Globe Life Inc (GL) 2022 Q1 法說會逐字稿

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

Thank you. Good morning, everyone. Joining the call today are Gary Coleman and Larry Hutchison, our Co-Chief Executive Officers; Frank Svoboda, our Chief Financial Officer; and Brian Mitchell, our General Counsel.

Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our earnings release, 2021 10-K and any subsequent Forms 10-Q on file with the SEC. Some of our comments may also contain non-GAAP measures. Please see our earnings release and website for discussion of these terms and reconciliations to GAAP measures. I will now turn the call over to Gary Coleman.

Thank you, Mike, and good morning, everyone. In the first quarter, net income was $164 million or $1.64 per share compared to $179 million or $1.70 per share a year ago. Net operating income for the quarter was $170 million or $1.70 per share, an increase of 11% per share from a year ago. On a GAAP reported basis, return on equity was 8.5% and book value per share is $69.16. Excluding unrealized gains and losses on fixed maturities, return on equity was 11.5%, and book value per share is $59.65, up 10% from a year ago. In our life insurance operations, premium revenue increased 7% from a year ago to $755 million. Life underwriting margin was $150 million, up 10% from a year ago. The increase in margin is due primarily to increased premium. For the year, we expect life premium revenue to grow around 6%. And at the midpoint of our guidance, we expect underwriting margin to grow around 23%, due primarily to an expected decline in COVID life claims.

In health insurance, premium grew 8% to $317 million, and health underwriting margin grew 10% to $79 million. The increase in underwriting margin was due primarily to increased premium and improved claims experience. For the year, we expect health premium revenue to grow 6% to 7%. And at the midpoint of our guidance, we expect underwriting margins to grow around 5%. Administrative expenses were $73 million for the quarter, up 10% from a year ago. As a percentage of premium, administrative expenses were 6.8% compared to 6.6% a year ago. For the full year, we expect administrative expenses to grow 10% to 11% and be around 6.9% of premium. That's due primarily to higher IT and information security costs, employee cost, a gradual increase in travel and facility costs and the addition of the Globe Life Benefits division.

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

Thank you, Gary. At American Income, life premiums were up 10% in the year ago quarter to $370 million, and life underwriting margin was up 13% to $111 million. The higher premium is primarily due to higher sales in recent quarters. In the first quarter of 2022, net life sales were $85 million, up 23%. The increase in net life sales is due to increased productivity, plus a gradual improvement in issue rates and some challenges in underwriting, such as staffing and speed of obtaining medical records and other information are resolving.

The average producing agent count for the first quarter was 9,385, down 5% from the year ago quarter and down 2% from the fourth quarter. The producing agent count at the end of the first quarter was 9,543. We are confident American Income will continue to grow. The agent count was trending up the last several weeks of the quarter. We also have seen improvement in personal recruiting, which generally yields better candidates and better retention than other recruiting sources. In addition, we've made changes to the bonus structure designed to improve agency middle management growth.

At Liberty National, life premiums were up 7% over the year ago quarter to $81 million and life underwriting margin was up 35% to $13 million. The increase in underwriting margin is primarily due to improved claims experience. Net life sales increased 7% to $17 million, and net health sales were $6 million, up 6% from the year ago quarter due to increased agent productivity. The average producing agent count for the first quarter was 2,656, down 3% for the year ago quarter and down 2% compared to the fourth quarter. The producing agent count of Liberty National ended the quarter at 2,687. We've introduced new training systems to help improve agent retention and updated our sales presentations to help agent productivity. We are pleased with the continued growth at Liberty National.

At Family Heritage, health premiums increased 7% from the year ago quarter to $90 million. The health underwriting margin increased 9% to $24 million. The increase in underwriting margin is due to increased premium and improved claims experience. Net health sales were up 19% to $19 million due to increased age-up productivity. The average producing agent count for the first quarter was 1,100, down 14% from the year ago quarter and down 8% in the fourth quarter. The producing agent count at the end of the quarter was 1,130. We have modified our agency compensation structure and are increasing our focus on agency middle management development to drive recruiting growth going forward. We are pleased with the record level of productivity at Family Heritage.

In our direct-to-consumer division of Globe Life, life premiums were up 3% over the year ago quarter to $251 million, and life underwriting margin increased 3% to $9 million. Net life sales were $34 million, down 15% from the year ago quarter. We expected this sales decline due to the 22% sales growth experienced for the first quarter of 2021. Although sales declined from the first quarter of 2021, we are still pleased with this quarter's sales results. At United American General Agency, health premiums increased 13% for the year ago quarter to $133 million, and health underwriting margin increased 6% to $20 million. Net health sales were $13 million, flat compared to the year ago quarter.

It's difficult to predict sales activity in this uncertain environment. I will now provide projections based on trends we are seeing and knowledge of our business. We expect the producing agent count for each agency at the end of 2022 to be in the following ranges: American Income, a decrease of 2% to an increase of 3%; Liberty National, flat to an increase of 14%; Family Heritage, an increase of 8% to 25%. Net life sales for the full year 2022 are expected to be as follows: American Income, an increase of 9% to 17%; Liberty National, an increase of 4% to 12%; direct-to-consumer, a decrease of 13% to a decrease of 3%. Net health sales for the full year of 2022 are expected to be as follows: Liberty National, an increase of 3% to 11%; Family Heritage, an increase of 4% to 12%; and United American Individual Medicare Supplement, a decrease of 5% to an increase of 3%.

I will now turn the call back to Gary.

Thanks, Larry. We will now turn to the investment operations. Excess investment income, which we define as net investment income less required interest on net policy liabilities and debt, was $61 million, up 1% from a year ago. On a per share basis, reflecting the impact of our share repurchase program, excess investment income was up 5%. For the full year, we expect excess investment income to decline between 1% and 2%, but be up around 2% on a per share basis. As to investment yield, in the first quarter, we invested $351 million in investment-grade fixed maturities, primarily in the municipal and financial sectors. We invested at an average yield of 3.97%, an average rating of A and an average life of 27 years. We also invested $118 million in limited partnerships that have debt-like characteristics. These investments are expected to produce additional yields and are in line with our conservative investment philosophy.

For the entire fixed maturity portfolio, the first quarter yield was 5.15%, down 9 basis points from the first quarter of 2021. As of March 31, the portfolio yield was also 5.15%. Regarding the investment portfolio, invested assets are $19.5 billion, including $18 billion of fixed maturities at amortized cost. Of the fixed maturities, $17.4 billion are investment grade with an average rating of A-. And below investment grade bonds were $583 million compared to $802 million a year ago. The percentage of below-investment-grade bonds to fixed maturities is 3.2%. And I would add that this is the lowest ratio has been for more than 20 years. Excluding net unrealized gains in the fixed maturity portfolio below-investment-grade bonds as a percentage of equity are 10%. Overall, the total portfolio is rated A-, same as a year ago. Bonds rated BBB are 54% of the fixed maturity portfolio. While this ratio is in line with the overall bond market, it is high relative to our peers. However, we have little or no exposure to higher-risk assets such as derivatives, equities, residential mortgages, CLOs and other asset-backed securities. Because we primarily invest long, a key criterion utilized in our investment process is that an issuer must have the ability to survive multiple cycles. We believe that the BBB securities that we acquire provide the best risk-adjusted, capital-adjusted returns due in large part to our ability to hold the securities to maturity regardless of fluctuations in interest rates or equity markets. I would also mention that we have no direct exposure to investments in Ukraine or Russia, and we do not expect any material impact to our investments in multinational companies that have exposure to those countries.

For the full year, at the midpoint of our guidance, we expect to invest approximately $1.1 billion in fixed maturities at an average yield of around 4.3%, and approximately $200 million and looked at partnership investments with debt-like characteristics at an average yield of around 7.7%. We are encouraged by the recent increase in interest rates and the prospect of higher interest rates in the future. Higher new money rates will have a positive impact on the operating income by driving up net investment income. We're not concerned about potential unrealized losses that are interest rate driven since we do not expect to realize them. We have the intent and more importantly, the ability to hold our investments to maturity. In addition, our life products have fixed benefits that are not interest-sensitive.

Now I will turn the call over to Frank for his comments on capital and liquidity.

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

During 2022, we anticipate the parent will generate $350 million to $370 million of excess cash flows. This amount of excess cash flows, which, again, is before the payment of dividends to shareholders, is lower than the $450 million received in 2021, primarily due to higher COVID-life losses and the nearly 15% growth in our exclusive agency sales in 2021, both of which results in lower statutory income in 2021, and thus, lower cash flows to the parent in 2022 than were received in 2021. Obviously, while an increase in sales creates a drag to the parent's cash flows in the short term, the higher sales will result in higher operating cash flows in the future. Including the excess cash flows and the $119 million of assets on hand at the beginning of the year, we currently expect to have around $470 million to $490 million of assets available to the parent during the year, out of which we anticipate distributing a little over $80 million to our shareholders in the form of dividend payments.

In the first quarter, the company repurchased 880,000 shares of Globe Life Inc. common stock at a total cost of $88.6 million and at an average share price of $100.70. Year-to-date, we have repurchased 1,097,000 shares for approximately $110 million at an average price of $100.76. We also made a $10 million capital contribution to our insurance subsidiaries during the first quarter. After these payments, we anticipate the parent will have $270 million to $290 million of assets available for the remainder of the year.

As noted on previous calls, we will use our cash as efficiently as possible. We still believe that share repurchases provide the best return or yield to our shareholders over other available alternatives. Thus, we anticipate share repurchases will continue to be a primary use of the parent's excess cash flows along with the payment of shareholder dividends. It should be noted that the cash received by the parent company from our insurance operations is after our subsidiaries have made substantial investments during the year to issue new insurance policies, expand and modernize our information technology and other operational capabilities and acquire new long-duration assets to fund the future cash needs.

As discussed on prior calls, we have historically targeted $50 million to $60 million of liquid assets to be held at the parent. We will continue to evaluate the potential impact of the pandemic on our capital needs and should there be excess liquidity, we anticipate the company will return such excess to the shareholders in 2022. In our earnings guidance, we anticipate between $400 million and $410 million will be returned to shareholders in 2022, including approximately $320 million to $330 million through share repurchases.

Now with regard to our capital levels at our insurance subsidiaries. Our goal is to maintain our capital levels necessary to support our current ratings. Globe Life targets a consolidated company action level RBC ratio in the range of 300% to 320%. For 2021, our consolidated RBC ratio was 315%. At this RBC ratio, our subsidiaries have approximately $85 million of capital over the amount required at the low end of our consolidated RBC target of 300%.

At this time, I'd like to provide a few comments relating to the impact of COVID-19 on first quarter results. In the first quarter, the company incurred approximately $46 million of COVID-life claims, equal to 6.1% of our life premium. The claims incurred in the quarter were approximately $17 million higher than anticipated due to higher levels of COVID deaths than expected, partially offset by a lower average cost per 10,000 U.S. deaths.

The Center for Disease Control and Prevention, or CDC, reported that approximately 155,000 U.S. deaths occurred due to COVID in the first quarter, the highest quarter of COVID deaths in the U.S. since the first quarter of 2021. This was substantially higher than the 85,000 deaths we anticipated based on projections from the IHME. At the time of our last call, we utilized IHME's projection of 65,000 first quarter U.S. deaths and added a provision for higher deaths in January as reported by the CDC, but that were not reflected in IHME's projection. IHME projection anticipate a significant drop-off in death starting in mid-February. Obviously, the decline in death did not occur as quickly as anticipated, especially during the latter half of the quarter.

With respect to our average cost per 10,000 U.S. deaths, based on data we currently have available, we estimate COVID losses on deaths in the first quarter were at a rate of $3 million per 10,000 U.S. deaths, which is at the low end of the range previously provided. This reflects an increase in the average age of COVID deaths and a decrease in the percentage of those deaths occurring in the South.

The first quarter of COVID life claims included approximately $25 million in claims incurred in our direct-to-consumer division or 10% of its first quarter premium income. Approximately $4 million at Liberty National or 5.5% of its premium for the quarter, and approximately $15 million at American Income or 4% of its first quarter premium. We continue to experience relatively low levels of COVID claims on policies sold since the start of the pandemic. Approximately 2/3 of COVID claim counts come from policies issued more than 10 years ago. For business issued since March of 2020, we paid 624 COVID life claims with a total amount paid of $9.3 million. The 624 policies with COVID claims comprised only 0.01% of the approximately 4 million policies issued by Globe Life during that time. These levels are not out of line with our expectations.

As noted in our past calls, in addition to COVID losses, we continue to experience higher life policy obligations from lower policy lapses and non-COVID causes of death. The increase from non-COVID causes of death are primarily medical related, including deaths due to lung ailments, heart and circulatory issues and neurological disorders. The losses we are seeing continue to be elevated over 2019 levels due at least in part, we believe, to the pandemic and the existence of either delayed or unavailable health care and potentially side effects of having contracted COVID previously.

In the first quarter, the life policy obligations relating to the non-COVID causes of death and favorable lapses were approximately $7 million higher than expected, primarily due to higher non-COVID death in our direct-to-consumer division than we anticipated. For the quarter, we incurred approximately $22 million in excess life policy obligations, of which approximately $15 million relates to non-COVID life claims. For the full year, we anticipate that our excess life policy obligations will now be approximately $64 million or 2.1% of our total life premium, 2/3 of which are related to higher non-COVID causes of death. This amount is approximately $11 million greater than we previously anticipated.

With respect to our earnings guidance for 2022, we are projecting net operating income per share will be in the range of $7.85 to $8.25 for the year ended December 31, 2022. The $8.05 midpoint is lower than the midpoint of our previous guidance of $8.25, primarily due to higher COVID life policy obligations related to higher expected U.S. deaths during the year. We continue to evaluate data available from multiple sources, including the IHME and CDC, to estimate total U.S. deaths due to COVID and to estimate the impact of those deaths on our in-force book.

At the midpoint of our guidance, we estimate we will incur approximately $71 million of COVID life claims, assuming approximately 245,000 COVID deaths in the U.S. This is an increase of $21 million over our prior estimate. This estimate assumes daily deaths will diminish somewhat from recent levels, but remain in an endemic state throughout the year. With respect to our cost per 10,000 deaths, we now estimate we will incur COVID life claims at the rate of $2.5 million to $3.5 million for 10,000 U.S. COVID deaths for the full year or approximately $2.8 million per 10,000 U.S. deaths over the final 3 quarters of the year.

Those are my comments. I will now turn the call back to Larry.

Thank you, Frank. Those are our comments. We will now open the call for questions.

(Operator Instructions)

We'll take our first question from Jimmy Bhullar with JPMorgan.

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

Jimmy, I'll address the first question first. I'm not sure of the second part. It's true that recruiting has been challenging because there are so many work opportunities. I'd also remind everyone that there's typically a decline in agent count sequentially from the fourth quarter to the first quarter because of seasonality of the holidays that affect American Income and Family Heritage. You also have open enrollments at Liberty National solution to the holidays. People are focused on open enrollments during that period. I do believe we continued to agency growth because our agencies selling the underserved middle-income market. Also, there's actually no shortage of underemployed workers looking for a better opportunity. Historically, we've been able to grow the agencies regardless of economic conditions.

For example, during an economic downturn and high unemployment of 2008 to 2010, American Income had very strong agency growth. In 2018 and 2019, the U.S. experienced record low unemployment, American Income, Liberty National, Family Heritage had strong growth. Our long-term ability to grow the agencies, Jimmy really depends on growing middle management, expanding new office openings and providing additional sales tools to our agents. During 2022, we anticipate opening new offices, increasing the number of middle managers in all 3 agencies. We're also providing additional sales technology to support our agents.

Jimmy, could you repeat the sales question? I don't think I heard the sales question.

It was just that like, obviously, to the extent that you are losing people who were recently hired then you don't lose a lot of production from them because they hadn't ramped up. But how do you think like -- does the decline in the agent count, both people leaving who are already agents and difficulty in hiring new agents, does that make you less optimistic about sales later this year and into next year?

Well, doesn't make me less optimistic. Though new agents were less productive than veteran agents, as you look across the 3 agents (sic) [agencies], the increases in sales are partially explained by the increase in productivity. As an example, the largest decline is the Family Heritage, and we had a 16% increase in the percentage of agency submitting business, also a 22% increase in the average premium written per agent. So with that level of productivity, that comes from the veteran agents and existing agents.

At American Income, in the first quarter, we saw personal recruits increased about 15% versus the first quarter of 2021. That's important because personal recruits are -- they stay twice as long and are twice as productive as the recruits from other sources. So I have confidence even though the agent increase will be slower this year, we'll still have the sales within the range that I gave during the script.

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

Yes, Jimmy, I mean, that is really consistent with what we're seeing right now as well and that we are seeing. Especially in the first quarter, we really did see elevated levels at -- especially in our direct-to-consumer, but saw it across the distributions and really across all the several different causes of death. But primarily, as I mentioned, in the heart and circulatory lung, some of the neurological disorder type areas. We really do attribute that to the various side effects of COVID and whether it just be not getting care when they needed it throughout 2021 or side effects of having had it and a decline in health for the survivors of COVID.

As we're looking at -- in 2022, looking back, we saw some early trends back in December that kind of led us to believe that we would start to see a decrease in those claims in 2022. And so we had originally anticipated those kind of trending back to more normal levels over the course of the year. In the first quarter, it really wasn't worse than what we have seen in the past. It was a little bit elevated, but not substantially. So -- but it was just greater than what we had anticipated. And we do think over time that these -- again, it kind of revert back to normal levels, but probably a little bit more slowly than what we had originally anticipated.

And then just lastly, on the accounting changes, do you have any sort of initial commentary on what you expect the impact to be, both in terms of the balance sheet and on the income statement?

Yes. No updates from what we had talked about in the last quarter. We do anticipate giving some more quantitative disclosure here after the end of the second quarter. We're still in the process of finalizing, if you will, our models, doing the testing, making sure our controls are in place, looking at the various aspects of validating our numbers, if you will.

So as I said on the last call, we do anticipate a favorable impact from an operating and earnings perspective, primarily through reduced -- the changes being made on the amortization side of the balance sheet, or of the income statement. And then with respect to the equity on the AOCI, there will be some decrease there clearly from just a change in the interest rate and the impact that, that entails.

And moving on we'll go to Andrew Kligerman with Crédit Suisse.

I thought I'd go back to the producing agent count numbers. So the new targets for American Income are negative 2% to positive 3%. That's versus 3% to 8% at your last quarterly guidance. Liberty National, 0% to 14% is versus 3% to 18% last time. And then Family Heritage, 8% to 25% versus 12% to 30% last time. So I guess the question is, was it the tight labor market that's primarily driving this change in guidance? Is there something else? What are some of the key drivers of this new guidance?

I think American Income is one of the key drivers. It's just the amount of agent growth we had in 2020 and 2021, which, you'll recall, we had a greater than 20% agency growth. Agency growth is always a stair-step process. So I wouldn't expect the same level of agency growth in 2022 than we had in 2020 through 2021. I think the uncertainty really is around the other 2 agencies has to do with COVID. If you'll recall, Liberty National really sells the majority of the sales and work site presentations, and those take place at the place of business and those appointments have been more difficult to set during the pandemic. If COVID continues to decline and the agent count growth of Liberty National will be at the upper end of the range because we were able to recruit to an at-business sale. If COVID doesn't decline, I expect our guidance to be at the lower end of the range.

Likewise, at Family Heritage, they don't sell life insurance with leads. They sell in the home -- physically in the home or at the business, and those are appointments were very difficult to set during the pandemic. So again, if COVID continues to decline and the agent count growth at Family Heritage will be at the upper end of the range, which we're better able to recruit to an at-home or at-business sale. If COVID doesn't decline, I'd expect Family Heritage to be at the lower end of the range.

What's encouraging, I think, is the sales levels we've had in the first quarter with a 19% sales growth at Family Heritage. That's really easy to recruit to, because the agents are having such success. Likewise, we saw work site sales increased 10% for the quarter -- first quarter of '22 versus '21, so that's easier to recruit to when there are more prospects in the work site market.

That makes a lot of sense, particularly Liberty and Family Heritage. But I guess, again, on American Income, you knew about the agency growth that was so strong in '20 and '21, and yet you gave the guidance of 3% to 8%. Now it's just -- it's off a bit sharply. Anything else, Larry, that might -- that changed your thinking in the course of 2 or 3 months?

Well, not in 2 or 3 months. So I'd remind you, at American Income, we had a large numbers of offices opened in 2018 and 2019, and that recruited -- that resulted in a higher agency growth with those new offices. During COVID, it was more difficult to open those new offices, and so we have lower new office led-leads in 2022 than we had in '21 and '22 -- excuse me, '21 and '22, versus '18 and '19.

And again, I would say that when you look at American Income with approximately 10,000 agents, a 3% increase is 300 agents. It's a large number of agents to bring in and train and enter your systems. So again, referring back to the stair-step process, we always have lower agent growth following the faster growth. If you go back to '17 and '18, you would see that at American Income and Family Heritage, we had almost 0 agent growth in those 2 years. And then in '19 and '20, we had the accelerated agent growth. So this follows a pattern that historically we've seen in all 3 agencies.

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

For the year for all 3 agencies, we expect to increase middle management from 5% to 8%. That's so important because middle management really drives most of the recruiting in all 3 agencies. So the lack of agent growth at Family Heritage, particularly middle management growth during 2022 as we see the agent growth accelerate, more people will take that opportunity and move into middle management. Again, we've got such rapid agent growth at American Income. I think the 5% to 8% growth is certainly a reasonable number to assume -- for a reasonable range to assume for 2022. And Family Heritage -- excuse me, the Liberty National, you see the work site sales increase, we'll see that same increase in middle management.

Got it. And I guess, lastly, you were just touching on how sort of those elevated sort of non-COVID, but COVID-related claims reverting back over time. And we've heard that from some of the big U.S. life reinsurers as well. Anything further there? Is it just -- once COVID subsides, all these kind of situations where people aren't getting medical checkups, et cetera, that will just kind of subside with COVID? Anything else that gives you confidence that will revert over time?

No. I think, Andrew, that, that's largely when you think about getting back to access to health care and generally, people feeling -- getting more comfortable with getting out of their homes and getting back into the doctor's office and getting the care that they need to take care of their conditions. I think as time goes on, obviously, we'll start to see -- get more experience in the numbers and be able to get a little better sense of that. I think at this point in time, it's where -- if you look at this elevated level and you kind of see the situation and it's more from the belief that over time that as we get past the COVID pandemic and just, again, use of health care gets back to normal levels, that's where we would anticipate that it would've -- that the non-COVID deaths would get back into kind of normal levels as well, at least until we start to see something in the numbers that would indicate otherwise.

Yes, that seems very encouraging for '23 -- 2023 and '24.

(Operator Instructions)

Next, we'll go to Erik Bass with Autonomous Research.

It looks like the lapses ticked up a little bit from where they've been running in the life business. So I was just wondering, are you starting to see persistency begin to normalize? And is that something you would expect to continue?

Erik, I think that's true of Liberty National. It appears that we're getting back more towards the pre-pandemic level of lapses. On the direct-to-consumer side, we're -- the lapse rates were a little bit higher. First year lapse rates was a little bit higher than it had been in late 2020 into 2021. But it along with the renewal lapse rates are still favorable compared to where we were pre-pandemic.

American Income, I think we've had a fluctuation there this quarter. The first-year lapse rate was a little over 10%, which is normally less than 9%. I think we're -- I think that will settle down as we go forward, and I think like direct-to-consumer, the rates there at American Income will be a little bit higher than what we experienced in '21, but still favorable versus the pre-pandemic levels.

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

Yes. About 1/3 -- I've mentioned in the opening comments that for the year, we have total excess policy obligations. We're estimating at around $64 million and about 1/3 of that is due to the higher lapses. Just over time, I mean we are bringing that down, if you will, over the course of 2022. And as Gary indicated, we still anticipate having favorable persistency versus pre-pandemic levels, but we are kind of grading that back over time. But by the end of the year, still anticipating some favorable persistency and then that favorable persistency does result in some higher policy obligations than normal. So over time, again, we're kind of just grading that down slowly though over the course of the year.

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

Yes, Erik. We had our -- the income from the limited partnerships that we have was about $2.5 million higher than expected, and I think that's a little bit of a timing thing. So the investment income was -- that investment income was weighted heavier towards the first quarter, than it will be later in the year.

Moving on, we'll go to Ryan Krueger with KBW.

On the $15 million of non-COVID excess mortality claims in the quarter, can you give that by division? I guess I'm curious if it was more concentrated in direct-to-consumer like the direct COVID claims were?

Yes, the total excess obligations, I think indicated were about $7 million higher for...

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

Yes. Okay. Yes. So about $10 million of that was from -- related to DTC and about $2 million each from -- I guess, about $11 million DTC and $2 million each from AIL and L&L.

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

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

Other than just being part of that, there just tends to be a broader swath of the U.S. population, if you will, and having just tend to -- I'm going to say, just be a little less healthy group of policyholders just because we do less underwriting, remember that you have simplified underwriting in direct-to-consumer that -- we don't really see anything else in the numbers, if you will, to specifically point to anything specific for DTC.

And then when I look at your -- if I take your life underwriting income in both 2021 and in the first quarter, and if I add back the direct and indirect COVID and mortality impacts that you cited. It looks like the margin would have been about 29% of premium if you add everything back, which is higher than it was running pre-pandemic, which I think was more in the 27% to 28% range. Is 29% more indicative of what you'd expect once the pandemic fully ends? Or are there some other offsets?

Ryan, I think one additional piece there is that we're seeing improved or longer amortization of deferred acquisition costs because of the improved persistency. And so that's a piece that gets you from the 20% -- what we would say, in normal 28% to the 29% that you came up with.

(Operator Instructions)

Next, we'll go to John Barnidge with Piper Sandler.

Can you then talk about how inflation changes the dynamics for distribution of products and your targeted demographic? Maybe asked a bit differently, how do you think your sales persistency holding up in a soft economic environment driven by inflation?

I'll first talk about the impact of inflation. It's really different in each distribution for the agency channels. We expect little impact on the level of sales due to inflation. And remember, we sell on a needs basis. Sales are favorably the impact of the customers need a larger face amount and should a client need to purchase additional coverage along with the premiums associated with the products for sales resulting a slightly increase in premiums. Our premiums are designed to comprise only a small percentage of the agent's budget. The direct-to-consumer inflation could be a negative for the mail and insert channels. Inflation increases, overall cost of insert mail media due to postal rate and paper cost increases. As such, we'll probably need to adjust mail volumes to maintain profit margins. However, we can expand the use of the internet and e-mail channels to offset those decreases.

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

That's very helpful. And then maybe on the investment portfolio as a follow-up. The rate environments could change a lot. Is this changed maybe interest in floating rate securities versus more versus fixed at all? Or maybe talk about how rates change your view on investments?

Well, John, as you know, we primarily invest long. And that's -- the reason we do that is because our liabilities are long. Yes, we have seen -- especially in treasury rates, we've seen in the quarter -- from the beginning of the quarter to the end of the quarter of the curve flattening. However, when you take into consideration spreads still the longer -- the 25-year bonds, and we're buying, providing our -- still providing a substantial yield enhancement over the shorter bond. So -- but we don't -- we're trying to look for the best opportunities that we don't rule out investing short. There are especially times that we want to improve diversification or quality or whatever we do go shorter. And in fact, we are going short to a certain extent. When you talk about the alternatives that we're investing in. And as I mentioned that we're going to invest approximately $200 million in 2022 in these limited partnerships that there are credit -- structured credit type of arrangements.

Yes, they're shorter, and it still gives us a good yield. But for the most part, when we're investing for assets to support our policy liabilities, we need to invest long and where we stand today, as I mentioned, 15% will go into the shorter investments. But that means 85% are still going to be in the longer investments.

And there are no further questions. I'd like to turn it back to Mr. Mike Majors for any additional or closing comments.

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

And that does conclude today's call. We'd like to thank everyone for their participation. You may now disconnect.