Q1 2026 Earnings Call Transcript

Hello, and welcome to Globe Life Inc. First Quarter Earnings Release Call. My name is Morgan, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Stephen Mota, Vice President of Investor Relations, to begin today's conference. Thank you.

Thank you. Good morning, everyone. Joining the call today are Frank Svoboda and Matt Darden, our Co-Chief Executive Officers; Tom Kalmbach, our Chief Financial Officer; Mike Majors, our Chief Strategy Officer; and Brian Mitchell, our General Counsel. Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only.

Accordingly, please refer to our earnings release and 2025 10-K on file with the SEC. Some of our comments may also contain non-GAAP measures. Please see our earnings release and website for discussion of these terms and reconciliations to GAAP measures. I will now turn the call over to Frank.

Thank you, Stephen, and good morning, everyone. In the first quarter, net income was $271 million or $3.39 per share compared to $255 million or $3.01 per share a year ago. Net operating income for the quarter was $274 million or $3.43 per share, an increase of 12% over the $3.07 per share from a year ago. We are very pleased with the results of our operations this quarter.

Despite the challenges faced by working class Americans in the current economic environment, Globe Life has now produced double-digit growth in net operating income per share in 7 of the last 8 quarters and the 1 quarter that didn't have double-digit growth was close at 8%. On a GAAP reported basis, return on equity through March 31 is 17.9%, and book value per share is $77.3. Excluding accumulated other comprehensive income, or AOCI, return on equity of 14%, and the book value per share as of March 31 is $98.56, up 12% from a year ago. Now in our insurance operations. Total premium revenue in the first quarter grew 6% over the year ago quarter.

For the full year, we expect total premium revenue to grow approximately 7%. Life premium revenue for the first quarter increased 3% from the year ago quarter to $853 million. Life underwriting margin was $349 million, also up 3% from a year ago. For the year, we expect life premium revenue to grow between 3% and 3.5%.

As a percent of premium, life underwriting margin was 41%, same as the year ago quarter. While we anticipate life underwriting margin to be between 42% and 45% for the full year 2026, we do expect it to be around 41% for both the second and fourth quarters and higher in the third quarter due to the anticipated remeasurement gain from assumption updates that will take place in the third quarter, as Tom will discuss in his comments. In health insurance, premium revenue grew 13% to $417 million, and health underwriting margin was up 12% to $95 million. For the year, we expect health premium revenue to grow in the range of 14% to 17%.

This is due to premium rate increases in our Medicare supplement business as well as strong sales activity in both our United American and Family Heritage divisions. As a percent of premium, health underwriting margin was approximately 23% in the first quarter, same as the year ago quarter. For the full year, we anticipate health underwriting margins to be between 23% and 27%. Administrative expenses were $94 million for the quarter, an increase of approximately 8% over the first quarter of 2025. As a percent of premium, administrative expenses were 7.4%.

For the year, we expect administrative expenses to be approximately 7.3% of premium. Over the long term, we anticipate that expanded implementation of AI applications across the company will help drive this ratio lower. We believe Globe Life is positively positioned to benefit from AI due to the high-volume nature of our business, including the number of applications received and policies issued calls received by our customer service representatives and number of claims reviewed in pay. Of course, these AI-driven improvements would not be limited to administrative expenses, we expect enterprise-wide benefits including significant benefits to our distribution and underwriting activity in particular.

I will now turn the call over to Matt for his comments on the first quarter marketing operations.

Thank you, Frank. We had strong first quarter sales results as the total Life net sales grew 6%, and the total health net sales grew 58%. I'm pleased to point out that we have seen growth in net life sales in each division for the last 2 quarters. Given the current economic environment, these results are indicative of the resiliency of our business model.

Now I'll discuss the trends at each distribution starting with our exclusive agencies. At American Income Life, life premiums were up 5% over the year ago quarter to $459 million and the life underwriting margin was up 7% to $209 million. Net life sales were $101 million, up 3% from a year ago due to improved agent productivity. The average producing agent count for the first quarter was 11,064 down 4% from a year ago due primarily to a decline in new agent retention.

Short-term declines in agent count are not necessarily a problem as we can see improved sales productivity among our veteran agents when they have more time to focus on sales. Now that being said, long-term growth is dependent on agent count growth. As we discussed in the last call, at the beginning of the second quarter, we have implemented compensation adjustments for our middle management team that is designed to emphasize new agent recruiting and retention of new agents. We expect these adjustments to have a positive impact on our overall agent count during the second half of this year.

Despite these short-term challenges, I am very pleased with the improvement in agent productivity we have seen over the last several quarters. Our investments in branding, lead generation and technology are paying off. And overall, I'm very optimistic regarding the long-term prospects for American Income. At Liberty National, the life premiums were up 4% over the year ago quarter to $100 million, and the life underwriting margin was up 11% to $35 million.

Net life sales were $25 million, up 13% from the year ago quarter due primarily to agent count growth. Net health sales were $7 million, down 3% from the year ago quarter as more emphasis has been placed on life business. The average producing agent count for the first quarter was 4,031, up 9% from a year ago. I'm excited about the strong life sales and agent count growth we are seeing and confident we will continue to see growth at this agency as we move forward.

In Family Heritage, the health premiums increased 10% over the year ago quarter to $123 million, and the health underwriting margin increased 11% to $44 million. Net health sales were up 22% to $33 million, and this is due to increases in agent count and productivity. The average producing agent count for the first quarter was 1,561, up 10% from a year ago. We continue to see strong agent count growth at Family Heritage.

This is resulting from the continued focus on our recruiting and growing agency middle management. Now in our direct-to-consumer division, the life premiums were down approximately 1% over the year ago quarter to $244 million, while the life underwriting margin increased 15% and to $74 million. Net life sales were $27 million, up 8% from the year ago quarter. Now as we've discussed before, the value of this division extends well beyond DTC sales and due to the support it provides to our agencies.

We've seen improved conversion of the direct-to-consumer leads shared with our agencies, which has also led to margin improvement. This allows us to invest more heavily in advertising and other lead generation activities, further increasing lead volume, which in turn leads to additional sales in both our direct-to-consumer and agency channels. We expect this division to increase leads generated for our 3 exclusive agencies during 2026 by approximately 5% to 10%. At the United American General Agency, here, the health premiums increased 22% over the year ago quarter to $194 million, and the health underwriting margin was $5 million, up approximately $4 million from the year ago quarter.

Net health sales were $62 million, and this is an increase of approximately $34 million over the year ago quarter. Sales were strong across the division in both the Medicare supplement and the [indiscernible] business due primarily to tailwinds from the continued movement of Medicare beneficiaries for Medicare Advantage to Medicare supplement and the further development of our group worksite business. As an additional note, I would remind everyone that we do not market Medicare Advantage plans. Now I'd like to discuss projections.

And based on these recent trends and our experience with the business, we expect the average producing agent count trends for the full year of 2026 to be as follows: at American Income, low single-digit growth; and then at both Liberty National and Family Heritage, low double-digit growth. Our life sales for 2026 we expect the following: at American Income, mid-single-digit growth; Liberty National, low double-digit growth; direct-to-consumer, low single-digit growth. For health sales for 2026, we expect to be as follows: Liberty National, mid-single-digit growth; Family Heritage, low double-digit growth, and United American high teens growth.

I'll now turn the call back to Frank.

Thanks, Matt. We'll now turn to the investment operations. Excess investment income, which we define as net investment income less required interest was $37 million, up approximately $1 million from the year ago quarter. Net investment income was $290 million, up 3%, while average invested assets grew 2%.

Required interest grew 3%, slightly lower than the 4% growth in average policy liabilities over the year ago quarter. Net investment income also increased 3% from the fourth quarter as we had higher returns from our limited partnerships. As a reminder, the income reported from these investments is based on income earned by the partnerships in the quarter and will vary from quarter-to-quarter. For the full year, we expect both net investment income and required interest to grow around 4%, resulting in excess investment income growth between 4% and 4.5%.

In the first quarter, we invested $419 million in fixed maturities, primarily in the industrial and financial sectors. These investments were at an average yield of 6.23% and an average rating of A and an average life of 42 years. We also invested approximately $147 million in commercial mortgage loans and other long-term investments with debt-like characteristics. These non-fixed maturity investments are expected to produce additional cash yield over our fixed maturity investments while still being in line with our overall conservative investment philosophy.

In the first quarter, the earned yield on our total long-term invested assets, which includes our fixed maturity, commercial mortgage loans and other long-term nonfixed matured investments, was 5.5%. For the full year, we expect the average yield earned on our long-term investments will be between 5.45% and 5.5%. For just the fixed maturity portfolio, we anticipate the earned yield for 2026 will be around 5.3%. While we do own some floating rate investments, they are well matched with floating rate liabilities on the balance sheet.

Now regarding the investment portfolio, invested assets are $22 billion including $19.1 billion of fixed maturities and amortized cost. Of the fixed maturities, $18.6 billion are investment grade with an average rating of A. Overall, the total fixed maturity portfolio is rated A-, same as a year ago. Of our total investment portfolio, only 1% is in senior direct lending and asset-based finance [indiscernible] and another approximately 1% is in traditional private placements.

Our fixed maturity investment portfolio has a net underlying loss position of $1.6 billion due to current market rates being higher than the book yield on our holdings. As we have historically noted, we are not concerned by the unrealized loss position and is mostly the interest rate driven and currently relates entirely to bonds with maturities that extend beyond 10 years. We have the intent and, more importantly, the ability to hold our investments to maturity. Bonds rated BBB comprised 41% of the fixed maturity portfolio compared to 45% from the year ago quarter.

This percentage is at its lowest level since 2003. As we have discussed on prior calls, the BBB securities we acquired generally provide the best risk-adjusted capital-adjusted returns due in part to our ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets. That said, our allocation of BBB-rated bonds has decreased over the past few years as we have found better risk-adjusted, capital-adjusted value in higher-rated bonds given the narrowing of corporate spreads. While the concentration of our BBB bonds might still be a little higher than some of our peers, remember that we have little or no exposure to other higher risk assets.

Low investment-grade bonds remained near historical lows at $511 million compared to $506 million a year ago. The percentage of below investment-grade bonds to total fixed maturity is just 2.7%, consistent with year-end 2025. The total exposure to both BBB and below investment-grade securities as a percent of our total equity, excluding AOCI, is at its lowest level in over 25 years and is among the lowest of our peers due to our low overall leverage. Due to the long duration of our fixed maturity liabilities, we predominantly invest in long-dated assets. As such, a critical and foundational part of our investment philosophy is to invest in entities that can survive through multiple economic cycles.

While there may be uncertainty as to where the U.S. economy is headed, we are well positioned to withstand a significant economic downturn due to holding historically low percentages of invested assets in BBB and below investment-grade bonds as a percentage of equity. In addition, we have very strong underwriting profits and the long-dated liabilities, so we will not be forced to sell bonds in order to pay clients. With respect to our anticipated investment acquisitions for the remainder of the year, at the midpoint of our guidance, we assume investment of approximately $800 million to $900 million of fixed maturities at an average yield of between 5.9% and 6.1%.

Including the expected investments in commercial mortgage loans and other long-term investments with deadline characteristics, we expect to invest approximately $1.1 billion to $1.2 billion across all asset classes at an average yield of 6.3% to 6.5%. Now I will turn the call over to Tom for his comments on capital and liquidity.

Thanks, Frank. First, let me spend a few minutes discussing our available liquidity, share repurchase program and capital position. The parent began the year with liquid assets of approximately $80 million and ended the quarter with liquid assets of approximately $85 million. We anticipate ending the year with liquid assets within our target range of $50 million to $60 million.

During the quarter, the company purchased approximately 1.4 million shares of Global Life Inc. common stock for a total cost of approximately $205 million at an average share price of $141.24. We accelerated a portion of our 2026 anticipated share repurchases given favorable market conditions in the first quarter. Including shareholder dividend payments of approximately $20 million, the company returned approximately $225 million to shareholders during the first quarter of 2026. In addition to liquid assets held by the parent, the parent will generate excess cash flows during 2026. The parent's excess cash flow, as we define it, primarily results from the dividends received by the parent from its subsidiaries less interest paid on debt and is available to return to shareholders and the return in the form of dividends or through share repurchases.

We continue to in the growth of our -- invest in our growth through making investments in new business, technology and insurance operations. It should be noted that the cash received by the parent company from our insurance operations is after our subsidiaries have made these substantial investments and acquire new long-duration assets to fund their future cash needs. We will continue to use our cash as efficiently as possible. We believe that share repurchases provide the best return yield to our shareholders over other available options.

Thus, we anticipate share repurchases will continue to be the primary use of the parent's excess cash flow after the payment of shareholder dividends. In our guidance, we anticipate distributing approximately $90 million to our shareholders in the form of dividend payments over the course of the year, which reflects the recently announced 22% increase in the annual dividend rate per share. In addition, we have increased the range for anticipated share repurchases to $560 million to $610 million for the full year. As a reminder, our excess cash flow estimates for 2026 do not anticipate any additional cash flows to the parent resulting from the establishment of our new Bermuda entity in 2025. As discussed in our last call, we anticipate filing for a simple jurisdiction in the second quarter and we'll provide an update on our next call.

With regards to the capital levels at our insurance subsidiaries, our goal is to maintain capital within our insurance operation at levels necessary to support our current ratings. Globe Life targets a consolidated company action level RBC ratio in the range of 300% to 320%. Although this target range is lower than many of our peers, it is appropriate given the stable premium revenue from a large number of in-force policies, the nature of our protection products with benefits that are not sensitive to interest rates or equity markets, our conservative investment portfolio and strong consistent underwriting margins, which result in consistent statutory earnings at our insurance companies.

As of year-end 2025, our consolidated RBC ratios of our U.S. subsidiaries was 316%, which provides approximately $95 million of excess capital above what is needed to meet our minimum target capital level of 300%. For 2026, we intend to maintain our consolidated RBC within the targeted range of 300% to 320%. Now with regards to policy obligations for the current quarter. For the first quarter, life policy obligations as a percent of premium declined from 36.3% in the year ago quarter to 35.4%, slightly favorable to management estimates and is consistent with the continued favorable trends in mortality.

Health policy obligations as a percent of premium were 56.3% compared to 55.6% from the year ago quarter. This was consistent with management estimates for the quarter, reflecting first quarter claims seasonality at United American. As a reminder, we intend to update our life and health assumptions annually in the third quarter. And thus, we have -- there have been no changes to our long-term assumptions this quarter.

Finally, with respect to our 2026 guidance. For the full year of 2026, we estimate net operating earnings per diluted share will be in the range of $15.40 to $15.90, represent 8% earnings growth per share at the midpoint of the range. The increase in our prior guidance is probably primarily due to the impact and timing of anticipated repurchases for the share, refined estimates of potential positive impacts of third quarter life assumption updates and increased estimates of full year investment income. The guidance range reflects the estimated before tax benefit from anticipated assumption updates of $70 million to $110 million expected in the third quarter.

This range is higher and narrower than last quarter's call due to continued refinement to estimates. Given the estimated benefit from assumption updates in the third quarter, we anticipate the third quarter life margin as a percent of premium will be in the range of 49% to 54%. We anticipate recent favorable mortality trends will continue through 2026 with full year normalized life underwriting margin as a percent of premium, which excludes the impact of the third quarter assumption update, of approximately 41% at the midpoint of our guidance. As previously mentioned, we expect health premium to grow in the range of 14% to 17% for the full year.

This health premium growth is benefiting not only from strong growth in Medicare Supplement sales in 2020 by -- and anticipated in 2026, but also from approximately $65 million of additional premium from approved rate increases on individual Medicare supplement policies that will be received in 2026, primarily in the last 3 quarters of the year. Our full year guidance, we anticipate United of Americans health margin as a percentage of premium to be in the range of 8% to 9%. However, we anticipate the average underwriting margin as a percent of premium to be approximately 10% over the last 3 quarters of the year as the impact of premium rate increases are realized.

Finally, I do want to point out that at the midpoint of our guidance, normalized EPS growth, which removes the impact of assumption updates in both '25 and '26 is approximately 11%. At the midpoint of our guidance, the projected 3-year compound annual growth rate of normalized EPS is 11.5%. Those are my comments. I'll turn the call back to Matt.

Thank you, Tom. Now those are our comments, and we will now open up the call for questions.

[Operator Instructions] Your first question comes from Jack Matten with BMO Capital Markets.

I said one on lapse rate trends, which takes higher. I think especially for first year lapses at American Income. I guess can you talk about what you're seeing in terms of consumer behavior? Is this more kind of macro-driven affordability issues or anything related to distribution? And any thoughts on your outlook for lapse rate trends from here?

Yes. Thanks for the question. Yes, we do expect lapse rates to remain elevated for '26 versus the pre-pandemic. And we've seen that over the past few years as well.

And I think the experience we expect is going to be more consistent with last year, given the economic stress that is on our policyholders from the current economic environment and overall price inflation. With regards to AIL, first quarter lapse rate, they definitely were high relative to recent experience. We consider this more of a fluctuation at this point, and we'll continue to monitor it. But no -- really just considered a fluctuation.

I think as we've indicated before, is that we do have impacts from macroeconomic environments. The resiliency of the business, though, is that I would say what we're seeing now is consistent with historical norms and other economic cycles. So we'll get a little bit of fluctuations based on what's going on in the economy. But overall, fairly resilient as that moderates between a fairly narrow band of our experience.

Yes. And Jack, the other thing I was just going to add is that I think when you kind of look at some of the trends at Liberty and even DTC a little bit, some of that is just mix of business. So we do know that the worksite as L&L has continued to grow that site, that worksite business as it's growing some of the lapse rates in the early issue years are always higher than the later issue years. And so is that -- as you continue to grow the sales there, then you -- those renewal lax rates just tend to drift up a little bit.

So we do think that we're seeing that a little bit. And then we talked a little bit just -- some of the lapse rates at DTC on the internet business are just historically higher than what they are. So as that becomes a greater proportion of our total sales, that probably moved that up a little bit. But it is interesting.

I think when you look at some of the economic forces, the renewal rates at DTC are continuing to be right in line with prepandemic experience. And so we're not seeing it consistently across the board on all the agencies. [ So that to us ] while the economy has some impact, surely, there's some other factors that are going on with the business that's being written today.

Got it. That's helpful. And maybe just follow up on some of the AI benefits that you referenced in your prepared remarks. I mean any way you could maybe unpack or quantify some of those benefits you expect over time, whether it's on the expense ratio or for productivity?

I guess to what extent are you kind of seeing those already? I think you talked about higher productivity at American Income along with agent count trends there. I just wonder if you could talk about how you're seeing that play out so far?

Sure. On the administrative side, what we anticipate is over time as those things get implemented, that we should be able to moderate our expense growth commensurate with our premium earnings growth. And so we would expect a little bit of margin expansion over time as those things get implemented as we're able to grow our revenue faster than our expenses. And so as we implement those right now, we've got a variety of different in addition to what we've deployed pilots going on.

So we're very optimistic on the future, as Frank had mentioned in his prepared remarks on where we're headed. On the sales side, we do anticipate that there will be a benefit. And it kind of shows up in a variety of different areas. We've talked about in the past, our investments in technology, and we have seen improvements in that.

So we know that to the extent that we can deploy technology that improves our agent experience and that can be in multiple facets from the fact to the extent that we can onboard and train agents quicker and more effectively and get them producing and more effective sooner. We know our agent productivity will go up, but we also know our agent retention will go up as well. And so anything that we can do there to deploy technology that helps on that agent recruiting and onboarding as well as just overall efficiency, we'll have longer-term gains. And we anticipate that to be a tailwind as we think about what our overall sales growth is going to be in the future.

So those are embedded for '26 in our projections, and I anticipate that '27 will be -- continue to benefit from those technologies as we get those rolled out.

Yes. I would just add from an admin expense perspective, we're really looking at the margin improvement, bringing that 7.3% of admin expenses as a percent of premium down closer to 7% a bit over the next few years. And so that's kind of really how we're talking about some of those improvements to be reflected in admin expenses.

Your next question comes from Wilma Burdis with Raymond James.

Could you provide some clarity on what's driving the higher buyback for '26? Just maybe a little bit more color there. Is it related to higher capital generation and other source? Maybe just get into a little bit more detail.

Yes, Wilma, we were able to finalize our 2025 statutory earnings. And as we looked at excess cash flows, it still within the range that I provided on the last call, $600 million to $700 million, but it was just a little bit higher and that allowed us to the opportunity to have some additional share repurchases.

Yes. And then Wilma, I'd just add as far as the kind of the timing was concerned, we really did take a look at the opportunities that kind of presented itself during the first quarter, and there was a period of time where the shares had dropped below $140 per share and really saw that as a good opportunity for us and the shareholders. And so we did take that opportunity to accelerate, do a little bit more in the first quarter than what we had anticipated originally in that quarter.

And then it seems like the life sales agent count and even premium growth are coming in a little bit lower than your prior expectations. Could you just give us a little bit more color on what's driving that, whether it's macro, just something in that kind of [indiscernible] process? Just a little bit of color would help.

Sure. I'd say we need to break it down between the components of our distribution. Liberty is growing both the agent count and the sales growth and consistent with earlier expectations, and we're really pleased with the trend that we're seeing there. From an American income perspective, I've mentioned this before, but our -- when we talk about our incentive compensation at the agent level, we're always trying to strike a balance between incentivizing and rewarding for recruiting and onboarding and training of new agents versus sales.

And so what we're seeing is that we're -- the compensation structure is driving a little bit more sales than the sales productivity. And so that's why we have some sales growth, but it's the agent cap growth is behind a little bit of where we had originally anticipated. We do, as I've mentioned in my prepared remarks, believe that some of the changes that we've made that will be -- that are implemented here at the beginning of the second quarter, those don't turn around things that immediately the day you put them in, takes a little bit of time for that to get into the agency operations and change behavior because when we talk about recruiting new agents, there's a time line and a pipeline associated with that.

So we anticipate over the second half of the year, we'll start getting that agent count growth we're looking for. And then if I talk about the life sales at our direct-to-consumer channel, what's going on there is just we looked at what happened in Q1, we're pleased with the continued sales growth that started the last half of last year. But we just looked at really our comparables of how strong the growth was in Q3 and then into Q4 for 2025. And so we just tempered, I'll say, slightly our sales projections there. Overall, we're still very pleased with the sales growth that we're getting at our direct-to-consumer channel.

And so the nice thing about having the 3 different agencies, particularly if you look at recruiting, is we go to market very similarly on agent recruiting between the 3 agencies. And so when I see growth at 2 of our agencies and strong growth, I know that it's really not a macroeconomic environment concern or issue. It's much more specific to the particular agency growth aspects that we have there. And so that's why I feel very confident about the overall environment provides a good environment for us to continue to grow our agent count across the agencies.

So a little bit of tweaks in our compensation system, we think, will play out well because the overall macroeconomic environment, we believe will still be strong for growth going forward.

Your next question comes from Wes Carmichael with Wells Fargo.

I had a question on United American. I think the guidance there. I think your guide for health sales was in the high teens, but you had, I think, 122% growth in the first quarter. Are you thinking that sales growth might be a little bit negative over strong growth last year? How are you thinking about the remaining quarters of 2026?

Yes. You may recall that on the last call, we guided to kind of flat sales, just considering the significant growth that we have in 2025. And really the dynamics that are going on there looked at our strong growth in sales during the first quarter of '26. And that, as a reminder, is a elevated premium levels because our price increases went in for new sales in the first quarter, even though a lot of the in-force premium increases come in primarily in the second quarter. And so we really want to see how the market played out. And so very pleased with that.

So we upped our guidance related to our overall year for 2026 sales. But we are cognizant that when you start looking at our fourth quarter, in particular, sales for the General Agency division, we nearly -- where we over -- we doubled our sales last year. And so really, the sales growth above that is just cognizant that we've got a real high level to continue to grow. And it will be interesting to see is the continued tailwinds that we're seeing right now of the Medicare Advantage market and the benefit that we're getting from Medicare supplement sales, how that plays out for the rest of the year.

So it's really not, in our view, a softening over the remainder of the year, just recognizing the high hurdle to overcome to continue to grow on top of that significant growth we had last year.

Yes. I would just say, Q2 and Q3 are probably still slight improvements over last year, but Q4, as Matt said, is what's just a little bit -- right now, we anticipate not quite at that same level.

All right. That's very helpful. And then my follow-up on Bermuda, I know in the prepared remarks, you mentioned that you're working to file reciprocal jurisdiction in the second quarter. But I just want to see, have there been any other developments around that initiative since the last earnings call, either with regulators or expectations around cash flow or near-term reinsurance sessions?

There are really no other developments. We're working through getting our financial statements. The audits complete on those. And so really no changes to kind of our thoughts around the business plan and our expected capital generation.

And I think on the next call, we should have a more significant update based on the activity plan for here in the second quarter.

Your next question comes from Andrew Kligerman with TD. Cowen.

My first question is around the assumption updates, just fantastic to see that come through. You talked about an estimate of 49% to 54% life margin third quarter versus the full year at 41%. So I'm wondering, is this the gift that's going to keep on giving? What should we be thinking about assumption update potentials in 2027, '28, '29?

Just it sounds like things have gone really well in terms of your assumptions. And I would like to know how you're thinking longer term about it.

I think, Andrew, first of all, we take a really disciplined approach as far as how we update assumptions and want to actually see the results emerge before we actually make some of those changes to our long-term assumptions. So I think this year is, we are seeing some continued mortality trends that multiple quarters of favorable mortality trends that are informing our assumption update this year. I think if we continue to see those current mortality at these current levels, I think there's always the opportunity or the potential for additional assumption updates as we move forward. So no real quantification of those at this point, but I think there is potential for those.

Well, I think the other thing that is important, past just the third quarter assumption updates and the benefits that we're getting there, which most likely will moderate over time. But that means that we're setting our new long-term assumption at a higher margin, right? So we should have earnings on the book of business overall at a little bit higher level on a go-forward basis because it's just indicative that we don't need as much reserves as we originally thought on that book of business. So that's how I kind of think about it as just the long-term stability and the growth of that underwriting margin, those are kind of indicators that we're resetting to a new higher level since they're positives in the last several -- in Q3 as we've looked at the last several years.

And I think you can really see that, Matt, and looking at normalized underwriting margins over the past few years by moving the impact of the assumption update, you can really see the trend in the overall improvement in underwriting margins.

That's right. The one thing -- Andrew, I was just going -- on your Q3 comments, and as Tom noted, the range on that is in that 49% to 54%. And so if we kind of take that assumption update of 70 to 110 that Tom had in his comments, so you have in that one quarter and 8% to 13% kind of bump, if you will, in that underwriting margin in that quarter, which off of the 41% kind of normalized margin that we're really expecting over the rest of -- in each of the quarters. Yes, I just -- if we continue to see the current mortality levels that we're seeing today as we continue to see that come in over time, that will work its way into those longer-term assumptions.

That was very helpful. And my follow-up is around the health underwriting margin, 23% in the first quarter. And then you guided to 23% to 27%, which is kind of wide. Agent's wise, could you kind of walk us through the next few quarters? Would it be more likely closer to 23% in the second and then we could see a significant bump in the last 2 quarters? How do you think about the cadence?

No. I think, Andrew, that actually in the remaining 3 quarters, as you would expect that full health margin to be north of 25%, at least we anticipate to be north of 25%. And in fact, you're probably a little bit lower out of those 3 in the fourth quarter just because that's, again, a little bit higher seasonality. So you have a little bit higher claims in that fourth quarter.

So that's probably more closer to that 25% range. But then over the -- so that kind of brings up where we were at around 23% up to, again, the midpoint of that range that we give is around 25%. And so I think you'll see -- we expect to see pretty good margins over the next 3 quarters.

Your next question comes from Pablo Singzon with JPMorgan.

First question is with insurance moving in larger volumes from [indiscernible], is there a greater risk of anti-selection from your end? I know most cases, you can underwrite, but I was just wondering if higher sales might have contributed to some of the margin compression you experienced in the health business?

Yes. I don't think it's a function of selection that's impacting the margins in the first quarter. I think it really is some seasonality of claims in the first quarter as well as the fact that the rate increases that we filed last year will largely come into effect in the second, third and fourth quarter. As I mentioned on our last call, the premium increases that we filed for was $80 million to $90 million on a 12-month run rate.

And we expect about $65 million to be received over the course of 2026 and then the remainder being received in 2027. And so we didn't receive very much of that in the first quarter. We'd expect to be on average about $20 million of additional premium in each of the next 3 quarters, which will help improve overall margins. But I don't think it's any selection at this point. So I don't think that's one of the drivers.

Well, yes, there was higher utilization across the entire industry for Medicare supplement over the last couple of years. What is unique to us...

And we have been seeing medical trends really stabilize and be relatively flat over the last couple of quarters. So that actually bodes well as well.

Got it. That makes sense. And then for my second question, so mortality has been a net contributor to your assumption updates in your quarterly [indiscernible] gains. I was wondering if you could speak about the lapse component of your [indiscernible] gains as well as the morbidity side for the health business.

Have those factors been generally positive or negative? But clearly, [indiscernible] has been good, but I was just curious about how those other assumptions have been playing out for you?

Yes. On the Life remeasurement gains, it's largely mortality claims, mortality claims that are driving the remeasurement gains. I think it's about kind of in our in our work, we look at kind of how much is mortality and how much is all there, and it's about 70% mortality and 30%, all other things from a remeasurement gain on a quarterly basis. And on the health side, it's -- I think a lot of that is being driven by kind of what the future rate increases are doing to result in remeasurement gains.

So that's -- it's more on the impacts to premium -- future premiums than it is on claims, although claims are positive as well overall, providing some health remeasurement gains.

Your next question comes from Randy Binner with Texas Capital.

It's a follow-up to Andrew Kligerman discussion with you on the -- I think you kind of answered more of the quantitative changes with the mortality assumptions. But I was wondering if you could share kind of more like qualitative assessment of like lifestyle behavior. It's just it's a significant shift. It's obviously very positive.

But is there something changing with the cohort of insureds that's kind of worth noting in this change in the numbers?

I don't think it's really a function of the cohort changing. I think it is just continued trends and we see continued favorable mortality and part of circulatory [indiscernible]. We see continued trends and favorable cancer death, nonlung cancer gets, which are really favorable. And then the other thing that's maybe happening on a macro basis is the non-medical deaths are actually really seem to be improving, and that would include suicide and homicide and the drug and alcohol abuse.

So I think that's probably one area where we're seeing a little bit more improvement from a [indiscernible] purpose that actually impacted the overall mortality.

Yes, I was going to note that on the nonmedical side because in the late teens and then especially in the early days of COVID, we had really seen a spike a lot of the opioid and just some of the other suicides and that type of a thing. And so we really did see a large increase there. It's probably been 7, 8 years ago now and had that for a few years, and that's been really good to see that temper here the last couple of years. And we've seen really -- even though the nonmedical accounts for only about 20% of our claims, we're seeing some really significant changes in that.

And I think that does have some impact, as Tom mentioned, they're a result of some of the societal impacts and that type of thing. And maybe some of the battles against the opioid crisis and that type of thing has maybe been a benefit there as well.

That's great color. And then one more, if I could, as a follow-up to the discussion on the American Income agent count. I guess I heard about the initiatives, and I think it was going to describe more of an issue of getting agents in the door. But is there is the retention of folks they are changing at all kind of after year one?

Are you kind of keeping the same percentage? Or has that changed as well?

The -- it's a little bit of both. It's a little bit of just recruiting activity, and it's more of the agent retention in the first 6 months. And we really focus on our agent retention in the early days because we are recruiting folks that are new to the industry, some are new to direct sales. And so we know that the extent of people getting onboarded, trained and producing and having a sustainable income really drives that long-term agent retention.

So we really focused on the early days. And so again, it's not our -- from a corporate perspective, we're doing all that activity. That is our middle managers out in the field that are spending time, recruiting agents, training them and the whole onboarding process and in addition to they're doing their own direct sales. And so that's what I'm describing when I say we're trying to make sure that our incentive compensation system appropriately rewards between those 2 activities because it is a balance.

There's only a certain number of hours in a day as they would say. And so when I talk about we're tweaking that a little bit, what I really like to see, as I've mentioned, is we've got 3 quarters in a row where we've got improvements in our agent productivity, just that agent count and a little bit higher turnover in that first year than what we've historically seen. So we know we need to move the pendulum. We want to pin on a swing back a little bit and move the incentive a little bit more on focusing on getting those agents trained and onboarded.

So that's kind of the overall dynamics of what's going on with American Income. But like I said, if you look at the growth and the retention at the other 2 agencies that tells us that it's really specific to this particular distribution versus a more macro view.

Randy, I was going to add one more thing to our discussion around some of the mortality trends that we're seeing and that just before we leave that. I think a question that we get fairly often to when we are talking to folks, do we think that the new drugs that are coming out and weight loss treatment and those type of things are, is that being -- having an impact -- and we really do think that's probably a little bit too early, especially for our insured population, just getting access to those drugs and affordability over time. I mean we're really optimistic that over time that, that -- that could have some really positive benefits to our mortality experience especially some of the side effects from diabetes and those type of things, if they're able to kind of delay death from some of those [indiscernible] health benefits and causes.

And then I kind of look at 2, and I don't think we have this empirically, but you look at the higher utilization that we've been seeing on the [indiscernible] subside and so you have a lot of more senior folks that are going to the doctor more often, they're getting with the doctors. I think people post-COVID -- there's been an increase in just taking care of themselves and getting some of that. I see that in just some of the utilization numbers. And so I tend to think that maybe that has a little bit of some impact on that as well.

Okay. And thanks for the clarification on American Income.

Your next question comes from Suneet Kamath with Jefferies.

I wanted to come back to this idea of the resiliency of your customer base. Clearly, showing up in the first quarter results, but if I just think about what's going on macro-wise with the war, a lot of those developments on things like gas prices sort of happened later in the quarter. So I guess the question is, are you seeing anything as we start traveling through 2Q that suggest that maybe there's incremental pressure? Is it too early to see the pressure from things like higher gas prices?

I think what we've seen historically during different economic cycles is, there might be a little bit of pressure, particularly in that first year. What happens, what we've seen through like early 2000s, great financial crisis, those type of cycles is -- we actually see a benefit a lot of times in growth in sales, growth in agent recruiting. And what we see with the in-force is it's very resilient because after that policy has been in the customers' budget, for a couple of years, it's very resilient. And the renewal persistency rates just do not move very much.

And I think that gets back to the affordability of our policies, the average premium, depending on the distribution for a rounding sake is $40 to $60 a month on average. And so that's just not a significant component of a consumer's wallet that they're spending on other things really, that's really not the first or the second place that we've seen that they look to scale back just because it's not significant dollars on a monthly basis as well as it's been in their budget for quite some time. And the consumer also knows that is kind of a security perspective is that periods of uncertainty or high inflation or things like that, my coverage for my family and the protection orientation of how we sell these products is not something that I really want to get rid of as well as I know if I cancel my policy, but I want it long term, I have to go back through underwriting, requalify and the policy may be more expensive because my age is older, my health may be in a different spot than I originally took it out.

So from our perspective, as we look at it over decades, we see slight movements, but we do not see significant movements from that resiliency perspective.

And I would just say what we're really hearing from the field in more recent times. And is that while there might be a little bit harder, you're not really seeing a major pushback from the consumers at this point in time. And maybe it's an extra call we get the sales. I mean the thing that helps having the exclusive distribution and contractors wanting to make their own money.

And so they're maybe they have to make an extra call or 2 during the week in order to get a sale, but they're continuing to work because they want to have their level of income. And then I would say Matt noted on prior calls as well, and we've been seeing this quarter too where that average premium just continues. We would think that if we're seeing to a lot of stress within the consumer that they would choose down, and they would say, maybe I can't afford $35 a month. I really want to have this.

Let me add something for $25 a month, but we're really not seeing that. We're still continuing to see the average premium monitor issues holding steady, if not decreasing just a little bit.

Okay. That's helpful. And then I wanted to circle back to AI real quick. It was helpful to get some of your thoughts on where the expense ratio could go. But are you seeing any additional threats emerge in terms of your target customer base or your distribution channels where new entrants are coming in, that may have a different distribution strategy to sort of attack your target market?

Yes. I think what's important there is a vast majority of our growth in sales are coming through exclusive agency channels. We don't see or experience a lot of competition in those channels at the at the time of sale. Our agents are out generating their own activity, referrals, working leads, those type of things.

And so it's not sold to consumers that are actively looking for a supplemental health policy today or basic protection life products today. The direct-to-consumer channel is more subject to competition because that is going after consumers that are actively looking and shopping and things like that. And so we do recognize there's a little bit more challenges as AI comes into play from entrance. And frankly, that's an easier market to get into from a new entrant perspective, the barrier to entry, the cost of entry is a lot less than agency sold business.

And so that's why I mentioned earlier, we think AI is going to be a benefit to our agency sold business. It's not subject to a lot of competition. It's harder for new entrants to get into that market. And the beauty about our marketplace is that a significant number of people in our targeted demographic is not -- income demographic is not saturated.

So when we sell more we are not having to take market share from somebody else. Over 50% of that population doesn't have life insurance and then it's even more significant when you talk about underinsured or they just get a little bit through work that doesn't travel with them because it's a group policy. And so we're very optimistic of where that goes, and we are focused on more direct competition in our direct-to-consumer channel. That's why you'll hear us over time, we think that's more of a low single-digit growth because there is going to be a certain subset of the population.

We believe that's smaller that is more active and looking than the majority of our agents sold business.

Our next question comes from Mark Hughes with Truist.

Just a quick one for me. You talked about the investment in lead generation. Can you talk about the trajectory you're spending there, whether they're are any new technologies or new approaches you're using? And does AI have any meaning for lead generation?

Yes. And so a lot of our lead generation is coming through our direct-to-consumer advertising. And so the benefit that we've had over the last year or 2 has been capitalizing on that investment spend and not just converting that advertising spend into sales of just the direct-to-consumer channel, but a lot of the leads and inquiries that we're getting, we're moving that to an agency channel that has a higher conversion rate. So we have significant growth in just the total volume of leads, which would be equating to the spend in that area last year.

And as I mentioned in my prepared remarks, we're probably going to be another 5% or 10% growth in the number of leads. The dynamic going on there is, over the last several years, until 2025, you heard me talk about we continue to scale back our advertising spend because the costs were going up and the lease conversion was going down. Well, now that our overall aggregate conversion ratio is going up when I look across both our direct-to-consumer and agency channel, that gives us more money to spend on generating more leads. So we're increasing our advertising spend to generate more leads.

And that will be something that continues to grow in itself. So to the extent that we have this better conversion, we have more leads being utilized by our agencies. I anticipate throughout '26 and then into '27, if that trend continues, to continue to spend more on advertising that benefits both sides of the equation, meaning both our direct-to-consumer and agency channels. So as far as the AI business in that -- no, I was going to say, I think you had a comment about AI is that on the consumer channel -- as you might imagine, the way consumers may be looking for life insurance or responding to ads, I believe that a lot of these AI platforms are going to convert into some sort of advertising revenue model.

And we will be there as part of that. And I think that's where our deep experience in advertising in these online channels will come into play. And frankly, the volume of dollars that we spend is very significant. With some of the big platforms we participate in their beta programs, and we're there with the seat at the table, so to speak, with these advertising platforms as they look to convert and monetize some of this AI technology.

And it's much like what we saw in some of the early days with Facebook and some of the others as they convert into advertising platforms.

Your next question comes from Ryan Krueger with KBW.

Just a quick one. On the life margin, and maybe this is -- there's some rounding here, but I think you said you expected 41% in the fourth quarter. I would have thought there would be some improvement given the lower net premium ratio after you factor in the remeasurement from the assumption review in the third quarter. So just curious how you're thinking about the benefit on a go-forward basis from the assumption for [indiscernible]?

Yes. Right. I think fourth quarter is one of those quarters that also has a little bit of seasonality in it. So that offsets some of the benefit that you get from a lower net premium ratio.

And then also, the net premium ratio changes are relatively small. I mean, there are small incremental changes that happen each time we make an assumption update. But I think for the fourth quarter, it's probably more of a seasonality thing.

Okay. Maybe just one follow-up on that issue is -- would you expect -- do you think 41% roughly is the right margin at this point, stripping out assumption review impacts? Or could there be some upside as we go out further?

I do. I think that's a pretty good normalized underwriting margin. We've seen mortality come down, so obligation ratios have come down. We've talked about amortization coming up a little bit, but it's really kind of aligning around that 41%.

And I think, Ryan, you got to think of it as around that. So if it's 40%, it could be if it 41.1%, 41.2% we're still thinking of that as being around 41%, same as 40.8% or something like that. So it's going to move by a few tenths of a point, but it's going to be pretty close to around that. So you do have some of the impact of the amortization that's coming into play as well.

I'd just add that, and that continues to grow just a little bit each quarter, just as the new renewal commissions at American Income come into amortization. So you'll see some benefits on the policy obligation percentage a little bit more than that. I think that gets offset a little bit by the higher amortization.

Your next question is a follow-up from Wilma Burdis with Raymond James.

Just wanted to confirm. I know you mentioned earlier that the cash flow generation was a little bit towards the higher end of the range. So if you could just give us a little bit more clarity on where the cash flow generation ended up? Just remind us of the range? And then if there was anything in particular that drove it towards the higher end?

Yes. Last quarter, excess cash flow, I said was going to be between $600 million and $700 million. I think as I look at it now, probably narrow that range to $650 million to $700 million. And so that excess cash flow, the midpoint of that is right around the $675 million side.

We got -- we have a better visibility, clearly, on the amount of dividend distributions coming out of the sub from that perspective. So you're down -- the downside clearly is much less, but -- and we're able to kind of get the sense of that as Tom said, in that upper part of the $600 million.

That concludes our Q&A session. I will now turn the conference back over to Stephen Mota, Vice President of Investor Relations for closing remarks.

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

That concludes today's call. Thank you for attending. You may now disconnect, and have a wonderful rest of your day.