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-20200930_g1.jpg]] 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-20200930_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-20200930_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 nine months endedSeptember 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 6% over the same period in the prior year. Life premium increased 6% for the period from$1.9 billion in 2019 to$2.0 billion in 2020. Life underwriting margin declined 3% from$526 million in 2019 to$511 million in 2020. •Net investment income increased 1% over the same period in the prior year. Excess investment income declined 6% below the prior year. •Total net sales increased over the same period in the prior year from$451 million to$473 million . •Book value per share increased 18% over the same period in the prior year from$65.96 to$77.60 . Book value per share, excluding net unrealized gains on the fixed maturity portfolio(1), increased 10% over the prior year from$47.58 to$52.39 . •The Company incurred$40 million of life claims as a result of the novel coronavirus (COVID-19) throughSeptember 30, 2020 . •For the nine months endedSeptember 30, 2020 , the Company has repurchased 3.1 million shares ofGlobe Life Inc. common stock at a total cost of$257 million and an average share price of$83.74 .
The following graphs represent net income and net operating income from
continuing operations for the nine months ended
[[Image Removed: gl-20200930_g4.jpg]][[Image Removed: gl-20200930_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$2.7 billion and$2.0 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$25.21 and$18.38 for 2020 and 2019, respectively. Refer to Analysis of Profitability by Segment for non-GAAP reconciliation to GAAP. 43 GL Q3 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 COVID-19 on the Company's business, distribution channels, employees, and policyholders. The Company has transitioned its employees, agents and customers from an in-person experience to one that is primarily virtual. Despite the challenges created by the pandemic, the Company continues to effectively conduct business operations through its various distribution channels. With respect to the impact of COVID-19 on our underwriting results for the full year 2020, we are estimating that we will incur$56 million of COVID-19 related life claims, primarily in our Direct to Consumer Division. We are not anticipating the policy obligations of our health segment to be significantly impacted by the COVID-19 pandemic in 2020. These estimates are 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. 44 GL Q3 2020 FORM
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GLOBE LIFE INC.
Management's Discussion & Analysis
Summary of Operations. Net income declined 8% to $528 million during the nine
months ended September 30, 2020 , compared with $574 million in the same period
in 2019. This decrease was primarily attributed to $22 million of after tax
realized losses on 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 nine months ended September 30, 2020 declined 5%
from $5.14 to $4.90 .
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
$553 million for the nine months ended September 30, 2020 , compared with $564
million for the same period in 2019. On a diluted per common share basis, net
operating income per common share for the nine months ended September 30, 2020
increased 2% from $5.05 to $5.14 .
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)
Nine Months Ended September 30,
2020 2019 Change %
Life insurance underwriting margin $ 511,205 $ 526,348 $ (15,143) (3)
Health insurance underwriting margin 200,565 182,614 17,951 10
Annuity underwriting margin 6,788 7,132 (344) (5)
Excess investment income 183,200 195,006 (11,806) (6)
Other insurance:
Other income 1,021 1,077 (56) (5)
Administrative expense (188,194) (179,177) (9,017) 5
Corporate and other (34,191) (41,335) 7,144 (17)
Pre-tax total 680,394 691,665 (11,271) (2)
Applicable taxes (127,021) (127,656) 635 -
Net operating income 553,373 564,009 (10,636) (2)
Reconciling items, net of tax:
Realized gain (loss)-investments (21,936) 14,557 (36,493)
Realized loss-redemption of debt (501) - (501)
Part D adjustments-discontinued operations - (92) 92
Administrative settlements - (400) 400
Non-operating expenses (816) - (816)
Legal proceedings (2,587) (4,345) 1,758
Net income $ 527,533 $ 573,729 $ (46,196) (8)
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GLOBE LIFE INC. Management's Discussion & Analysis In the first nine 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 nine months endedSeptember 30, 2020 .
[[Image Removed: gl-20200930_g6.jpg]][[Image Removed: gl-20200930_g7.jpg]]
Total premium income rose 6% for the nine months endedSeptember 30, 2020 to$2.8 billion . Total net sales increased 5% to$473 million , when compared with the same period in 2019. Total first-year collected premium was$405 million for the 2020 period, compared with$365 million for the 2019 period. Life insurance premium income increased 6% to$2.0 billion over the prior year total of$1.9 billion . Life net sales rose 9% to$353 million for the first nine months of 2020. First-year collected life premium rose 11% to$273 million . Life underwriting margins, as a percent of premium, declined to 26% in 2020 from 28% in the prior year. Underwriting margin declined to$511 million for the nine months endedSeptember 30, 2020 , 3% below the same period in 2019. The decline in the underwriting margin is primarily due to$40 million of claims related to COVID-19 incurred during the first nine months of 2020. The Company is expecting to see decreased life underwriting margins as a percent of premium for the full year 2020 as a result of$56 million in estimated COVID-19 related life claims. Health insurance premium income increased 6% to$851 million over the prior year total of$802 million . Health net sales fell 5% to$121 million for the first nine months of 2020. First-year collected health premium rose 12% to$132 million . Health underwriting margins, as a percent of premium, increased to 24% in 2020 compared with 23% in 2019. Underwriting margin increased to$201 million for the first nine months of 2020, 10% over the same period in 2019. Excess investment income, the measure of profitability of our investment segment, declined 6% during the first nine months of 2020 to$183 million from$195 million in the same period in 2019. Excess investment income per common share, reflecting the impact of our share repurchase program, declined 3% to$1.70 from$1.75 in the same period last year. Insurance administrative expenses increased 5.0% in 2020 when compared with the prior year period. These expenses were 6.6% as a percent of premium during the first nine months of 2020, compared with 6.7% a year earlier.
For the nine 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 steps to help ensure the health and safety of our employees through adherence to theCDC and local government work guidelines. With over 13 thousand 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. Through the nine months endedSeptember 30, 2020 , the Company has seen a 24% increase in agent count at American Income and a 19% increase at Family Heritage compared with the prior year comparable period. Growth in agent count during the third quarter of 2020 for American Income and Family Heritage was 11% and 20%, respectively. Our Direct to Consumer Division continues to experience record high demand for its products through its internet and inbound phone call channels with a 50% increase in net sales for three months endedSeptember 30, 2020 compared with the prior quarter comparable period and a 31% increase in net life sales for nine months endedSeptember 30, 2020 compared with the prior year comparable period. 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 this pandemic.
The discussions of our segments are presented in the manner we view our operations, as described in Note 10-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 in this uncertain environment,
the Company is expecting net life sales to increase 12% for the full year, while
health sales are expected to be down 5%. Due to the strength of the Company's
policies in force, we still expect our total life premiums to grow around 6% for
the full year and our total health premiums to grow by 6%. 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. During the first nine months of 2020, life premium represented 70% of total premium and life underwriting margin represented 71% 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)
Nine Months Ended September 30, Increase
2020 2019 (Decrease)
Amount % of Premium Amount % of Premium Amount %
Premium and policy charges $ 1,994,473 100 $ 1,886,314 100 $ 108,159 6
Policy obligations 1,340,746 67 1,227,616 65 113,130 9
Required interest on reserves (520,207) (26) (496,894) (26) (23,313) 5
Net policy obligations 820,539 41 730,722 39 89,817 12
Commissions, premium taxes, and
non-deferred acquisition expenses 159,369 8 150,567 8 8,802 6
Amortization of acquisition costs 503,360 25 478,677 25 24,683 5 Total expense 1,483,268 74 1,359,966 72 123,302 9 Insurance underwriting margin $ 511,205 26$ 526,348 28$ (15,143) (3)
The lower life insurance underwriting margins for the nine months ended
The following table presentsGlobe Life's life insurance premium by distribution channel. Life Insurance Premium by Distribution Channel (Dollar amounts in thousands) Nine Months Ended September 30, Increase 2020 2019 (Decrease) Amount % of Total Amount % of Total Amount % American Income $ 930,444 47$ 863,250 46$ 67,194 8 Direct to Consumer 682,978 34 646,530 34 36,448 6 Liberty National 220,009 11 214,007 11 6,002 3 Other 161,042 8 162,527 9 (1,485) (1) Total$ 1,994,473 100$ 1,886,314 100$ 108,159 6
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)
Nine Months Ended September 30, Increase
2020 2019 (Decrease)
Amount % of Total Amount % of Total Amount %
American Income $ 182,091 52 $ 178,291 55 $ 3,800 2
Direct to Consumer 126,196 36 96,420 30 29,776 31
Liberty National 36,866 10 39,100 12 (2,234) (6)
Other 7,688 2 9,265 3 (1,577) (17)
Total $ 352,841 100 $ 323,076 100 $ 29,765 9
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)
Nine Months Ended September 30, Increase
2020 2019 (Decrease)
Amount % of Total Amount % of Total Amount %
American Income $ 157,178 57 $ 145,445 59 $ 11,733 8
Direct to Consumer 76,193 28 62,667 25 13,526 22
Liberty National 31,953 12 29,663 12 2,290 8
Other 7,817 3 8,818 4 (1,001) (11)
Total $ 273,141 100 $ 246,593 100 $ 26,548 11
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 47% of the Company's 2020 year-to-date total. Net sales increased 2% to$182 million during the first nine months of 2020 over the 2019 total for the same period of$178 million . The underwriting margin, as a percent of premium, was 32% for the nine months endedSeptember 30, 2020 , down from 34% in the year-ago period.
This division is anticipating an increase in net sales for 2020 as compared to 2019. However, due to higher mortality from the pandemic, the underwriting margin as a percent of premium, is likely to be slightly lower.
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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 September 30, Change
2020 2019 Amount %
American Income 8,437 7,269 1,168 16
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 nine months
ended September 30, 2020 , which was lower than the 18% result during the same
period in 2019 primarily due to approximately $22 million of incurred claims
related to COVID-19. Additionally, this division will likely will see a decrease
in underwriting margin as a percent of premium for the full year 2020 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 24% for the nine months ended September 30, 2020 , down from 26%
during the same period a year ago. The decrease is primarily attributable to
higher policy obligations during the nine months ended September 30, 2020 as a
result of COVID-19 compared with the same period a year ago. For 2020, we
anticipate higher levels of COVID-19 related claims in the remainder of the
year, which may cause the underwriting margin as a percent of premium to
decrease further.
While the division has seen some challenges in this current work-from-home
environment as a result of the pandemic, the current easing of local COVID-19
restrictions in certain areas has allowed agents to return to performing some
in-person sales presentations in addition to virtual methods. As a result, total
net life sales may be flat for the full year 2020 as compared to the prior year
.
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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, the agency will benefit from the abundant recruiting opportunities
currently available for new agents.
At September 30, Change
2020 2019 Amount %
Liberty National 2,531 2,289 242 11
The Liberty National Division average producing agent count increased 11% 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 $161 million of life premium income, or 8% of Globe Life's total
premium income in the nine months ended September 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 28% 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)
Nine Months Ended September 30, Increase
2020 2019 (Decrease)
% of % of
Amount Premium Amount Premium Amount %
Premium and policy charges $ 850,877 100 $ 802,132 100 $ 48,745 6
Policy obligations 546,444 64 511,403 63 35,041 7
Required interest on reserves (69,131) (8) (65,131) (8) (4,000) 6
Net policy obligations 477,313 56 446,272 55 31,041 7
Commissions, premium taxes, and
non-deferred acquisition expenses 70,304 8 70,719 9 (415) (1)
Amortization of acquisition costs 102,695 12 102,527 13 168 -
Total expense 650,312 76 619,518 77 30,794 5
Insurance underwriting margin $ 200,565 24 $ 182,614 23 $ 17,951 10
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Globe Life Inc.
Management's Discussion & Analysis
Globe Life markets 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)
Nine Months Ended September 30, Increase
2020 2019 (Decrease)
Amount % of Total Amount % of Total Amount %
United American $ 337,269 39 $ 308,271 39 $ 28,998 9
Family Heritage 235,195 28 218,469 27 16,726 8
Liberty National 142,230 17 142,887 18 (657) -
American Income 78,310 9 73,861 9 4,449 6
Direct to Consumer 57,873 7 58,644 7 (771) (1)
Total $ 850,877 100 $ 802,132 100 $ 48,745 6
Of total health premium ($851 million ), premium from limited-benefit plans
comprise $437 million , or 51%, for 2020 compared with $414 million in the same
period in the prior year. Premium from Medicare Supplement products comprises
the remaining 49% or $414 million for 2020 compared with $388 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)
Nine Months Ended September 30, Increase
2020 2019 (Decrease)
Amount % of Total Amount % of Total Amount %
United American $ 39,335 33 $ 47,276 37 $ (7,941) (17)
Family Heritage 49,314 41 47,453 37 1,861 4
Liberty National 15,820 13 17,332 14 (1,512) (9)
American Income 14,580 12 13,108 10 1,472 11
Direct to Consumer 1,608 1 2,273 2 (665) (29)
Total $ 120,657 100 $ 127,442 100 $ (6,785) (5)
Of total net sales ($121 million ), sales of limited-benefit plans comprise $80
million , or 66% of the total for 2020, compared with $78 million in the same
period in the prior year. Medicare Supplement sales make up the remaining 34% or
$41 million for 2020, compared with $49 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)
Nine Months Ended September 30, Increase
2020 2019 (Decrease)
Amount % of Total Amount % of Total Amount %
United American $ 59,948 45 $ 51,142 43 $ 8,806 17
Family Heritage 40,425 31 37,123 31 3,302 9
Liberty National 15,399 12 14,692 13 707 5
American Income 13,859 10 12,467 11 1,392 11
Direct to Consumer 2,256 2 2,839 2 (583) (21)
Total $ 131,887 100 $ 118,263 100 $ 13,624 12
First-year collected premium related to limited-benefit plans comprises $70
million , or 53% of total first-year collected premium, for 2020 compared with
$65 million in the same period in the prior year. First-year collected premium
from Medicare Supplement policies makes up the remaining 47% or $62 million for
2020 compared with $54 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 nine months
ended September 30, 2020 , Medicare Supplement premium in this agency rose 10% to
$330 million in 2020 over the prior period total of $300 million . Medicare
Supplement net sales declined 17% to $39 million in 2020 from the prior year
period, primarily as a result of a decrease in individual sales. Underwriting
margin as a percent of premium was 14% for the nine months ended September 30,
2020 and 2019. This agency will likely see reduced sales during the remainder of
the year.
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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 26%
for the nine months ended September 30, 2020 , up from 25% in the year-ago
period.
The division saw a 4% increase in net health sales as compared with the
nine-month period a year ago. 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.
This is reinforced by the strong recovery in sales during the third quarter of
2020. For the full year, net health sales in 2020 are expected to be higher than
2019. Despite higher costs associated with those infected with the COVID-19
virus, we expect higher underwriting margins as a percent of premium for the
full year 2020 compared with 2019 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 September 30, Change
2020 2019 Amount %
Family Heritage Division 1,282 1,073 209 19
The Liberty National Division represented 17% of all Globe Life health premium
income for the nine-month period ended September 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. Health premium at Liberty National
Division was $142 million for the nine months ended September 30, 2020 , down
slightly from $143 million in the year ago period. As discussed in the Liberty
National Division life section above, this division has seen decreased net sales
across both life and health as a result of the COVID-19 response. For 2020, we
expect health net sales to be approximately the same as 2019.
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 $2 million of Medicare Supplement
net sales as of September 30, 2020 and $2 million during the same period 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
10-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 $8.1 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
54
GL Q3 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)
Nine Months Ended Increase
September 30, (Decrease)
2020 2019 Amount %
Net investment income $ 691,991 $ 683,003 $ 8,988 1
Interest on net insurance policy liabilities:
Interest on reserves (620,473) (594,865) (25,608) 4
Interest on deferred acquisition costs 176,977 170,672 6,305 4
Net required interest (443,496) (424,193) (19,303) 5
Financing costs (65,295) (63,804) (1,491) 2
Excess investment income $ 183,200 $ 195,006 $ (11,806) (6)
Excess investment income per diluted share
1.75 $ (0.05) (3)
Mean invested assets (at amortized cost) $ 17,855,428 $ 16,947,539 $ 907,889 5
Average net insurance policy liabilities(1) 10,395,811 10,024,627 371,184 4
Average debt and preferred securities (at
amortized cost) 1,841,942 1,659,108 182,834 11
(1)Net of deferred acquisition costs, excluding the associated unrealized gains and losses thereon.
Net investment income for the nine months endedSeptember 30, 2020 was$692 million or 1% greater than the year ago period. Mean invested assets increased 5% during the first nine months of 2020 over the same period last year. The effective annual yield rate earned on the fixed maturity portfolio was 5.35% in the first nine months of 2020, compared with 5.50% a year earlier. Growth in net investment income has been negatively impacted in recent periods primarily due to investing new money at rates less than the average portfolio yield rate and 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 and proceeds from dispositions 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 80 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 142 to 147 basis points before the net unrealized gains on our fixed maturity portfolio as ofSeptember 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 do not intend to sell, nor is it likely that management will be required to sell, the fixed maturities prior to their anticipated recovery. 55 GL Q3 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 10-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$19 million , or 5%, to$443 million , compared with the 4% 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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