth quarter. The producing agent count at the end of the quarter was 1,130. We have modified our agency compensation structure and are increasing our focus on agency middle management development to drive recruiting growth going forward. We are pleased with the record level of productivity at Family Heritage. In our direct-to-consumer division of Global Life, Life premiums were up 3% over the year-ago quarter to $251 million, and life underwriting margin increased 3% to $9 million. Net life sales were $34 million, down 15% from the year-ago quarter. We expected this sales decline due to the 22% sales growth experienced in the first quarter of 2021. Although sales declined from the first quarter of 2021, We are so pleased with this quarter's sales results. At United American General Agency, health premiums increased 13% over the year-ago quarter to $133 million, and health underwriting margin increased 6% to $20 million. Net health sales were $13 million flat compared to the year-ago quarter. It is difficult to predict sales activity in this uncertain environment, but I will projections based on trends we are seeing and knowledge of our business.

We expect the producing agent count for each agency at the end of 2022 to be in the following ranges.

American income, a decrease of 2% to an increase of 3%. Liberty National, Flat to an increase of 14%. Family heritage, an increase of 8% to 25%. Net life sales for the full year 2022 are expected to be as follows. American income, an increase of 9% to 17%. Liberty National, an increase of 4% to 12%. Direct to consumer, a decrease of 13%. to a decrease of 3%. Net health sales for the full year of 2022 are expected to be as follows. Liberty National, an increase of 3% to 11%. Family Heritage, an increase of 4% to 12%. United American Individual Medicare Supplement, a decrease of 5% to an increase of 3%. I will now turn the call back to Gary.

Thanks, Larry. We will now turn to the investment operations.

Excess investment income, which we define as net investment income with required interest on net policy liabilities and debt, was $61 million, up 1% from a year ago.

On a per share basis, reflecting the impact of our share repurchase program, Excess investment income was up 5%. For the full year, we expect excess investment income to decline between 21% and 2%, but be up around 2%.

on a per share basis.

As to investment yield in the first quarter, we invested $351 million in investment grade fixed maturities, primarily in the municipal and financial sectors.

We invested at an average yield of 3.97%, an average rating of A, and an average life of 27 years. We also invested $118 million in limited partnerships that have debt-like characteristics. These investments are expected to produce additional yield and are in line with our conservative investment philosophy. For the entire fixed maturity portfolio, the first quarter yield was 5.15%, down nine basis points from the first quarter of 2021. As of March 31st, the portfolio yield was also 5.15%.

Regarding the investment portfolio, invested assets are 19%. point five billion dollars including eighteen billion dollars of fixed cost.

Of the fixed maturities, $17.4 billion are investment grade with an average rating of A-. And below investment grade bonds are $583 million compared to $802 million a year of

The percentage of below investment-grade bonds with fixed maturities is 3.2%. And I would add that this is the lowest ratio it has been for more than 20 years.

Excluding net unrealized gains in the fixed maturity portfolio, the low investment grade bonds as a percentage of equity are 10%. Overall, the total portfolio is rated A-, same as a year ago. Bonds rated BBB are 54% of the fixed maturity portfolio. While this ratio is in line with the overall bond market, it is high relative to our peers. However, We have little or no exposure to higher risk assets such as derivatives, equities, residential mortgages, CLOs, and other asset-backed securities. Because we primarily invest long, a key criterion utilized in our investment process is that an insurer must have the ability to survive multiple cycles. We believe that the BBB securities that we acquire provide the best risk-adjusted, capital-adjusted returns due in large part to our ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets. I would also mention that we have no direct exposure to investments in Ukraine or Russia And we do not expect any material impact to our investments in multinational companies that have exposure to those countries. For the full year, at the midpoint of our guidance, we expect to invest approximately $1.1 billion in fixed materials at an average yield of around $4.5 billion.

and approximately $200 million in liabilities. The partnership investments with debt-like characteristics had an average yield of around 7%. We are encouraged by the recent increase in interest rates and the prospect of higher interest rates in the future.

Higher new money rates will have a positive impact on operating income by driving up net investment income. We're not concerned about potential unrealized losses that are interest rate driven, since we would not expect to realize them. We have the intent, and more importantly, the ability to hold our investments to maturity.

In addition,

live products have fixed benefits that are not interest sensitive. Now, I will turn the call over to Frank for his comments on capital and liquidity.

Thanks, Gary. First, I want to

Spend a few minutes discussing our share repurchase program, available liquidity, and capital position. The parent began the year with liquid assets of $119 million. In addition to these liquid assets, the parent company will generate excess cash flows in 2022. The parent company's excess cash flow, as we define it, results primarily from the dividends received by the parent from its subsidiaries, less the interest paid on parent company debt. During 2022, we anticipate the parent will generate $350 million to $370 million

million dollars of excess cash flows.

This amount of excess cash flows, which again is before the payment of dividends to shareholders, is lower than the $450 million received in 2020

primarily due to higher COVID life losses and the nearly 15% growth in our exclusive agency sales in 2021.

both of which result in lower statutory income in 2021 and thus lower cash flows to the parent in 2022 than were received in 2021. Obviously, while an increase in sales creates a drag to the parent's cash flows in the short term, the higher sales will result in higher operating cash flows in the future, including the excess cash flows and the $119 million of assets on hand at the beginning of the year, we currently expect to have around $470 million to $490 million of assets available to the parent during the year, out of which we anticipate distributing a little over $80 million to our shareholders.

in the form of dividend payments. In the first quarter, the company repurchased 880,000 shares of Globe Life Inc. common stock. At a total cost of $88.6 million, and at an average share year-to-date, we have repurchased 1,097,000 shares for approximately $110 million at an average price of $100.70. We also made a $10 million applicant contribution to our insurance subsidiaries during the first quarter. After these payments, we anticipate the parent will have $250,000 to $290 million of assets available for the remainder of the year. 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. Thus, we anticipate share repurchases will continue to be a primary use of the parent's excess cash flows along with the payment of shareholder dividends. It should be noted that the cash received by the parent company from our insurance operations is added

After our subsidiaries have made substantial investments during the year to issue new insurance policies, expand and modernize our information technology and other operational capabilities, and acquire new long-duration assets, assets to fund their future cash needs. As discussed on prior calls, we have historically targeted $50 to $60 million of liquid assets to be held at the parent.

We will continue to evaluate the potential impact of the pandemic on our capital needs, and should there be excess liquidity, we anticipate the company will return such excess to the shareholders in 2022. In our earnings guidance, we anticipate between $400 and $410 million will be returned to shareholders in 2022, including approximately $320 to $330 million through share repurchases. Now with regard to our capital levels at our insurance subsidiaries, our goal is to maintain our capital levels necessary to support our current ratings. Globe Life targets a consolidated company action level RBC ratio in the range of 300 to 320%. For 2021, our consolidated RBC ratio was 315%. At this RBC ratio, our subsidiaries have approximately $85 million of capital over the amount required at the low end of our consolidated RBC target of 300%. At this time, I'd like to provide a few comments relating to the impact of COVID-19 on first quarter results. In the first quarter, the company incurred approximately $46 million of COVID life claims, equal to 6.1% of our life premium. The claims incurred in the quarter were approximately $17 million higher than anticipated due to higher levels of COVID deaths than is expected.

partially offset by a lower average cost per 10,000 US deaths. The Center for Disease Control and Prevention, or CDC, reported that approximately 155,000 US deaths occurred

due to COVID in the first quarter, the highest quarter of COVID deaths in the U.S. since the first quarter of 2021. This was substantially higher than the 85,000 deaths we anticipated based on projections from the IHME.

At the time of our last call, we used utilized IHME's projection of 65,000 first quarter U.S. deaths and added a provision for higher deaths in January as reported by the CDC, but the reflected in IHME's projection.

IHME's projection anticipated a significant drop-off in deaths starting in mid-February. Obviously, the decline in deaths did not occur as quickly as anticipated, especially during the latter half of the quarter. With respect to our average cost per 10,000 US deaths, Based on data we currently have available, we estimate COVID losses on deaths in the first quarter were at the rate of $3 million per 10,000 U.S. deaths, which is at the low end of the range previously provided. This reflects an increase in the average age of COVID deaths and a decrease in the percentage of those deaths occurring in the South. The first quarter COVID-like claims include approximately $25 million in claims incurred in our direct-to-consumer division, or 10% of its first quarter premium income, approximately $4 million at Liberty National, or 5.5% of its premium for the quarter, and approximately $15 million at American income, or 4% of its first quarter premium. We continue to experience relatively low levels of COVID claims on policy sold since the start of the pandemic.

Approximately two-thirds of COVID claim counts come from policies issued more than 10 years ago. For business issues, since March of 2020, we've paid $624,000 for COVID-19.

claims with a total amount paid of $9.3 million. The 624 policies with COVID claims comprise only 0.01% of the approximately 4 million policies issued by Globe Life during that time. These levels are not out of line with our expectations. As noted on past calls, in addition to COVID losses, we continue to experience higher life policy obligations from lower policy lapses and non-COVID causes of death.

The increase from non-COVID causes of death are primarily medical related, including deaths due to lung ailments, heart and circulatory issues, and neurological disorders. The losses we are seeing continue to be elevated over 2019 levels. due at least in part to the pandemic and the existence of either delayed or unavailable healthcare. potentially side effects of having contracted COVID previously. In the first quarter, the life policy obligations related to the non-COVID causes of death and favorable lives. We're approximately $7 million higher than expected, primarily due to higher non-COVID deaths in our direct-to-consumer division. and then we had For the quarter, we incurred approximately $22 million in excess life policy obligations. of which approximately $15 million relates to non-COVID-19 clients.

For the full year, we anticipate that our excess life policy obligations will now be approximately $64 million, or 2.1% of our total life premium, two-thirds of which are related to higher non-COVID causes of death. This amount is approximately $11 million greater than we previously anticipated.

With respect to our earnings guidance for 2021, We are projecting net operating income per share will be

in the range of $7.85 to $8.25 for the year ended December 31st, 2022. The $8.05 midpoint is lower than the midpoint of our previous guidance of $8.25, primarily due to higher COVID life policy obligations related to higher expected US deaths during the year. We continue to evaluate data available from multiple sources. including the IHME and CDC, to estimate total U.S. deaths due to COVID and to estimate the impact of those deaths on our in-force book. At the midpoint of our guidance, we estimate we will incur approximately $71 million of COVID life claims, assuming approximately 245,000 COVID deaths in the U.S. This is an increase of $21 million over our prior estimate. This estimate assumes daily deaths will diminish somewhat from recent levels, but remain in an endemic state throughout the year.

With respect to our cost per 10,000 deaths, we now estimate we will incur COVID life claims at the rate of $2.5 million

to $3.5 million for 10,000 U.S. COVID deaths for the full year, or approximately $2.8 million for 10,000 U.S.

deaths over the final three quarters of the year. Those are my comments. I will now turn the call back to Larry. Thank you, Frank.

Those are our comments. We will now open the call for questions.

Thank you. To signal for a question, please press star 1 on your telephone keypad.

Also, if you are using a speakerphone, please make sure that your mute button is turned off to allow your signal to reach our equipment. Once again, it is start. at this time for questions And we'll pause for just a moment to give everyone the opportunity. to signal. We'll take our first question from Jimmy Bular with JPMorgan. Hi, good morning. So I had a couple of questions. First, if you could talk about the decline in the agent count.

And I guess it's multiple factors, but to what extent is it difficulty finding new agents in this labor market versus just sort of departures of people that you've hired over the past couple of years for other jobs? And then, how do you think... Do you think this applies for sales? Do you think this is something that will pressure sales as you get into late this year and into next year?

It's true that been challenging because there's so many work opportunities. I'd also like to remind everyone that there's typically a decline in age account sequentially from the fourth quarter to the first quarter because of seasonality. You have the holidays that affect American income and family heritage. You also have open enrollments at Liberty National.

So in addition to the holidays, people are focused on open enrollments during that period. I do believe in continued agency growth because our agency is selling in the underserved middle income market. Also, there's absolutely no shortage of underemployed workers. looking for a better opportunity. Historically, we've been able to grow the agencies regardless of economic conditions. For example, during the economic downturn and high unemployment of 2008 to 2010, American income had very strong agency growth. In 2018 and 2019, the U.S. experienced record lows. American Income, Liberty National, and Family Heritage had strong growth.

Our long-term ability to grow the agencies, Jimmy, really depends on growing middle management, expanding new office openings, and providing additional sales tools to our agents. During 2020-2022, we anticipate opening new offices, increasing the number of mental management measures in all three agencies. We're providing additional sales technology to support our agents. Jimmy, can you repeat the sales question? I don't think I heard the sales question.

losing people who were recently hired um then you don't lose a lot of production from them because they hadn't ramped up but how do you think that like does the decline in the agent count um both people leaving who are already agents and difficulty in hiring new agents does that change make you less optimistic about sales later this year and into next year what does

I've got less up to . projected than vendor agents. As you look across the three agents, the increases in the sales partially explained. The increase in productivity is a good example. clients and family heritage. We had a 16% increase and the percentage of submitting business. Well, it's at a 22%. an increase in the average premium written for agents.

So that level of productivity, that comes from the veteran agents, the existing agents. At American Income, in the first quarter, we saw personal recruits increase about 15% versus the first quarter of 2021.

That's important because personal recruits, they stay twice as long are twice as productive from other sources. So, you know, I have confidence that even though the Asian increase will be slower this year, we'll still have the sales for the within the range that I gave during the script. Okay.

And then any comments on what you're seeing in terms of non-COVID mortality? because it seems like claims for a number of life companies have been elevated even beyond COVID because of other health issues or related issues related potentially to COVID, but not direct COVID claims.

Yeah, Jimmy, I mean, that is really consistent with What we're seeing right now as well, and we are seeing, especially in the first quarter, we really did see elevated levels. at, especially in our direct consumer, but, you know, thought across the distribution and really across all the you know, several different causes of death.

But, you know, primarily, as I've mentioned, in the heart and circulatory, lung, you know, some of the neurological disorder type areas. You know, we really do attribute, you know, to the

various side effects of COVID and whether it just be, you know, not getting care when they needed it, you know, throughout 2020, 2021, or side effects of having had it and, you know, declined health, you know, for the survivors of As we're looking at in 2022, looking back, we saw some early trends back in December that kind of led us to believe that we would start to see you know, a decrease in those claims in 2022.

And so we had originally anticipated, you know, those kind of trending back to more normal levels over the course of the year. In the first quarter, it really wasn't worse than what, you know, we've seen in the past.

It was a little bit elevated, but not substantially so. So, but it was just, you know, greater than what we had anticipated. You know, we do think over time that these will, again, kind of revert back to normal. levels, but probably a little bit more slowly than what we had originally anticipated. And then just Lastly, on the accounting changes, do you have any sort of initial commentary on what you expect the impact to be both in terms of the balance sheet and on the income statement? Yeah, no updates. From what we had talked about on the last quarter, you know, we do anticipate giving some more quantitative Disclosure. Here after the end of the second quarter.

We're still in the process of finalizing, if you will, our models, doing the testing, making sure our controls are in place, looking at the various aspects of validating our numbers, if you will.

So, as I said on the last call, you know, we do anticipate a favorable and on operating earth perspective my through the changes being made. on the amortization. side of the balance sheet. income statement and then with back to the equity on the AOC. There will be some decrease there. Clearly from Thank you. And moving on, we'll go to Andrew Kleigerman with Credit Suisse. Hi, good morning. I want to go back. back to the producing agent count numbers. So the new targets for American income are negative two to positive three. That's vertical. is three to eight at your last quarterly guidance. Liberty National zero to five. is verses 3 to 18 last time and then uh family heritage 8 to 25 versus 12 to 30 last time. So I guess the question is was it the type labor market that primarily driving this change in guidance?

Is there something else? What are some of the key drivers of this new guidance?

I think for American Income, one of the key drivers is just the amount of agent growth we had in 2020 and 2021. As you recall, we had greater than 20% agency growth.

And agency growth is always a stair-step process. So I wouldn't expect the same level of agency growth in 2021. that we had in 2023 to 2021. I think the uncertainty really is around the other two agencies. It has to do with COVID. Now, we should recall really sells the majority of the sales and worksite presentation.

and those take place at the place of business, and those appointments have been more difficult to set during the pandemic.

COVID continues to decline, and the age account growth of Liberty National would be the upper end of the range. to recruit to an ad business sale. If COVID doesn't decline, I'd expect our guidance to be the laureate of the branch. Likewise, with Family Heritage, They don't sell life insurance with leads. They sell in the home, physically in the home or at the business. And those appointments were very difficult to set during the pandemic.

So again, COVID continues to decline. and the agent account growth of Family Heritage would be the upper end of the range because you're better able to recruit to an at-home or at-business sale. If COVID doesn't decline, I'd expect Family Heritage to be the lower end of the range. What's encouraging, I think, is the sales levels we had in the first quarter. With a 19% sales growth at Family Heritage, that's really easy to recruit to because the agents are having such success. Likewise, we saw worksite sales increase 10% per quarter, first quarter, 22 versus 21.

So that's... use your to recruit More aspects. in the works market. That makes a lot of sense, particularly liberty and family heritage. But I guess, again, on American income,

You know, you knew about the agency growth that was so strong in 20 and 21, and yet you gave the guidance of three to eight percent.

Now it's just it's off a bit sharply. Anything else, Larry? that might you know the change your thinking in the course of two or three months. Not in the two or three months.

I'd remind you of American Income. We had a large number of offices open in 2018 and 2019. And that recruited, that resulted in a higher agency growth for those new offices. During COVID, it was more difficult to open those new offices. And so we had lower new office openings in 2022 than we had in 21 and 22, excuse me, 21 and 22 versus 18 and 19. And again, I would say that when you look at American income with approximately 10,000 agents, A 3% increase is 300 agents. That's a large number of agents to bring in and train and enter into your systems.

So again, referring back to the stair-step process, we always have slower agent growth following the faster growth. Go back to 17 and 18.

You would see that at American Income and Family Areas, we had almost zero agent growth in those two years. And then in 19 and 20, we had the accelerated agent growth. So this follows a pattern that historically we've seen in all three agencies.

I see. Okay.

And then, you know, you talked a little bit about going forward, some building out the middle management and increasing the offices further as we go through 22. Could you put any numbers around it or any further color?

For the year, for all three agencies, we expect to increase middle management. from 5% to 8%.

That's so important because mental management really drives most of the recruiting in all three agencies.

So the lack of agent growth at Family Heritage hurt their mental management growth during 2022. As we see the agent growth accelerate, more people will take that opportunity and move into mental management. Again, we've had such rapid Asian growth in American income.

I think the 5% to 8% growth is certainly a reasonable number to assume, a reasonable range to assume for 2022. Family heritage is great. Excuse me at Liberty Nationals.

You see the worksite sales increase. We'll see that same increase in mental management.

Got it and you know, I guess lastly you were you were just touching on how sort of those. Elevated, you know, sort of non COVID but COVID related claims reverting back overtime and and we've heard that from some of the big US life reinsurers as well. Anything further there? Is it just, you know, once COVID subsides, all these kind of situations where people aren't getting medical checkups, et cetera, that'll just kind of subside with COVID?

Anything else? that gives you confidence that will revert over time? No. I think, Andrew, that that's, you know, largely when you think about getting back to action,

access to health care and just generally people feeling, getting more comfortable with getting out of their homes and getting back into the doctor's office and getting the care that they need to take care of their conditions. I think as time goes on, obviously we'll start to see, get more experience in the numbers and be able to get a little better sense of that.

I think, you know, at this point in time, it's, you know, where you look at this elevated level and you kind of see the situation and it's more from

You know, the belief that over time, as we get past the COVID pandemic and just, again, use of healthcare gets back to normal levels.

That's where we would anticipate. that the non-COVID deaths would get back into kind of normal levels as well. at least until we start to see something in the numbers that would indicate it.

Yeah, that seems very encouraging for 2023 and 2024. Anyway, thank you very much for answering the questions. Sure. Thanks.

And once again, it is star one for questions. Next, we'll go to Eric Bass with Autonomous Research.

Hi. Thank you. It looks like the lapses ticked up a little bit from where they've been running in the life business.

So just I'm wondering, are you starting to see persistency begin to normalize? And is that something you would expect to continue? Eric, I think that's... True. Liberty National appears that we're getting back more toward the pre-pandemic level lapses. On the direct-to-consumer side, the lapse rates were a little bit higher

The first-year lapse rate was a little bit higher than it had been in late 2020 and 2021. But it, along with the renewal lapse rates, are still favorable compared to where we were pre-pandemic. American income, I think we've had a fluctuation there this quarter. The first-year lapse rate was a little over 10%, which is normally – you know, less than 9%. I think that'll settle down as we go forward. And I think like direct consumer, the rates there in American income will be a little bit higher than what we experienced in 21, but still favorable versus the pre-pandemic levels.

Got it. Thank you. And then can you remind me, I think one of the other factors driving the excess life claims that you're assuming is the better persistency. Can you just kind of provide a reminder of what you're assuming there and how that works through?

Yeah.

You know, about a third, you know, I've mentioned in the opening comments that, you know, for the year, you know, we have total excess policy. obligations, you know, we're estimating at around $64 million and about a third of that is, you know, due to the higher lapses. Just over time, I mean, we are bringing that down, if you will, over the course of 2022. And as Gary, you know, indicated, we still anticipate having favorable persistency, you know, versus pre-pandemic levels, but we are kind of grading that back over time. By the end of the year, still anticipating some favorable persistency, and then that favorable persistency does result in some higher policy obligations than normal. So over time, again, we're kind of just grading that down slowly, though, over the course of the year.

Thanks. And if I could sneak one more. And on your excess investment income, I think it was up year over year this quarter, and your guidance is still for it to decline on kind of a dollar basis. Was there anything unusual in the investment income this quarter?

Yeah, Eric, we had the income from the limited partnerships that we had was about $2.5 million higher than expected.

And I think that's a little bit of a timing thing. So the investment income is – that investment income was weighted heavier toward the first quarter than it will be later in the year. Got it. Thank you. Moving on, we'll go to Ryan Krueger with KBW. Hi. Good morning. On the $15 million of non-COVID access, mortality claims in the quarter. Can you... give that by division. And I guess I'm curious if it was more concentrated in direct-to-consumer, like your direct COVID claims were.

Yeah, so the total excess obligations, I think, indicated were about $7 million higher.

I was looking for the $15 million of the, I think you said there was $22 million of indirect policy obligations and $15 million was from mortality?

Yes. Okay. Yes.

And about $10 million of that was related to DTC. And about $2 million each from, I guess about $11 million DTC and $2 million each from AIL and LNL.

Got it. I guess is there any, as you dug into the data, are there any conclusions as to why you think you're seeing more concentration in both direct and indirect COVID claims in direct-to-consumer relative to the agent-driven divisions.

You know, I think just in general as we look at it, you know, remember that direct-to-consumer is just a higher mortality, you know, business. So, you know, just in the normal course of time, you know, their policy obligations make up about 54%, 55% of their profits. total premium, whereas for both Liberty and American Income, you know, they're in that 30 to 35% range, you know, kind of on a pre-pandemic level. You know, so just from a proportion perspective, DTC is just, you know, has just that higher mortality. You know, other than just being part of that, there just tend to

a broader swath of the U.S. population, if you will.

and having just tends to be, I'm going to say, just be a little less healthy group of policyholders just because we do less underwriting and members of the simplified underwriting and direct-to-consumer.

you know that you know we don't really see anything else in the numbers you want to specifically point to anything specific for DTC. Thanks.

And then when I look at your – if I take your life underwriting income in both 2021 and in the first quarter, and if I add back the direct and indirect COVID and mortality –

that you cited, it looks like the market it would have been about 29% of premiums. If you add everything back, which is higher than it was running pre-pandemic, which I think was more in the 27 to 28% range, is 29% more indicative of what you'd expect.

once the pandemic fully ends, or are there some other offsets?

Yeah, Ryan, I think one additional piece there is that we're seeing improved or lower amortization of deferred acquisition costs because of the improved persistency.

And so that's It gets you from the 20, what we would say a normal 28 to 29 that you Okay, understood. Thank you. And as a final reminder, star one at this time if you do have a question. Next we'll go to John Barnage with Piper Sandler. Thank you very much. Can you maybe talk about how inflation changes the dynamics for distribution of products into your targeted demographic? Maybe ask a bit differently. How do you think through sales persistence holding up in a soft economic environment driven by inflation. I'll first talk about the impact of inflation. Inflation is It's really different in each distribution.

For the agency channels, we expect a little impact on the level of sales due to inflation. Remember, we sell on a needs basis. Sales may favorably be impacted if customers need a larger face amount. And should a client need to purchase additional coverage, the low monthly premiums associated with the products we sell is only a slight increase in premiums. Our premiums are designed to comprise only a small percentage of the agent's budget For direct-to-consumer, inflation could be a negative for the mail and insert channels.

Inflation increases.

For Medicare supplement at United American, inflation can lead to higher medical trend. This higher trend will be offset with rate increases over time to achieve the lifetime loss ratios. To the extent medical trends are higher than assumed, profit margins may actually improve as the fixed dollar acquisition costs become a lower percentage of premium.

That's very helpful. And then maybe on the investment portfolio as a follow-up, the rate environment's clearly changed a lot. Has this changed maybe interest in floating rate securities more versus fixed at all?

Or maybe talk about how rates have Investments. Well, John, we primarily invest. The reason we do that is because our... Our liabilities are long.

Yeah, we have seen, especially in treasury rates, we've seen...

From the beginning of the quarter to the end of the quarter, the curve flattened. However, When you take into consideration... When you take into consideration... It's still the longer.

The 25-year bonds that we're buying still provide a substantial yield enhancement over the shorter bonds. We're trying to look for the best opportunities.

We don't rule out investing short. You know, there's especially times we want to improve diversification or quality or whatever we do go shorter and in fact we are going short to a certain extent when you talk about the

alternatives that we're investing in.

As I mentioned, we're going to invest approximately $200 million in 2022 in these limited partnerships that are structured credit type arrangements. They're shorter and they still give us a good yield. But for the most part, when we're investing for assets to support our policy liabilities, we need to We need to invest long, and where we stand today, as I mentioned,

But that means 85% are still going to be in the longer investments. Thank you very much. Waterhead. And there are no further questions.

I'd like to turn it back to Mr. Mike Majors for any additional or closing comments.

All right. Thank you for joining us this morning. Those are our comments, and we'll talk to you again next quarter.

Thank you. And that does conclude today's call.