Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with
Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.
"Globe Life" and the "Company" refer toGlobe Life Inc. and its subsidiaries and affiliates. Results of Operations How Globe Life Views Its
Operations.
insurance companies that
market primarily individual life and supplemental health insurance to
lower middle to middle
income households throughout
[[Image Removed: gl-20200331_g1.jpg]] by segments, which are the insurance product lines of life, supplemental health, and annuities,
and the investment segment
that supports the product lines. Segments are aligned based on their
common characteristics,
comparability of the profit margins, and management techniques used to
operate each segment. Insurance Product Line
Segments. The insurance product line segments involve the marketing,
underwriting, and
administration of policies. Each product line is further segmented by the
various distribution
channels that market the insurance policies. Each distribution channel
[[Image Removed: gl-20200331_g2.jpg]] operates in a niche market offering insurance products designed for that particular market.
Whether analyzing
profitability of a segment as a whole, or the individual distribution
channels within the
segment, the measure of profitability used by management is the
underwriting margin, as seen below: Premium revenue (Policy obligations) (Policy acquisition costs and commissions) Underwriting margin Investment Segment. The
investment segment involves the management of our capital resources,
[[Image Removed: gl-20200331_g3.jpg]] including investments and the management of corporate debt and liquidity. Our measure of
profitability for the
investment segment is excess investment income, as seen below:
Net investment income (Required interest on net policy liabilities) (Financing costs) Excess investment income 35 GL Q1 2020 FORM 10-Q
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GLOBE LIFE INC. Management's Discussion & AnalysisCOVID-19-The Company is closely monitoring the impact of the novel coronavirus (COVID-19) on the Company's business, distribution channels, employees, and policyholders. The Company did not incur material claims or significant disruptions to the business for the three months endedMarch 31, 2020 . However, we do foresee some adverse impact to near-term sales activity, premium, policy benefits, invested assets, and regulatory capital, although the full extent to which COVID-19 impacts financial results remains uncertain as of the date of this Form 10-Q. As a Company, we are committed to our employees, agents, customers, vendors, and shareholders in our resolve to maintain a stable and secure business. The Company has been taking the necessary steps to ensure the health and safety of our employees through adherence to theCenters for Disease Control and Prevention (CDC ) and local government work guidelines. In addition, the Company has converted to virtual sales and recruiting processes to enable our agents to continue their activities. The Company continues to diligently monitor and respond to the coronavirus outbreak and is taking every reasonable measure to make sure customers continue to be served without interruption. 36 GL Q1 2020 FORM 10-Q
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GLOBE LIFE INC. Management's Discussion & Analysis Current Highlights, comparing 2020 with 2019. •Net income as a return on equity ("ROE") was 9.6% and net operating income as an ROE, excluding net unrealized gains on the fixed maturity portfolio(1) was 14.1%. •Total premium increased 4% over the same period in the prior year. Life premium increased 4% for the period from$624 million in 2019 to$650 million in 2020. Life underwriting margin increased 5% from$170 million in 2019 to$179 million in 2020. •Net investment income increased 1% over the same period in the prior year. Excess investment income declined 4% below the prior year. •Total net sales increased 6% over the same period in the prior year from$144 million to$153 million . •Book value per share increased 13% over the same period in the prior year from$54.13 to$60.98 . Book value per share, excluding net unrealized gains on the fixed maturity portfolio(1), increased 9% over the prior year from$45.45 to$49.66 . •In 2020, the Company repurchased 1.6 millionGlobe Life Inc. common shares at a total cost of$139 million for an average share price of$85.47 .
The following graphs represent net income and net operating income from
continuing operations for the three months ended
[[Image Removed: gl-20200331_g4.jpg]][[Image Removed: gl-20200331_g5.jpg]] (1)Net operating income is the consolidated total of segment profits after tax and as such is considered a non-GAAP measure. It has been used consistently byGlobe Life's management for many years to evaluate the operating performance of the Company. It differs from net income primarily because it excludes certain non-operating items such as realized gains and losses and certain significant and unusual items included in net income. Net income is the most directly comparable GAAP measure. Net operating income as an ROE, excluding net unrealized gains on the fixed maturity portfolio, is considered a non-GAAP measure. Management utilizes this measure to view the business without the effect of the net unrealized gains, which are primarily attributable to fluctuation in interest rates on the available-for-sale portfolio. The impact of the adjustment to exclude net unrealized gains on fixed maturities is$1.2 billion and$969 million for 2020 and 2019, respectively. Book value per share, excluding net unrealized gains on the fixed maturity portfolio, is also considered a non-GAAP measure. Management utilizes this measure to view the book value of the business without the effect of net unrealized gains, which are primarily attributable to fluctuation in interest rates on the available for sale portfolio. The impact of the adjustment to exclude net unrealized gains on fixed maturities is$11.32 and$8.68 for 2020 and 2019, respectively. Refer to Analysis of Profitability by Segment for non-GAAP reconciliation to GAAP. 37 GL Q1 2020 FORM 10-Q
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GLOBE LIFE INC. Management's Discussion & Analysis Summary of Operations. Net income declined 11% to$166 million during the three months endedMarch 31, 2020 , compared with$185 million in the same period in 2019. This decrease was primarily attributed to the recording of a$25 million after tax provision for credit losses on the available-for-sale fixed maturities. See further discussion under the caption Investment s . On a diluted per common share basis, net income per common share for the three months endedMarch 31, 2020 declined 8% from$1.65 to$1.52 . Net operating income is the consolidated total of segment profits after-tax and as such is considered a non-GAAP measure. Net operating income increased 2% to$189 million for the three months endedMarch 31, 2020 , compared with$185 million for the same period in 2019. On a diluted per common share basis, net operating income per common share for the three months endedMarch 31, 2020 increased 5% from$1.64 to$1.73 .Globe Life's operations on a segment-by-segment basis are discussed in depth below. Net operating income has been used consistently by management for many years to evaluate the operating performance of the Company, and is a measure commonly used in the life insurance industry. It differs from net income primarily because it excludes certain non-operating items such as realized investment gains and losses, provision for credit losses, and other significant and unusual items included in net income. Management believes an analysis of net operating income is important in understanding the profitability and operating trends of the Company's business. Net income is the most directly comparable GAAP measure. Analysis of Profitability by Segment (Dollar amounts in thousands) Three Months Ended March 31, 2020 2019 Change % Life insurance underwriting margin$ 178,803 $ 169,839 $ 8,964 5 Health insurance underwriting margin 63,465 61,514 1,951 3 Annuity underwriting margin 2,270 2,416 (146) (6) Excess investment income 62,737 65,555 (2,818) (4) Other insurance: Other income 325 241 84 35 Administrative expense (63,620) (59,191) (4,429) 7 Corporate and other (11,687) (13,202) 1,515 (11) Pre-tax total 232,293 227,172 5,121 2 Applicable taxes (43,549) (42,428) (1,121) 3 Net operating income 188,744 184,744 4,000 2 Reconciling items, net of tax: Realized gain (loss)-investments 4,548 1,050
3,498
Realized loss-provision for credit losses (25,165) -
(25,165)
Part D adjustments-discontinued operations - (49) 49 Administrative settlements - (400) 400 Legal proceedings (2,587) - (2,587) Net income$ 165,540 $ 185,345 $ (19,805) (11) 38 GL Q1 2020 FORM 10-Q
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GLOBE LIFE INC. Management's Discussion & Analysis In first quarter of 2020, the largest contributor of total underwriting margin was the life insurance segment and the primary distribution channel was American Income Life Division. The following tables represent the breakdown of total underwriting margin by operating segment and distribution channel for the three months endedMarch 31, 2020 .
[[Image Removed: gl-20200331_g6.jpg]][[Image Removed: gl-20200331_g7.jpg]]
Total premium income rose 4% for the three months endedMarch 31, 2020 to$930 million . Total net sales increased 6% to$153 million , when compared with the same period in 2019. Total first-year collected premium was$128 million for the 2020 period, compared with$118 million for the 2019 period. Life insurance premium income increased 4% to$650 million over the prior year total of$624 million . Life net sales rose 5% to$111 million for the first three months of 2020. First-year collected life premium rose 5% to$85 million . Life underwriting margins, as a percent of premium, increased to 28% in 2020 from 27% in the prior year. Underwriting margin increased to$179 million for the three months endedMarch 31, 2020 , 5% over the same period in 2019. Health insurance premium income increased 5% to$280 million over the prior year total of$267 million . Health net sales rose 9% to$42 million for the first three months of 2020. First-year collected health premium rose 15% to$43 million . Health underwriting margins, as a percent of premium, were 23% in both periods. Underwriting margin increased to$63 million for the first three months of 2020, 3% over the same period in 2019. Excess investment income, the measure of profitability of our investment segment, declined 4% during the first three months of 2020 to$63 million from$66 million in the same period in 2019. Excess investment income per common share, reflecting the impact of our share repurchase program, declined 2% to$0.57 from$0.58 in the same period last year. Insurance administrative expenses increased 7.5% in 2020 when compared with the prior year period. These expenses were 6.8% as a percent of premium during the first three months of 2020 compared with 6.6% a year earlier. The increase in administrative expenses was primarily due to an increase in investments in information technology and pension costs.
For the three months ended
39 GL Q1 2020 FORM 10-Q
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GLOBE LIFE INC. Management's Discussion & Analysis
A discussion of each of
We use three statistical measures as indicators of premium growth and sales over the near term: "annualized premium in force," "net sales," and "first-year collected premium." •Annualized premium in force is defined as the premium income that would be received over the following twelve months at any given date on all active policies if those policies remain in force throughout the twelve-month period. Annualized premium in force is an indicator of potential growth in premium revenue. •Net sales is annualized premium issued (gross premium that would be received during the policies' first year in force and assuming that none of the policies lapsed or terminated), net of cancellations in the first thirty days after issue, except in the case of our Direct to Consumer Division, where net sales is annualized premium issued at the time the first full premium is paid after any introductory offer period has expired. We believe that net sales is a better indicator of the rate of premium growth as compared with annualized premium issued. •First-year collected premium is defined as the premium collected during the reporting period for all policies in their first policy year. First-year collected premium takes lapses into account in the first year when lapses are more likely to occur, and thus is a useful indicator of how much new premium is expected to be added to premium income in the future. COVID 19-Once COVID-19 was recognized as an immediately disruptive issue to our country and the Company, our incident response team and crisis management team, which includes members of executive management, took action and ultimately guided the Company into a smooth transition of working remotely. Within a very short time, the Company was able to transition those employees whose jobs did not require them to be in the office, over 70 percent of the Company's total workforce, to working remotely. The Company has continued to operate at nearly full capacity while taking the necessary steps to ensure the health and safety of our employees through adherence to theCDC and local government work guidelines. With over 12,000 exclusive agents in the field, the Company was presented with a challenge to move from face-to-face sales presentations in customers' homes and businesses to a virtual sales process. The Company's agencies also had to move from in-person recruiting and training of new agents to virtual processes. While not without its challenges, the Company's exclusive agency divisions have been able to quickly pivot and continue to write new business and hire new agents due in part to new and updated information technology systems that we have put in place over the last several years. While our exclusive agencies had to make significant changes to their distribution processes as a result of COVID-19, our Direct to Consumer Division has been able to meet an increased demand for our products through its internet and inbound phone call channels. While it is difficult to predict sales activity during this uncertain environment, the Company is expecting sales to be down for the full year. However, due to the strength of the Company's policies in force, we still expect our total premiums to grow around 3% to 4% for the full year. Furthermore, while we may see decreased sales over the next several months, we are pleased with the willingness of our agents and employees to quickly respond to the crisis. See further discussion of the distribution channels below for Life and Health . 40 GL Q1 2020 FORM 10-Q
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Table of ContentsGLOBE LIFE INC. Management's Discussion & Analysis LIFE INSURANCE Life insurance is the Company's predominant segment, with first quarter 2020 life premium representing 70% of total premium and life underwriting margin representing 73% of the total. Additionally, investments supporting the reserves for life products produce the majority of excess investment income attributable to the investment segment.
The following table presents the summary of results of life insurance. Further discussion of the results by distribution channel is included below.
Life Insurance Summary of Results (Dollar amounts in thousands) Three Months Ended March 31, Increase 2020 2019 (Decrease) Amount % of Premium Amount % of Premium Amount % Premium and policy charges$ 649,630 100$ 624,289 100$ 25,341 4 Policy obligations 421,670 65 409,692 66 11,978 3 Required interest on reserves (171,205) (27) (163,662) (26) (7,543) 5 Net policy obligations 250,465 38 246,030 40 4,435 2 Commissions, premium taxes, and non-deferred acquisition expenses 53,936 8 50,106 8 3,830
8
Amortization of acquisition costs 166,426 26 158,314 25 8,112 5 Total expense 470,827 72 454,450 73 16,377 4 Insurance underwriting margin$ 178,803 28$ 169,839 27$ 8,964 5 The following table presentsGlobe Life's life insurance premium by distribution channel. Life Insurance Premium by Distribution Channel (Dollar amounts in thousands) Three Months Ended March 31, Increase 2020 2019 (Decrease) Amount % of Total Amount % of Total Amount % American Income$ 302,852 47$ 281,767 45$ 21,085 7 Direct to Consumer 220,043 34 217,559 35 2,484 1 Liberty National 72,868 11 70,717 11 2,151 3 Other 53,867 8 54,246 9 (379) (1) Total$ 649,630 100$ 624,289 100$ 25,341 4
Annualized life premium in force was
41 GL Q1 2020 FORM 10-Q
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Globe Life Inc. Management's Discussion & Analysis
An analysis of life net sales, an indicator of new business production, by distribution channel is presented below.
Life Insurance Net Sales by Distribution Channel (Dollar amounts in thousands) Three Months Ended March 31, Increase 2020 2019 (Decrease) Amount % of Total Amount % of Total Amount % American Income$ 62,869 57$ 57,551 54$ 5,318 9 Direct to Consumer 32,547 29 32,447 31 100 - Liberty National 12,488 11 12,259 12 229 2 Other 2,709 3 3,083 3 (374) (12) Total$ 110,613 100$ 105,340 100$ 5,273 5 First-year collected life premium by distribution channel is presented in the table below. Life Insurance First-Year Collected Premium by Distribution Channel (Dollar amounts in thousands) Three Months Ended March 31, Increase 2020 2019 (Decrease) Amount % of Total Amount % of Total Amount % American Income$ 50,669 60$ 47,476 58$ 3,193 7 Direct to Consumer 21,094 25 21,256 26 (162) (1) Liberty National 10,666 12 9,394 12 1,272 14 Other 2,652 3 2,958 4 (306) (10) Total$ 85,081 100$ 81,084 100$ 3,997 5
A discussion of life operations by distribution channel follows.
The American Income Life Division markets to members of labor unions and continues to diversify its lead sources by building relationships with other affinity groups, utilizing third-party internet vendor leads, and obtaining referrals to ensure sustainable growth. This division isGlobe Life's largest contributor to life premium of any distribution channel at 47% of the Company's 2020 year-to-date total. Net sales increased 9% to$63 million in 2020 over the 2019 total of$58 million . The underwriting margin, as a percent of premium, was 33% for the three months endedMarch 31, 2019 , same a year-ago quarter. Subsequent to quarter end, the division has seen a decrease in net sales as compared to the year-ago quarter as a result of COVID-19 restrictions; however, the level of sales has improved in recent weeks as agents have adapted to the new virtual sales process. This demonstrates a strength of having our agency comprised of independent business owners who are motivated to search out and adopt new ways of doing business. As a result of COVID-19, net sales may be lower in the remainder of 2020 as compared to the same periods in 2019. In addition, due to higher mortality from the pandemic, the underwriting margin as a percent of premium, is also likely to be slightly lower. 42 GL Q1 2020 FORM 10-Q
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Globe Life Inc. Management's Discussion & Analysis Below is the average producing agent count at the end of the period for American Income. The average producing agent is based on the actual count at the end of each week during the year. At March 31, Change 2020 2019 Amount % American Income 7,630 6,865 765 11 American Income Life continues to focus on growing and strengthening the agency force, specifically through additional agency office openings and emphasis on middle-management growth. In addition to offering financial incentives and training opportunities, the agency has made considerable investments in information technology, including launching a lead mapping and customer relationship management (CRM) tool for the agency force. We anticipate this tool will help enhance agent productivity and agent retention. The Direct to Consumer Division offers adult and juvenile life insurance through a variety of marketing approaches, including direct mailings, insert media, and electronic media. In recent years, electronic media production has grown rapidly as management has aggressively increased marketing activities related to internet and mobile technology as well as focused on driving traffic to our inbound call center. The different approaches support and complement one another in the division's efforts to reach the consumer. The Direct to Consumer Division's long-term growth has been fueled by constant innovation and name recognition. We continually introduce new initiatives in this division in an attempt to increase response rates. While the juvenile market is an important source of sales, it also is a vehicle to reach the parents and grandparents of juvenile policyholders, who are more likely to respond favorably to a Direct to Consumer solicitation for life coverage on themselves than is the general adult population. Also, both juvenile policyholders and their parents are low acquisition-cost targets for sales of additional coverage over time. Direct to Consumer Division's underwriting margin, as a percent of premium, was 17% for the three months endedMarch 31, 2020 , same as the year-ago quarter. Subsequent to quarter-end, the Company saw an increased interest in our life insurance products through our internet and inbound phone channels. This increase may correlate with the COVID-19 pandemic response. Our continued investments in technology have allowed us to successfully serve the higher demands for our products through the digital self-serve and phone channels. If this level of activity continues as a result of COVID-19 response, net sales may be higher in the remainder of 2020 as compared to the same quarters in 2019. Additionally, due to expected higher claims from COVID-19, we likely will see a decrease in our underwriting margin as a percent of premium as a result of increased policyholder claims relating to the pandemic. The Liberty National Division markets individual life insurance to middle-income household and worksite customers. Recent investments in new sales technologies as well as recent growth in middle management within the division will help continue this growth. The underwriting margin as a percent of premium was 26% for the three months endedMarch 31, 2020 , up from 25% during the same quarter a year ago. The increase is primarily attributable to lower policy obligations during the three months endedMarch 31, 2020 compared with higher than normal policy obligations during the same quarter a year ago. Subsequent to quarter-end, the division has seen a decrease in net sales as compared to the year ago quarter as a result of COVID-19 restrictions. Although we are seeing an increase in individual sales and the agencies in the field are quickly adapting to the virtual sales process, it has been challenging to obtain new worksite sales as small businesses have been adversely affected by the pandemic. As a result of COVID-19, net sales may be lower in the remainder of 2020 as compared to the same periods in 2019. In addition, due to higher mortality from the pandemic, the underwriting margin as a percent of premium is also likely to be lower. 43 GL Q1 2020 FORM 10-Q
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Globe Life Inc. Management's Discussion & Analysis Below is the average producing agent count at the end of the period for Liberty National Division. At March 31, Change 2020 2019 Amount % Liberty National 2,648 2,179 469 22 The Liberty National Division average producing agency count increased 22% since prior year. We continue to execute our long-term plan to grow this agency through expansion from small-town markets in the Southeast to more densely populated areas with larger pools of potential agent recruits and customers. Continued expansion of this agency's presence into more heavily populated, less-penetrated areas will help create long-term agency growth. Systems that have been put in place, including the addition of a customer relationship management (CRM) platform and enhanced analytical capabilities, have helped the agents develop additional worksite marketing opportunities as well as improve the productivity of agents selling in the individual market. The Other Agencies distribution channels primarily include non-exclusive independent agencies selling predominantly life insurance. The Other Agencies contributed$54 million of life premium income, or 8% ofGlobe Life's total premium income in the three months endedMarch 31, 2020 , and contributed 3% of net sales for the period. HEALTH INSURANCE
Health insurance sold by the Company includes primarily Medicare Supplement insurance, accident coverage, and other limited-benefit supplemental health products including cancer, critical illness, heart, and intensive care coverage.
Health premium accounted for 30% of our total premium in 2020, while the health underwriting margin accounted for 26% of total underwriting margin, reflective of the lower underwriting margin as a percent of premium for health compared with life insurance. As noted under the caption Life I nsurance , the Company has emphasized life insurance sales relative to health due to life's superior profitability and its greater contribution to excess investment income.
The following table presents underwriting margin data for health insurance.
Health Insurance Summary of Results (Dollar amounts in thousands) Three Months Ended March 31, Increase 2020 2019 (Decrease) % of % of Amount Premium Amount Premium Amount % Premium and policy charges$ 280,205 100$ 266,684 100$ 13,521 5 Policy obligations 178,711 64 170,017 64 8,694 5 Required interest on reserves (22,510) (8) (21,496) (8) (1,014) 5 Net policy obligations 156,201 56 148,521 56 7,680 5 Commissions, premium taxes, and non-deferred acquisition expenses 24,995 9 23,352 9 1,643 7 Amortization of acquisition costs 35,544 12 33,297 12 2,247 7 Total expense 216,740 77 205,170 77 11,570 6 Insurance underwriting margin$ 63,465 23$ 61,514 23$ 1,951 3 44 GL Q1 2020 FORM 10-Q
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Globe Life Inc. Management's Discussion & Analysis
We market supplemental health insurance products through a number of distribution channels. The following table is an analysis of our health premium by distribution channel.
Health Insurance Premium by Distribution Channel (Dollar amounts in thousands) Three Months Ended March 31, Increase 2020 2019 (Decrease) Amount % of Total Amount % of Total Amount % United American$ 110,059 39$ 102,905 38$ 7,154 7 Family Heritage 76,983 28 71,264 27 5,719 8 Liberty National 47,640 17 48,156 18 (516) (1) American Income 25,727 9 24,099 9 1,628 7 Direct to Consumer 19,796 7 20,260 8 (464) (2) Total$ 280,205 100$ 266,684 100$ 13,521 5 Of total health premium ($280 million ), premium from limited-benefit plans comprise$144 million , or 51%, for 2020 compared with$136 million in the same period in the prior year. Premium from Medicare Supplement products comprises the remaining 49% or$136 million for 2020 compared with$131 million in the same period in the prior year.
Annualized health premium in force at
Presented below is a table of health net sales by distribution channel.
Health Insurance Net Sales by Distribution Channel (Dollar amounts in thousands)
Three Months Ended March 31, Increase 2020 2019 (Decrease) Amount % of Total Amount % of Total Amount % United American$ 14,464 35$ 14,894 39$ (430) (3) Family Heritage 16,281 39 13,030 34 3,251 25 Liberty National 5,943 14 5,565 14 378 7 American Income 4,752 11 3,899 10 853 22 Direct to Consumer 590 1 1,145 3 (555) (48) Total$ 42,030 100$ 38,533 100$ 3,497 9 Of total net sales ($42 million ), sales of limited-benefit plans comprise$27 million , or 64% of the total for 2020, compared with$23 million in the same period in the prior year. Medicare Supplement sales make up the remaining 36% or$15 million for 2020, compared with$16 million in the same period in the prior year. 45 GL Q1 2020 FORM 10-Q
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Globe Life Inc. Management's Discussion & Analysis
The following table presents health insurance first-year collected premium by distribution channel.
Health Insurance First-Year Collected Premium by Distribution Channel (Dollar amounts in thousands)
Three Months Ended March 31, Increase 2020 2019 (Decrease) Amount % of Total Amount % of Total Amount % United American$ 19,005 44$ 16,084 43$ 2,921 18 Family Heritage 13,446 31 11,936 32 1,510 13 Liberty National 5,286 12 4,601 12 685 15 American Income 4,507 11 3,758 10 749 20 Direct to Consumer 767 2 1,023 3 (256) (25) Total$ 43,011 100$ 37,402 100$ 5,609 15 First-year collected premium related to limited-benefit plans comprises$23 million , or 54% of total first-year collected premium, for 2020 compared with$20 million in the same period in the prior year. First-year collected premium from Medicare Supplement policies makes up the remaining 46% or$20 million for 2020 compared with$17 million in the same period in the prior year. A discussion of health operations by distribution channel follows.The United American Independent Agency consists of non-exclusive independent agencies who may also sell for other companies.The United American Independent Agency wasGlobe Life's largest health agency in terms of health premium income. This division is alsoGlobe Life's largest producer of Medicare Supplement insurance.The United American Independent Agency represents 79% of all Medicare Supplement premium and 96% of Medicare Supplement net sales. For the period endedMarch 31, 2020 , Medicare Supplement premium in this agency rose 7% to$108 million in 2020 over the prior period balance of$100 million . Medicare Supplement net sales declined 3% to$14 million in 2020 from the prior year period, primarily as a result of a decrease in group sales. Underwriting margin as a percent of premium was 14%, down from 15% for the period endedMarch 31, 2019 . This decrease was primarily due to higher policy obligations and amortization of deferred acquisition costs as a percentage of premium in the current period versus the year-ago period. Subsequent to quarter-end, the individual Medicare Supplement net sales decreased from the prior year. Accordingly, due to the COVID-19 pandemic, this agency may also see reduced sales during the remainder of the year. 46 GL Q1 2020 FORM 10-Q
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Globe Life Inc. Management's Discussion & Analysis The Family Heritage Division primarily markets limited-benefit supplemental health insurance in non-urban areas. Most of their policies include a cash-back feature, such as a return of premium, where any excess of premiums over claims paid is returned to the policyholder at the end of a specified period stated within the insurance policy. Underwriting margin as a percent of premium was 25% for the period endedMarch 31, 2020 , same as the year-ago quarter. Subsequent to quarter-end, the division has seen a decrease in net sales as compared to the year ago quarter as a result of COVID-19 restrictions. While it has been a challenge at this division to move from in-home sales to virtual sales, we are encouraged by the motivation of the agency owners to adopt this new way of doing business. As the shelter-in-place restrictions ease over the course of the next few months, we expect to see net sales toward the end of the year return to normal levels. However, for the full year, net sales in 2020 may be lower than the same periods in 2019. Additionally, we are expecting to see increased health claims which likely will cause a lower underwriting margin as a percent of premium. Below is the average producing agent count at the end of the period for Family Heritage. At March 31, Change 2020 2019 Amount % Family Heritage 1,227 1,002 225 22 The Liberty National Division represented 17% of allGlobe Life health premium income as ofMarch 31, 2020 . The Liberty National Division markets limited-benefit supplemental health products consisting primarily of critical illness insurance. Much of this health business is now generated through worksite marketing. In 2020, health premium at Liberty National Division declined 1% to$48 million from the prior year period. The slight decline in health premium is primarily attributable to the runoff of a block of discontinued Medicare Supplement policies previously sold by the agency. As discussed in the Liberty National Division life section above, this division has seen decreased net sales across both life and health as result of the COVID-19 response. For the remainder of 2020, we expect health net sales to decrease compared with prior-year periods. Other distribution. While some of the Company's other distribution channels market health products, their main emphasis is on life insurance. On a combined basis, they accounted for 16% of health premium in 2020 and 17% in 2019. The American Income Life Division primarily markets accident plans. The Direct to Consumer Division markets primarily Medicare Supplements to employer or union-sponsored groups. The Direct to Consumer Division added$1 million of Medicare Supplement net sales as ofMarch 31, 2020 and 2019. ANNUITIES
Annuities represent an insignificant part of our business and are not expected to be an important part of our marketing strategy going forward.
INVESTMENTS We manage our capital resources including investments, debt, and cash flow through the investment segment. Excess investment income represents the profit margin attributable to investment operations and is the measure that we use to evaluate the performance of the investment segment as described in Note 9-Business Segments. It is defined as net investment income less both the required interest on net insurance policy liabilities and the interest cost associated with capital funding or "financing costs." Management also views excess investment income per diluted common share as an important and useful measure to evaluate the performance of the investment segment. It is defined as excess investment income divided by the total diluted weighted average shares outstanding, representing the contribution by the investment segment to the consolidated earnings per share of the Company. Since implementing our share repurchase program in 1986, we have used$8.0 billion of excess cash flow at the Parent Company to repurchaseGlobe Life Inc. common shares after determining that the repurchases provided a greater risk adjusted after-tax return than other investment alternatives. If we had not used this excess cash to repurchase shares, but had instead invested it in interest-bearing assets, we would have earned more investment income and had more shares outstanding. As excess 47 GL Q1 2020 FORM 10-Q
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Globe Life Inc. Management's Discussion & Analysis
investment income per diluted common share incorporates all capital resources, we view excess investment income per diluted share as a useful measure to evaluate the investment segment.
Excess Investment Income. The following table summarizes
Analysis of Excess Investment Income (Dollar amounts in thousands, except for per share data) Three Months Ended Increase March 31, (Decrease) 2020 2019 Amount % Net investment income$ 228,991 $ 226,673 $ 2,318 1 Interest on net insurance policy liabilities: Interest on reserves (204,171) (196,278) (7,893) 4 Interest on deferred acquisition costs 58,725 56,438 2,287 4 Net required interest (145,446) (139,840) (5,606) 4 Financing costs (20,808) (21,278) 470 (2) Excess investment income$ 62,737 $ 65,555 $ (2,818) (4)
Excess investment income per diluted share
0.58$ (0.01) (2) Mean invested assets (at amortized cost)$ 17,472,498 $ 16,780,373 $ 692,125 4 Average net insurance policy liabilities(1) 10,277,692 9,942,946 334,746 3
Average debt and preferred securities (at amortized cost)
1,720,755 1,656,543 64,212 4
(1)Net of deferred acquisition costs, excluding the associated unrealized gains and losses thereon.
Excess investment income declined 4% compared with the year-ago period, while on a per diluted common share basis it declined 2% from the prior year-ago period.
Net investment income for the three months endedMarch 31, 2020 was$229 million or 1% greater than the year ago period. Mean invested assets increased 4% during the first three months of 2020 over the same period last year. The effective annual yield rate earned on the fixed maturity portfolio was 5.39% in the first three months of 2020, compared with 5.53% a year earlier. Growth in net investment income has been negatively impacted in recent periods primarily by reinvesting the proceeds from dispositions at yield rates less than what we earned on these bonds prior to disposition. As a result, growth in net investment income has been slower than the growth in mean invested assets. While the Company may see a higher turnover rate of fixed maturity assets of 2% to 4% in 2020 due to calls of highly-rated municipal securities, we expect that the average annual turnover of fixed maturity assets during the next five years will be less than 2% of the portfolio and will not have a material negative impact on net investment income. Should the current low interest rate environment continue, the growth of the Company's net investment income will be negatively impacted primarily due to the investment of new money at rates less than the average portfolio yield rate. While net investment income would grow, it would continue to grow at rates less than the growth in mean invested assets. For 2020, we currently anticipate the average new money yield on our fixed maturity acquisitions to be approximately 100 basis points lower than the rate applicable to our 2019 acquisitions. Should interest rates, especially long-term rates, rise,Globe Life's net investment income would benefit due to higher interest rates on new purchases. While such a rise in interest rates could adversely affect the fair value of the fixed maturities portfolio, we could withstand an increase in interest rates of approximately 75 to 80 basis points before the net unrealized gains on our fixed maturity portfolio as ofMarch 31, 2020 would be eliminated. Should interest rates increase further, we would not be concerned with potential interest rate driven unrealized losses in our fixed maturity portfolio because we have the intent and, more importantly, the ability to hold our fixed maturities to maturity. 48 GL Q1 2020 FORM 10-Q
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Table of ContentsGlobe Life Inc. Management's Discussion & Analysis Required interest on net insurance policy liabilities reduces net investment income, as it is the amount of net investment income considered by management necessary to "fund" required interest on net insurance policy liabilities, which is the net of the benefit reserve liability and the deferred acquisition cost asset. As such, it is removed from the investment segment and applied to the insurance segments to offset the effect of the required interest from the insurance segments. As discussed in Note 9-Business Segments, management regards this as a more meaningful analysis of the investment and insurance segments. Required interest is based on the actuarial interest assumptions used in discounting the benefit reserve liability and the amortization of deferred acquisition costs for our insurance policies in force. The great majority of our life and health insurance policies are fixed interest rate protection policies, not investment products, and are accounted for under current accounting guidance for long-duration insurance products which mandate that interest rate assumptions for a particular block of business be "locked in" for the life of that block of business. Each calendar year, we set the discount rate to be used to calculate the benefit reserve liability and the amortization of the deferred acquisition cost asset for all insurance policies issued that year. That rate is based on the new money yields that we expect to earn on cash flow received in the future from policies of that issue year, and cannot be changed. The discount rate used for policies issued in the current year has no impact on the in force policies issued in prior years as the rates of all prior issue years are also locked in. As such, the overall discount rate for the entire in force block of 5.7% is a weighted average of the discount rates being used from all issue years. Changes in the overall weighted-average discount rate over time are caused by changes in the mix of the reserves and the deferred acquisition cost asset by issue year on the entire block of in force business. Business issued in the current year has very little impact on the overall weighted-average discount rate due to the size of our in force business. Since actuarial discount rates are locked in for life on essentially all of our business, benefit reserves and deferred acquisition costs are not affected by interest rate fluctuations unless a loss recognition event occurs. Due to the strength of our underwriting margins, we do not expect an extended low interest rate environment to cause a loss recognition event. Required interest on net insurance policy liabilities increased$6 million , or 4%, to$145 million , greater than the 3% growth in average net interest-bearing insurance policy liabilities. Financing costs for the investment segment consist primarily of interest on our various debt instruments. The table below presents the components of financing costs and reconciles interest expense per the Condensed Consolidated Statements of Operations .
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