GLOBE LIFE INC. 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-20200630_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-20200630_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. Theinvestment segment involves the management of our capital resources,
[[Image Removed: gl-20200630_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
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GLOBE LIFE INC. Management's Discussion & Analysis Current Highlights, comparing year to date 2020 with 2019. •Net income as a return on equity ("ROE") for the six months endedJune 30, 2020 was 9.4% and net operating income as an ROE, excluding net unrealized gains on the fixed maturity portfolio(1) was 13.6%. •Total premium increased 5% over the same period in the prior year. Life premium increased 5% for the period from$1.26 billion in 2019 to$1.32 billion in 2020. Life underwriting margin declined 1% from$345 million in 2019 to$341 million in 2020. •Net investment income increased 1% over the same period in the prior year. Excess investment income declined 5% below the prior year. •Total net sales increased slightly over the same period in the prior year from$300 million to$301 million . •Book value per share increased 22% over the same period in the prior year from$60.22 to$73.26 . Book value per share, excluding net unrealized gains on the fixed maturity portfolio(1), increased 10% over the prior year from$46.43 to$51.21 . •The Company is estimated to have incurred an additional$22 million of life policy obligations as a result of COVID-19 throughJune 30, 2020 .
The following graphs represent net income and net operating income from
continuing operations for the six months ended
[[Image Removed: gl-20200630_g4.jpg]][[Image Removed: gl-20200630_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$2.4 billion and$1.5 billion 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$22.05 and$13.79 for 2020 and 2019, respectively. Refer to Analysis of Profitability by Segment for non-GAAP reconciliation to GAAP. 38 GL Q2 2020 FORM 10-Q
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GLOBE LIFE INC. Management's Discussion & Analysis COVID-19. The Company continues to monitor the impact of the novel coronavirus (COVID-19) on the Company's business, distribution channels, employees, and policyholders. The Company has transitioned the organization-its employees, agents and customers from an in-person experience to one that is primarily virtual and has taken the necessary steps to help ensure the health and safety of these individuals. While the current operating environment presents challenges,Globe Life's operations continue to be conducted in an effective manner. With respect to the estimated impact of COVID-19 on our underwriting results, overall we have not seen a significant adverse impact of the pandemic on our lapse rates or premium income throughJune 30, 2020 . However, in the second quarter, we estimate that we incurred an additional$22 million of life policy obligations from COVID-related deaths, primarily in our Direct to Consumer Division and American Income Life Division. The policy obligations of our health segment were not significantly impacted by the COVID-19 pandemic in the second quarter. After further analysis with more granular data regarding infection and projected deaths in various geographies, management estimates the total incurred life policyholder obligations in 2020 related to COVID-19 deaths to be approximately$45 million . However, due to lower overall utilization rates, management now anticipates that supplemental health obligations will be approximately$8 million lower than expected at the beginning of the year. Thus, the combined impact of COVID-19 to the Company's life and health policy obligations for the full year is estimated to be approximately$37 million . Of course, this estimate is dependent on many variables, including the effect of efforts to reopen the economy, the timing and availability of effective treatments for the disease, and the actual ages and states in which infections and deaths occur. Summary of Operations. Net income declined 9% to$339 million during the six months endedJune 30, 2020 , compared with$372 million in the same period in 2019. This decrease was primarily attributed to the recording of a$25.8 million after tax provision for credit losses on the available-for-sale fixed maturities. See further discussion under the caption Investments . On a diluted per common share basis, net income per common share for the six months endedJune 30, 2020 declined 6% from$3.32 to$3.13 . Net operating income is the consolidated total of segment profits after-tax and as such is considered a non-GAAP measure. Net operating income declined 2% to$366 million for the six months endedJune 30, 2020 , compared with$372 million for the same period in 2019. On a diluted per common share basis, net operating income per common share for the six months endedJune 30, 2020 increased 2% from$3.32 to$3.38 . 39 GL Q2 2020 FORM 10-Q
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GLOBE LIFE INC.
Management's Discussion & Analysis
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 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)
Six Months Ended June 30,
2020 2019 Change %
Life insurance underwriting margin $ 340,502 $ 344,889 $ (4,387) (1)
Health insurance underwriting margin 127,705 121,673 6,032 5
Annuity underwriting margin 4,535 4,781 (246) (5)
Excess investment income 123,874 130,233 (6,359) (5)
Other insurance:
Other income 729 639 90 14
Administrative expense (125,186) (118,607) (6,579) 6
Corporate and other (22,835) (27,330) 4,495 (16)
Pre-tax total 449,324 456,278 (6,954) (2)
Applicable taxes (83,748) (84,652) 904 (1)
Net operating income 365,576 371,626 (6,050) (2)
Reconciling items, net of tax:
Realized gain (loss)-investments (24,401) 5,122 (29,523)
Part D adjustments-discontinued operations - (92) 92 Administrative settlements - (400) 400 Legal proceedings (2,587) (4,345) 1,758 Net income$ 338,588 $ 371,911 $ (33,323) (9) 40 GL Q2 2020 FORM 10-Q
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GLOBE LIFE INC. Management's Discussion & Analysis In the first six months 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 six months endedJune 30, 2020 .
[[Image Removed: gl-20200630_g6.jpg]][[Image Removed: gl-20200630_g7.jpg]]
Total premium income rose 5% for the six months endedJune 30, 2020 to$1.9 billion . Total net sales increased slightly to$301 million , when compared with the same period in 2019. Total first-year collected premium was$264 million for the 2020 period, compared with$241 million for the 2019 period. Life insurance premium income increased 5% to$1.32 billion over the prior year total of$1.26 billion . Life net sales rose 3% to$225 million for the first six months of 2020. First-year collected life premium rose 8% to$176 million . Life underwriting margins, as a percent of premium, declined to 26% in 2020 from 27% in the prior year. Underwriting margin declined to$341 million for the six months endedJune 30, 2020 , 1% below the same period in 2019. Health insurance premium income increased 6% to$563 million over the prior year total of$533 million . Health net sales fell 8% to$76 million for the first six months of 2020. First-year collected health premium rose 13% to$87 million . Health underwriting margins, as a percent of premium, were 23% in both periods. Underwriting margin increased to$128 million for the first six months of 2020, 5% over the same period in 2019. Excess investment income, the measure of profitability of our investment segment, declined 5% during the first six months of 2020 to$124 million from$130 million in the same period in 2019. Excess investment income per common share, reflecting the impact of our share repurchase program, declined 1% to$1.15 from$1.16 in the same period last year. Insurance administrative expenses increased 5.5% in 2020 when compared with the prior year period. These expenses were 6.6% as a percent of premium during the first six months of 2020, the same as a year earlier.
For the six months ended
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GLOBE LIFE INC. Management's Discussion & Analysis A discussion of each ofGlobe Life's segments follows. A significant factor in the performance of our various segments has been the impact of COVID-19. In response to this crisis, our crisis management and incident response teams have successfully guided the Company into a smooth transition of working remotely. We quickly transitioned those employees whose jobs did not require them to be in the office, approximately 80-85% of the Company's total workforce, to working remotely. The Company has continued to operate effectively while taking the necessary steps to help 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 made significant changes to their distribution processes as a result of COVID-19, our Direct to Consumer Division experienced record high demand for its products through its internet and inbound phone call channels. The Company has often seen through the years that times of crisis highlight the need for basic life protection and this has proven true with the pandemic.
The discussions of our segments are presented in the manner we view our operations, as described in Note 9-Business Segments.
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. Management considers net sales to be 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.
While it is difficult to predict sales activity during this uncertain
environment, the Company is expecting sales to be relatively flat for the full
year. However, due to the strength of the Company's policies in force, we still
expect our total life premiums to grow around 5% for the full year and our total
health premiums to grow by 6%. Furthermore, while we may see decreased sales in
certain distribution channels 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 .
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GLOBE LIFE INC.
Management's Discussion & Analysis
LIFE INSURANCE
Life insurance is the Company's predominant segment, with the first six months
of 2020 life premium representing 70% of total premium and life underwriting
margin representing 72% 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)
Six Months Ended June 30, Increase
2020 2019 (Decrease)
Amount % of Premium Amount % of Premium Amount %
Premium and policy charges $ 1,320,452 100 $ 1,255,490 100 $ 64,962 5
Policy obligations 881,515 67 820,653 65 60,862 7
Required interest on reserves (344,413) (26) (329,175) (26) (15,238) 5
Net policy obligations 537,102 41 491,478 39 45,624 9
Commissions, premium taxes, and
non-deferred acquisition expenses 106,513 8 100,192 8 6,321 6
Amortization of acquisition costs 336,335 25 318,931 26 17,404 5
Total expense 979,950 74 910,601 73 69,349 8
Insurance underwriting margin $ 340,502 26 $ 344,889 27 $ (4,387) (1)
The following table presents Globe Life's life insurance premium by distribution
channel.
Life Insurance
Premium by Distribution Channel
(Dollar amounts in thousands)
Six Months Ended June 30, Increase
2020 2019 (Decrease)
Amount % of Total Amount % of Total Amount %
American Income $ 611,527 46 $ 570,101 45 $ 41,426 7
Direct to Consumer 455,244 35 434,837 35 20,407 5
Liberty National 146,194 11 142,195 11 3,999 3
Other 107,487 8 108,357 9 (870) (1)
Total $ 1,320,452 100 $ 1,255,490 100 $ 64,962 5
Annualized life premium in force was
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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)
Six Months Ended June 30, Increase
2020 2019 (Decrease)
Amount % of Total Amount % of Total Amount %
American Income $ 114,283 51 $ 118,599 54 $ (4,316) (4)
Direct to Consumer 81,943 37 66,903 31 15,040 22
Liberty National 23,197 10 25,687 12 (2,490) (10)
Other 5,319 2 6,290 3 (971) (15)
Total $ 224,742 100 $ 217,479 100 $ 7,263 3
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)
Six Months Ended June 30, Increase
2020 2019 (Decrease)
Amount % of Total Amount % of Total Amount %
American Income $ 101,975 58 $ 96,220 59 $ 5,755 6
Direct to Consumer 47,775 27 42,447 26 5,328 13
Liberty National 21,308 12 19,475 12 1,833 9
Other 5,325 3 5,924 3 (599) (10)
Total $ 176,383 100 $ 164,066 100 $ 12,317 8
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 facilitate sustainable growth. This division isGlobe Life's largest contributor to life premium of any distribution channel at 46% of the Company's 2020 year-to-date total. Net sales declined 4% to$114 million during the first six months of 2020 over the 2019 total for the same period of$119 million . The underwriting margin, as a percent of premium, was 32% for the six months endedJune 30, 2020 , down from 33% in the year-ago period. The division has seen a decrease in net sales as compared to the six months ended a year-ago as a result of COVID-19 restrictions on in-person contact. COVID-19 may also cause net sales to 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. 44 GL Q2 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 the
American Income Life Division. The average producing agent count is based on the
actual count at the end of each week during the year. The division saw a large
increase in activity during the quarter as we continue to see a significant pool
of high quality candidates due to current unemployment levels.
At June 30, Change
2020 2019 Amount %
American Income 8,012 7,115 897 13
American Income Life continues to focus on growing and strengthening the agency
force, specifically through emphasis on middle-management growth and additional
agency office openings. 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 (DTC) offers adult and juvenile life insurance
through a variety of marketing approaches, including direct mail, 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 DTC'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 DTC solicitation for life coverage on
themselves in comparison to the general adult population. Also, both juvenile
policyholders and their parents are low acquisition-cost targets for sales of
additional coverage over time.
The DTC division saw record high demand of its life insurance products in the
current quarter through its internet and inbound phone channels as a result of
the response from COVID-19. 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 are expected to be higher during the remainder
of 2020 as compared to the same period in 2019.
DTC's underwriting margin, as a percent of premium, was 15% for the six months
ended June 30, 2020 , which was lower than the 18% result during the same period
in 2019 and driven by higher obligations related to COVID-19. Additionally, due
to expected higher claims from COVID-19, we likely will see a decrease from
prior year 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. The underwriting margin as a percent of
premium was 26% for the six months ended June 30, 2020 , up from 25% during the
same period a year ago. The increase is primarily attributable to lower policy
obligations during the six months ended June 30, 2020 compared with higher than
normal policy obligations during the same period a year ago. While we did not
incur significant additional COVID-19 incurred losses in the second quarter of
2020, we do anticipate higher levels of claims in the remainder of the year,
which may cause the underwriting margin as a percent of premium to decrease.
While the division has seen an increase in individual net sales over the past
two quarters, the worksite business is more challenging in this current
work-from-home environment as a result of COVID-19 restrictions and closings of
many small businesses. It has been challenging to obtain new worksite sales as
small businesses have been adversely affected by the pandemic. As a result, net
sales may be lower in the remainder of 2020 as compared to the same period in
2019.
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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. As the division gains momentum in the virtual sales environment, we will benefit from the abundant recruiting opportunities currently available for new agents.
At June 30, Change
2020 2019 Amount %
Liberty National 2,522 2,235 287 13
The Liberty National Division average producing agent count increased 13% since
the 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.
The Other Agencies distribution channels primarily include non-exclusive
independent agencies selling predominantly life insurance. The Other Agencies
contributed $107 million of life premium income, or 8% of Globe Life's total
premium income in the six months ended June 30, 2020 , and contributed 2% 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.
Year-to-date health premium accounted for 30% of our total premium in 2020, while the health underwriting margin accounted for 27% of total underwriting margin, reflective of the lower underwriting margin as a percent of premium for health compared with life insurance. The Company continues to emphasize 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)
Six Months Ended June 30, Increase
2020 2019 (Decrease)
% of % of
Amount Premium Amount Premium Amount %
Premium and policy charges $ 563,082 100 $ 532,966 100 $ 30,116 6
Policy obligations 362,207 64 340,528 64 21,679 6
Required interest on reserves (45,361) (8) (43,176) (8) (2,185) 5
Net policy obligations 316,846 56 297,352 56 19,494 7
Commissions, premium taxes, and
non-deferred acquisition expenses 48,551 9 46,960 9 1,591 3
Amortization of acquisition costs 69,980 12 66,981 12 2,999 4
Total expense 435,377 77 411,293 77 24,084 6
Insurance underwriting margin $ 127,705 23 $ 121,673 23 $ 6,032 5
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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)
Six Months Ended June 30, Increase
2020 2019 (Decrease)
Amount % of Total Amount % of Total Amount %
United American $ 222,944 40 $ 205,159 39 $ 17,785 9
Family Heritage 154,970 27 144,301 27 10,669 7
Liberty National 95,031 17 95,448 18 (417) -
American Income 51,281 9 48,549 9 2,732 6
Direct to Consumer 38,856 7 39,509 7 (653) (2)
Total $ 563,082 100 $ 532,966 100 $ 30,116 6
Of total health premium ($563 million ), premium from limited-benefit plans
comprise $289 million , or 51%, for 2020 compared with $274 million in the same
period in the prior year. Premium from Medicare Supplement products comprises
the remaining 49% or $274 million for 2020 compared with $259 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)
Six Months Ended June 30, Increase
2020 2019 (Decrease)
Amount % of Total Amount % of Total Amount %
United American $ 26,465 35 $ 31,481 38 $ (5,016) (16)
Family Heritage 29,845 39 29,928 36 (83) -
Liberty National 10,032 13 11,429 14 (1,397) (12)
American Income 8,440 11 8,198 10 242 3
Direct to Consumer 1,112 2 1,727 2 (615) (36)
Total $ 75,894 100 $ 82,763 100 $ (6,869) (8)
Of total net sales ($76 million ), sales of limited-benefit plans comprise $48
million , or 64% of the total for 2020, compared with $50 million in the same
period in the prior year. Medicare Supplement sales make up the remaining 36% or
$27 million for 2020, compared with $33 million in the same period in the prior
year.
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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)
Six Months Ended June 30, Increase
2020 2019 (Decrease)
Amount % of Total Amount % of Total Amount %
United American $ 39,853 46 $ 33,498 43 $ 6,355 19
Family Heritage 26,584 30 24,465 32 2,119 9
Liberty National 10,407 12 9,661 12 746 8
American Income 8,951 10 7,784 10 1,167 15
Direct to Consumer 1,508 2 1,979 3 (471) (24)
Total $ 87,303 100 $ 77,387 100 $ 9,916 13
First-year collected premium related to limited-benefit plans comprises $46
million , or 53% of total first-year collected premium, for 2020 compared with
$42 million in the same period in the prior year. First-year collected premium
from Medicare Supplement policies makes up the remaining 47% or $41 million for
2020 compared with $35 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 was Globe Life's largest health agency in terms of health premium income.
This division is also Globe Life's largest producer of Medicare Supplement
insurance. The United American Independent Agency represents 80% of all Medicare
Supplement premium and 96% of Medicare Supplement net sales. For the six months
ended June 30, 2020 , Medicare Supplement premium in this agency rose 9% to $218
million in 2020 over the prior period balance of $200 million . Medicare
Supplement net sales declined 16% to $26 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 six months ended June 30,
2019 . This decrease was primarily due to higher policy obligations as a
percentage of premium in the current period versus the year-ago period.
Individual Medicare Supplement net sales decreased from the prior year. This
agency will likely see reduced sales during the remainder of the year, in part
due to the COVID-19 pandemic.
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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 its 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 six months ended June 30, 2020 , same as the year-ago period.
The division saw a slight decrease in net sales as compared with the six-month
period a year ago. However, net sales were significantly lower in the second
quarter of 2020 as compared to the same period a year ago as a result of
COVID-19 restrictions. While it has been a challenge at this division to move
from in-home and in-business sales to virtual sales, we are encouraged by the
adoption of the agency owners to this supplementary way of doing business. The
division is also encouraged by the positive results from new agents. For the
full year, net sales in 2020 may be lower than the same periods in 2019. Despite
higher costs associated with those infected with the COVID-19 virus, we expect
higher underwriting margins as a percent of premium due to lower overall
utilization rates.
Below is the average producing agent count at the end of the period for the
Family Heritage Division.
At June 30, Change
2020 2019 Amount %
Family Heritage Division 1,238 1,042 196 19
The Liberty National Division represented 17% of all Globe Life health premium
income for the six-month period ended June 30, 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 and 2019, health premium at
Liberty National Division were $95 million for the six-month periods. 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 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 of June 30, 2020 and $2 million in 2019.
ANNUITIESAnnuities 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 repurchase Globe 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
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GL Q2 2020 FORM 10-Q
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Table of Contents
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)
Six Months Ended Increase
June 30, (Decrease)
2020 2019 Amount %
Net investment income $ 460,559 $ 454,098 $ 6,461 1
Interest on net insurance policy liabilities:
Interest on reserves (410,562) (394,359) (16,203) 4
Interest on deferred acquisition costs 117,498 113,204 4,294 4
Net required interest (293,064) (281,155) (11,909) 4
Financing costs (43,621) (42,710) (911) 2
Excess investment income $ 123,874 $ 130,233 $ (6,359) (5)
Excess investment income per diluted share
1.16 $ (0.01) (1)
Mean invested assets (at amortized cost) $ 17,700,476 $ 16,847,397 $ 853,079 5
Average net insurance policy liabilities(1) 10,328,750 9,980,813 347,937 3
Average debt and preferred securities (at amortized cost)
1,726,718 1,761,751 (35,033) (2)
(1)Net of deferred acquisition costs, excluding the associated unrealized gains and losses thereon.
Excess investment income declined 5% compared with the year-ago period, while on a per diluted common share basis it declined 1% from the prior year-ago period.
Net investment income for the six months endedJune 30, 2020 was$461 million or 1% greater than the year ago period. Mean invested assets increased 5% during the first six months of 2020 over the same period last year. The effective annual yield rate earned on the fixed maturity portfolio was 5.38% in the first six months of 2020, compared with 5.52% a year earlier. Growth in net investment income has been negatively impacted in recent periods primarily due to 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 70 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 130 to 135 basis points before the net unrealized gains on our fixed maturity portfolio as ofJune 30, 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. 50 GL Q2 2020 FORM 10-Q
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Globe 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 $12 million , or
4%, to $293 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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