Globe Life - Earnings Call - Q1 2025
May 1, 2025
Executive Summary
- Q1 2025 EPS was $3.01 (GAAP) and $3.07 net operating EPS, up 13% and 10% year over year, respectively; revenue grew 4.5% to $1.480B.
- Results missed Wall Street consensus: EPS $3.07 vs $3.24* and revenue $1.480B vs $1.487B*, driven by weaker United American health margins despite strong life margins and premium growth; management said net operating income was slightly above internal expectations.
- Guidance was reaffirmed at $13.45–$14.05 net operating EPS for FY25, but sub-guidance shifted: life underwriting margin raised (42–44%), health margin lowered (24–26%), life premium growth trimmed to ~4%.
- Health headwinds stem from elevated utilization (including high-cost in-office procedures and “specialty bandages” fraud) with rate increases largely effective April 1; United American margins are expected at 5–7% for 2025.
- Potential stock catalysts: anticipated Q3 remeasurement gain of $60–$100M in life assumptions, continued share repurchases ($177M in Q1), and commercial paper reduction toward $300–$325M; no material developments in DOJ/SEC inquiries were disclosed.
What Went Well and What Went Wrong
What Went Well
- Life underwriting margin rose 9% YoY to $337M and held at 41% of premium; premiums +3% YoY to $830M.
- Agency momentum: American Income life premiums +6% YoY; Liberty National life premiums +6% and average producing agents +8% YoY; Family Heritage health premiums +9% and agents +9% YoY.
- Management tone confident: “Net operating income…was…slightly higher than our internal projections” and reaffirmed FY25 EPS guidance with expectation of favorable mortality supporting a Q3 life assumption remeasurement gain.
What Went Wrong
- Health underwriting margin fell to 23% of premium (from 27% YoY) with United American margin down sharply (1% of premium vs 8% YoY) due to elevated utilization and specific high-cost procedure trends.
- Administrative expense ratio increased vs prior year (7.3% vs 7.0%) on higher IT, employee, and legal costs; tech spend will keep admin around ~7.4% of premium for 2025.
- Direct-to-Consumer net life sales declined 12% YoY as marketing spend was optimized; DTC is expected to inflect later in 2025 via underwriting automation, but near-term sales remained softer.
Transcript
Operator (participant)
Welcome to the Globe Life first quarter 2025 earnings release conference call. My name is Alan, and I'll be your coordinator for today's event. Please note this call is being recorded, and for the duration, your lines will be on listen only. However, you will have the opportunity to ask questions at the end. This can be done by pressing star one on your telephone keypad. If you require assistance at any time, please press star zero, and you'll be connected to an operator. I will now hand you over to your host, Stephen Mota, Senior Director of Investor Relations, to begin today's conference. Thank you.
Stephen Mota (Senior Director of Investor Relations)
Thank you. Good morning, everyone. Joining the call today, 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 2024 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.
Frank Svoboda (Co-CEO)
Thank you, Stephen, and good morning, everyone. In the first quarter, net income was $255 million, or $3.01 per share, compared to $254 million, or $2.67 per share, a year ago. Net operating income for the quarter was $259 million, or $3.07 per share, an increase of 10% from a year ago and slightly higher than our internal projections. On a GAAP reported basis, return on equity through March 31 is 19%, and book value per share is $64.50. Excluding accumulated other comprehensive income, or AOCI, return on equity is 14.1%, and book value per share as of March 31 is $87.92, up 11% from a year ago. In our life insurance operations, premium revenue for the first quarter increased 3% from the year-ago quarter to $830 million. Life underwriting margin was $337 million, up 9% from a year ago, driven by premium growth and lower overall policy obligations.
For the year, we expect life premium revenue to grow around 4%. As a percent of premium, we anticipate life underwriting margin to be between 42% and 44%. In health insurance, premium revenue grew 8% to $370 million, while health underwriting margin was down 10% to $85 million due primarily to higher claim costs in the United American resulting from higher utilization. For the year, we expect health premium revenue to grow in the range of 7.5%-8.5% and anticipate health underwriting margin as a percent of premium to be between 24% and 26%. Administrative expenses were $88 million for the quarter. The increase over the year-ago quarter is primarily due to higher information technology, employee, and legal costs. For the year, we expect administrative expenses to be approximately 7.4% of premium.
I will now turn the call over to Matt for his comments on the first quarter marketing operations.
Matt Darden (Co-CEO)
Thank you, Frank. At American Income Life, life premiums were up 6% over the year-ago quarter to $438 million, and the life underwriting margin was up 5% to $196 million. In the first quarter of 2025, net live sales were $99 million, up 1% from a year ago. As a reminder, we had a difficult comparable this quarter as American Income had a 17% increase in live sales in the year-ago quarter. The average producing agent count for the first quarter was 11,510, up 3% from a year ago. The average agent count declined from the fourth quarter, but I would attribute this to the tremendous agency growth produced over the last couple of years. From the fourth quarter of 2022 to the fourth quarter of 2024, average agent count grew 29%. It is typical for our agencies to see some contraction after periods of significant recruiting success.
We are pleased to see productivity has increased as more agents are submitting weekly, and I'm confident we will see continued growth in this agency going forward. Now, at Liberty National, here the life premiums grew 6% over the year-ago quarter to $96 million, and life underwriting margin was up 3% to $32 million. Net life sales increased 4% to $22 million, while net health sales were $7 million, down 5% from the year-ago quarter. The average producing agent count for the first quarter was 3,688, and this is up 8% from a year ago. I continue to be excited by the agent count growth at Liberty National, which is primarily driven by recruiting activity and growth in agency middle management, and is a good leading indicator for continued sales growth at this division.
At Family Heritage, health premiums increased 9% over the year-ago quarter to $112 million, and health underwriting margin increased 10% to $39 million. Net health sales were up 7% to $27 million, and this is due primarily to an increase in agent count. The average producing agent count for the first quarter was 1,417, up 9% from a year ago. This is three consecutive quarters of strong agent count growth for this division and is driven by this agency's focus on recruiting and middle management development. In our direct-to-consumer division, the life premiums were down 1% over the year-ago quarter to $246 million, while life underwriting margin increased 10% to $64 million. Net live sales were $25 million, down 12% from the year-ago quarter.
As we have previously mentioned, the continued decline in sales is primarily due to lower customer inquiries as we have reduced marketing spend on certain campaigns that did not meet our profit objectives as a result of higher distribution cost. Our focus in this area is having a positive impact on our overall margin as we will continue to focus on maximizing the underwriting margin dollars on new sales by managing the rising advertising and distribution costs associated with acquiring new business. The value of our direct-to-consumer business is not only those sales directly attributable to this channel, but the significant support that is provided to our agency business through brand impressions and sales leads. As we mentioned last year, we expect this division to generate over 750,000 leads during 2025, which will be provided to our exclusive agencies. Now, on to United American General Agency.
Here the health premiums increased 13% over the year-ago quarter to $160 million, driven by strong prior-year sales growth. Health underwriting margin was $2 million, down approximately $10 million from the year-ago quarter due to higher claim costs resulting primarily from higher utilization. For the year, we anticipate mid-single-digit growth in underwriting margin due to strong sales and premium rate actions. As a reminder, the majority of the premium rate increases for 2025 on individual Medicare Supplement business will take effect starting in the second quarter. Net health sales were $28 million, and this is up $11 million from the year-ago quarter. Now, I'd like to discuss projections.
Based on recent trends we are seeing in our experience with our business, we expect the average producing agent count trends for the full year 2025 to be as follows: at American Income, mid-single-digit growth; at Liberty National, high single-digit growth; and at Family Heritage, low double-digit growth. We are reaffirming the life and health sales guidance we gave on the last earnings call. As a reminder, net life sales for 2025 are expected to be as follows: American Income, high single-digit growth; Liberty National, low double-digit growth; direct-to-consumer, low to mid-single-digit growth. For health sales, we expect Liberty National, Family Heritage, and United American General Agency to all have low double-digit growth.
Now, before I turn the call back over to Frank for investment operations, I want to note that with respect to the inquiries made by the SEC and the DOJ discussed on previous calls, there have been no material developments to disclose at this time. To the extent there is further information to share on any of these items, we will update you accordingly. I'll now turn the call back to Frank.
Frank Svoboda (Co-CEO)
Thanks, Matt. Now, turning to the investment operations. Excess investment income, which we define as net investment income less only required interest, was $36 million, down approximately $8 million from the year-ago quarter. Net investment income was $281 million, down 1% from the year-ago quarter as compared to a 1.3% growth in invested assets. Required interest is up a little more than 2% over the year-ago quarter, consistent with growth in average policy liabilities. The growth in average invested assets and average policy liabilities are lower than normal due to the impact of the annuity reinsurance transaction in the fourth quarter, which involved approximately $460 million of annuity reserves being transferred to a third party along with supporting assets. Net investment income was also negatively impacted by lower short-term interest rates.
For the full year 2025, we expect net investment income to be fairly flat and required interest to grow around 2.5%, resulting in excess investment income to be down 7%-15% for the year. With regard to investment yield, in the first quarter, we invested $245 million in investment-grade fixed maturities, primarily in the industrial and financial sectors. These investments were at an average yield of 6.4%, at an average rating of A-minus, and an average life of 43 years. We also invested approximately $51 million in commercial mortgage loans and limited partnerships with debt-like characteristics, and an average expected cash return of approximately 8.5%. None of our direct investments in commercial mortgage loans involved office properties. These non-fixed maturity investments are expected to produce additional cash yield over our fixed maturity investments while still being in line with our conservative investment philosophy.
For the entire fixed maturity portfolio, the first quarter yield was 5.25%, up one basis point from the first quarter of 2024. As of March 31, the portfolio yield was 5.26%. Including the investment income from our commercial mortgage loans and limited partnerships, the first quarter earned yield was 5.4%. Now, regarding the investment portfolio. Invested assets are $21.4 billion, including $19 billion of fixed maturities at amortized cost. Of the fixed maturities, $18.5 billion are investment-grade with an average rating of A-minus. Overall, the total fixed maturity portfolio is rated A-minus, same as a year ago. Our fixed maturity investment portfolio has a net unrealized loss position of approximately $1.5 billion due to the 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 as it is mostly 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 comprise 45% of the fixed maturity portfolio, compared to 47% from the year-ago quarter. This percentage is at its lowest level since 2007. As we have discussed on prior calls, we believe 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 rate or equity markets.
While the percentage of our invested assets comprised of BBB bonds might be a little higher than some of our peers, remember that we have little or no exposure to other higher-risk assets such as derivatives, equities, residential mortgages, CLOs, and other asset-backed securities. Below investment-grade bonds remain at historical lows at $506 million, compared to $542 million a year ago. The percentage of below investment-grade bonds to total fixed maturities is just 2.7%. Our below investment-grade bonds, as a percent of equity, excluding AOCI, are at their lowest level in over 30 years. While there are clearly uncertainties as to where the U.S. economy is headed in the upcoming months, we are well-positioned to withstand a significant economic downturn. Due to the long duration of our fixed policy liabilities, we 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. In addition, we have very strong underwriting profits and long-dated liabilities, so we will not be forced to sell any of our bonds in order to pay claims. With respect to our anticipated investment acquisitions for the year, at the midpoint of our full-year guidance, we assume investment of approximately $600 million-$700 million in fixed maturities at an average yield of 6%-6.2%, and approximately $300 million-$500 million in commercial mortgage loans and limited partnership investments with debt-like characteristics at an average expected cash return of 7%-9%. Now, I will turn the call over to Tom for his comments on capital and liquidity.
Tom Kalmbach (CFO)
I spent a few minutes discussing our available liquidity, share repurchase program, and capital position. The parent began the year and ended the quarter with liquid assets of approximately $90 million. We anticipate concluding the year with liquid assets at the higher end of our targeted range of $50 million-$60 million. During the first quarter, the company repurchased approximately 1.5 million shares of Globe Life common stock for a total cost of approximately $177 million at an average share price of $121.70. Thus, including shareholder dividend payments of $20 million for the quarter, the company returned approximately $197 million to shareholders during the first quarter of 2025.
The parent's liquid asset at the end of the quarter, along with the excess cash flows expected to be generated over the last three quarters of the year, will provide the parent with $675 million-$725 million to meet the needs of the parent, or that can be returned to shareholders in the form of dividends or share repurchases. In April, we used approximately $47 million to repurchase Globe Life Common Stock, and for the remainder of 2025, we anticipate using approximately $65 million for shareholder dividends. The total amount of excess cash flows in 2025 is higher than in 2024, primarily because of higher statutory earnings in 2024 than in 2023, and due to the inclusion of an extraordinary dividend of approximately $190 million approved late in 2024.
The parent company's excess cash flow, as we define it, primarily results from the dividends received by the parent from its subsidiaries, less the interest paid on debt, and is available to return to its shareholders in the form of dividends and through share repurchases. We will continue to 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 the primary use of the parent's excess cash flows after the payment of shareholder dividends. However, we also intend to reduce outstanding commercial paper balances over the course of the year to be more in line with historical levels.
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, implement new technologies, and enhance operational capabilities and modernize existing information technology, as well as to acquire new long-duration assets to fund their future cash needs. The remaining amount is sufficient to support our targeted capital levels at our insurance operations and maintain the share repurchase program in 2025. In our earnings guidance, we anticipate between $600 million and $650 million of share repurchases will occur over the full year. Our goal is to maintain capital at levels necessary to support our current ratings. Globe Life targets a consolidated company action level RBC ratio in the range of 300%-320%.
As of year-end 2024, our consolidated RBC ratio was 316%, which provides approximately $100 million of capital in excess of that needed to meet our minimum target capital of 300%. As we do every quarter, we have performed stress tests in our investment portfolio under multiple economic scenarios, anticipating various levels of downgrades and defaults. If the estimated losses under our stress tests were to occur before year-end, we have concluded that we have sufficient capital to maintain our target RBC ratios, given the current excess capital at our subsidiaries and capital resources of the parent, while maintaining our share repurchases as planned. For 2025, we intend to maintain our consolidated RBC within the targeted range of 300%-320%. In addition, as mentioned on previous calls, we continue to evaluate the opportunity to manage capital under an economic framework available in Bermuda.
We expect to conclude this work in 2025 and intend to provide an update on the strategic decisions made on the next call. Now, with regards to policy obligations for the current quarter, as we discussed on prior calls, we have included within the supplemental financial information available on our website an exhibit that details the remeasurement gain or loss by distribution channel. For the quarter, life remeasurement gain was $8.5 million. This was favorable to management's estimates and resulted in lower life policy obligations than anticipated. The health remeasurement gain was about $400,000. In other life distribution, during the quarter, we completed the recapture of a reinsurance agreement that involved a small block of business associated with our military life business. This resulted in a one-time favorable impact to life margins of approximately $14 million.
There have been no changes to our long-term assumptions this quarter, as we will update life and health assumptions in the third quarter of 2025. Due to the continued favorable mortality we are experiencing, we anticipate a favorable margin impact in the third quarter for life assumption updates, as recent mortality and lapse experience are incorporated into these new assumptions. At this time, our guidance anticipates a remeasurement gain in the third quarter related to life assumption updates in the range of $60 million-$100 million, similar to third quarter's life remeasurement gain last year. As Frank mentioned, we anticipated life margins as a percent of premium to be in the range of 42%-44% for the full year.
However, for the first half of the year, we expect life margins as a percent of premium to be in the range of 40%-41% and 43%-46% in the second half of the year, given the anticipated favorable impact from third quarter life assumption updates. For the health segment, we anticipate health obligations will continue to be elevated, given recent claim trends outpacing premium rate increases on individual and group Medicare Supplement business. This appears to be largely impacted by an increase in a select set of procedures taking place in doctors' offices. In addition, although a portion of the premium rate increases for 2025 were effective late in the first quarter, the majority are effective in April, and we will reflect, in addition, we will reflect recent claim trends in our 2025 premium rate filings, which will be effective in 2026.
Finally, with respect to earnings guidance in 2025, for the full year 2025, we reaffirm our previous guidance and estimate net operating earnings per diluted share will be in the range of $13.45-$14.05, representing 11% growth at the midpoint of our range. Those are my comments. I will now turn the call back to Matt.
Matt Darden (Co-CEO)
Thanks, Tom. Those are our comments, and we will now open up the call for questions.
Operator (participant)
Thank you. If you'd like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. To withdraw your question, please press star two. You will be advised when to ask your question. We will take our first question from Jack Matten, BMO Capital Markets. Your line is open. Please go ahead.
Jack Matten (VP of Equity Research)
Hi, good morning. Just a question on the outlook for health margins. How much of a lag is usually between kind of the rate actions you've taken and when you usually would see the benefit flow into your results? I think you mentioned some of the rate increases took effect on April 1, so should we see a significant step up in margins starting in the second quarter, or is there a bit of a timing impact that we should be thinking about?
Tom Kalmbach (CFO)
Yeah, no, almost all the rate increases will be effective or in place in the beginning of the second quarter, so we'll see the full benefit of those rate increases. We'd expect margins for United American to be in the 5%-7% range, so about 6% overall for the year.
Jack Matten (VP of Equity Research)
Got it. Okay. I mean, in the health business, you recorded a small remeasurement gain, even though, I guess, reported margins for the segment were a little bit weaker on a year-over-year basis. I'm just curious what was driving that outcome in the quarter.
Tom Kalmbach (CFO)
There's just, in the current GAAP accounting framework under LDTI, there is just a little bit of volatility that's related to the way that operates for Medicare Supplement business, where rate increases are an aggregate rate increase for the entire block. There are some cohorts of business where that rate increase is not enough, and there are some cohorts of business where that rate increase is more than sufficient. It creates a little bit of volatility on a quarter-to-quarter basis.
Frank Svoboda (Co-CEO)
Yeah, I would just add that if you look at United American, they had a slight negative remeasurement gain, whereas with respect to Liberty, American Income, and Family Heritage, they all had small remeasurement gains, and the net of those was about the $400 million or $1,000 that Tom had mentioned.
Jack Matten (VP of Equity Research)
Thank you.
Operator (participant)
We will take our next question from Jimmy Bhullar, JPMorgan. Your line is open. Please go ahead.
Jimmy Bhullar (Equity Research Analyst)
Hi. I had a question first on your EPS guidance for the year. You grew sort of in line with your guidance this quarter, but the third quarter is obviously very tough comp. Just wondering what gives you the confidence that you can achieve maybe the middle end of the range, or should we assume, given the results this quarter, that you're much more comfortable with the lower end but decided not to change the range as a result of that?
Tom Kalmbach (CFO)
Jimmy, we're very comfortable with the range. I think one of the things we've been wanting to see is actually the continued trends of favorable mortality, which would lead to a life mortality assumption update. We've seen really good mortality results in the third quarter, in the fourth quarter, and now in the first quarter, which gives us a bit more confidence. As we reflect that experience in our assumption updates, we'll see some favorable remeasurement gains due to those updates.
Frank Svoboda (Co-CEO)
Yeah. I would just say, in addition to that, Jimmy, that, I mean, we are reflecting some of the negative utilization trends that we're seeing from the United American side. We are expecting that to be a little lower over the course of the year, and you kind of see the range of underwriting margin percentage coming down on that a little bit. That is being offset. The negatives of that are being offset with some of the positive views that we have with respect to the underwriting margins. Maybe I'll let Matt talk just a little bit about, I think, some of the views on sales and why there's some confidence there.
Matt Darden (Co-CEO)
Sure. Jimmy, just to your point, I was going to also mention that the third quarter, the remeasurement gain would be probably in the range of magnitude of what we had last year. That also kind of gives us some confidence, as Tom had mentioned, our positive mortality experience over the last three quarters that we're seeing. That is really why we're reaffirming our guidance back to the midpoint, not at the lower end of the range. On the sales side, we're seeing good positive trends there. We normally do not discuss kind of current, but we're a month through the second quarter here. What we're seeing is very strong recruiting and agent count growth, as well as sales are in line with our expectations.
We are reaffirming our sales guidance for the year based on what we saw in Q1 with our expectations and then what we are seeing here early through the month of April in Q2. Our average agent count just in the month of April is up 3% over where we were ending March, and it is also higher than where we ended at the end of last year. It is not uncommon for us to see a little bit of seasonality at the beginning of the year. That is what we saw, a little bit of weakness, frankly, in January. That ramped up toward the latter half of Q1, and that trend is continuing on here through the month of April.
Frank Svoboda (Co-CEO)
Yeah. Jimmy, one last thing I'll add on to that. I think with some of the better trends that we anticipate for sales for the remainder of the year, some of the, they call it the drag in life premium growth that we are around 3% here for the first quarter, a little lower than we would like to see. We see that really the effects of some of the new sales, and as we think we anticipate lapses at least stabilizing here over the course of the year. As we kind of get to the latter half of the year, still able to, I see seeing that premium growth pick up a little bit in the second half of the year, being more in that 4.5%-5% range and getting that life premium growth for the full year to be close to that 4%.
Jimmy Bhullar (Equity Research Analyst)
Okay. On your life business, if we look at the non-deferable commissions and policy acquisition expense for the life division, it's been running up over the past couple of years, and it was higher in month Q than it's been in the previous several quarters. Wondering how much of that is economic in terms of you having to spend more money to originate sales versus maybe the result of LDTI or accounting-related items.
Frank Svoboda (Co-CEO)
A lot of that, Jimmy, is really just due to some of the higher investments that we've been making in information technology. As those systems come on, the depreciation from those, as well as the software from the service and what we're paying for that and the data and analytics that's being allocated to the acquisition side, none of that's deferable. We're just seeing a little bit of that tick up just because of some of that higher, largely because of some of that higher technology spend.
Jimmy Bhullar (Equity Research Analyst)
Okay. Just the last one on your health margins. It seems like for the MedSup product, for you guys and many of the other companies, usage has gone up, so you guys have been raising prices, but it's sort of a constant catch-up where usage continues and claims continue to go up, and you're having to catch up to that. Do you feel that with the higher prices earning in in 2Q and beyond, the margins are going to be at normal levels, or is it more you're probably going to need to raise prices more as you get into 2026 season, given just claims usage and inflation?
Tom Kalmbach (CFO)
Jimmy, I think we need to see exactly what happens, but I think one of the things that gives me confidence is I think this is a very manageable issue when we see short-term increases in health trends, is that we can, in fact, manage that through rate increases. It may take us a year or two to effectively get those caught up, so it may be a little bit longer than a year. We have been very successful in the past getting those rate increases approved by regulators. I would expect improvement in 2026, and if we continue to see trend, then it might be a little we always have a little bit of a timing delay, so we may actually see a little bit of delay in actually getting back to kind of normal margins.
I think the other thing to think about is this is largely around Medicare Supplement business, right? For our other health lines, we're not seeing the same level of claim costs. Medicare Supplement, really from a total underwriting margin perspective, is really in that 3%-4% range of total underwriting margins. It is a fairly small set of just the core underwriting margins that we see from the business.
Jimmy Bhullar (Equity Research Analyst)
Okay. Thank you.
Operator (participant)
We will take our next question from Elyse Greenspan, Wells Fargo. Your line is open. Please go ahead.
Elyse Greenspan (Senior Equity Research Analyst)
Hi, thanks. Good morning. My first question, I guess, is on some of the capital stuff. You guys, the Q1 buyback rate was, I guess, a bit elevated relative to what the annual guide would imply on a quarterly basis. I know you guys also said, right, you're going to pay down some commercial paper. How do we think about, I guess, capital return over the back three quarters? Are you thinking it's just even relative to hitting the guide, or would you potentially, depending upon your stock price, look to front-run some of the buyback to earlier Q2, Q3, etc.?
Tom Kalmbach (CFO)
Generally, we think normally ratable throughout the year, but we will take advantage of kind of market opportunities. I could see us buying a little bit more in the first half of the year relative to the second half of the year.
Elyse Greenspan (Senior Equity Research Analyst)
Thanks. My follow-up on you guys were talking about, I guess, Bermuda, which you were also talking about a bit last quarter. Just any updates there relative to what's going on this quarter? I know you guys have been talking about that more being something that's beneficial in 2026 and into 2027.
Tom Kalmbach (CFO)
Yeah, we're still working through it. We'll plan to update you on the next call.
Elyse Greenspan (Senior Equity Research Analyst)
Okay. Thank you.
Operator (participant)
We will take our next question from Andrew Kligerman, KBW. His line is open. Please go ahead.
Andrew Kligerman (Managing Director)
Hey, good morning, everyone. Or actually, good afternoon. Going back to the health margins, you had been guiding to 2024-2020. You're guiding now to 2024-2026 versus 2025-2027. I'm thinking you kind of gave a timeframe where you start to see improvement in 2026, but you really don't get to where you need to be or would like to normally be until 2027, if I understand it correctly. Could you give us a sense of what historically have been normal margins and maybe work through the timeline when you're actually going to get the price increases? Is it going to be gradual? Maybe just walk through the timeline a little more granularly and where a normal historic ratio has been.
Frank Svoboda (Co-CEO)
Yeah. Andrew, I'll start on that and then let Tom or Matt add. You do look at kind of the post-LDTI, the margins on that business on the UAGA side have been a little bit on the, sounds like, that 10-11%. I think from an overall health, somewhere more in the upper 20s overall as a margin percentage of premium income. I think with respect to UAGA and the MedSup specifically, we would be looking into getting the cost and the higher utilization that we're seeing here in the last couple of quarters of 2024 and at least here early in 2025, and working those into our third quarter premium rate adjustments that we'd be filing that would be effective in 2026.
Depending upon where the utilization trends kind of take, how those emerge over the remainder of the year, will really kind of inform whether or not can we really capture all of the increase that we need in those third quarter rate filings or not, or is there some of that that'll be that we're chasing a little bit into 2027 as well. We do anticipate getting the full margins for the UAGA to be closer to that 5%-7% range, so second half of the year being a little bit north of that because at least the utilization that we're seeing here in the first quarter clearly outran the impacts of the premium increases that we had put into place.
We do think with the premium, the majority of our premium increases coming into play here in the second quarter, that will help over the course of the remainder of the year.
Andrew Kligerman (Managing Director)
That was very helpful. Maybe shifting over to the life insurance premium, you'd been guiding to that, and you mentioned it on this call. You've been guiding to 4.5%-5%, and now you're looking at 4% for the year. Could you give a little more color on lapsation, why you're maybe seeing a little higher, more elevated lapsation, and how to think about that going forward?
Tom Kalmbach (CFO)
Yeah. I think from a lapse perspective at American Income, we are seeing a little bit higher lapses in the first year. The question for us is whether that's fluctuations or a trend, and is virtual sales kind of just driving a more normal higher lapse level in the first year. I would say that renewal rates for American Income have been fairly consistent over the past four quarters, so those seem to have stabilized. I think DTC lapse rates are consistent with prior quarters and maybe slightly improved in the first year, which is a good sign. Renewal lapse rates are fairly consistent with historical levels as well. Those seem to be all going very well.
I think it's kind of a testament to the resiliency of our customers, even in times of economic stress, our lapse rates move just a little bit plus and minus depending upon what the economic environment is. For Liberty, first overall lapse rates have been relatively stable as well. I think we're feeling okay about lapses. We'll certainly keep an eye on it. I do think that sales that emerge over the course of the second half of the year will actually add to premium growth above first quarter sales growth. That's kind of where we're looking at that around 4% premium growth, life premium growth over the year. Yeah.
Frank Svoboda (Co-CEO)
Andrew, the one thing I'll add to that is that we did start seeing some of the lapses, but especially in the first year at AIL and maybe a little bit on DTC tick up toward the latter half of last year. Obviously, just kind of look at it period over period as those increases in lapse rates year over year take effect, that has that drag on premium growth on the same year-over-year period. As we kind of look out over the latter half of the year, we kind of see some of the stabilizing, even though they're maybe running a little bit higher than long-term averages just because of some of the economic uncertainty.
As we look back at other periods of some economic stress, where the rates that we're seeing, even especially at American Income on their first year, are not out of line at all. As we look at the comparables then in the latter half of the year, we see that as really being stabilizing. That will help with the period-over-period premium growth as well. Maybe just one other comment. Maybe just one other comment is we do not see dramatic changes in lapse rates, even in periods of economic stress. They are relatively narrow changes. Kind of as we've looked at this for AIL and DTC, where there has been more economic stress, the lapse rates in renewal years have moved less than 1% to a little bit over 1%, depending upon the policy duration.
I think really a testament of the resiliency of our enforced book of business.
Andrew Kligerman (Managing Director)
That was very helpful. One last quick one. I saw a line item for legal proceedings, $4.8 million. Maybe this is not an answerable question, but could that be an indication that maybe you're coming toward the tail end of the back and forth with the regulators? Is this an indication that we can see more of these type expenses? I don't know. I was just kind of throwing it out there to see if there's some kind of read-through on that number, which I hadn't seen before.
Tom Kalmbach (CFO)
Yeah. I don't know if there's anything to read through that. Andrew, I think from time to time, we're subject to litigation, and it's common in the industry, the insurance industry. The uptick in litigation claims and expenses over the past several quarters, they've really been stemming from claims made by recent short sellers. Some of that hopefully subsides. This quarter, the legal proceedings includes an estimate for settlements related to an outstanding litigation, not related to the DOJ, SEC matters, as well as certain other legal expenses as well. There are a number of items that can come through there, but they're usually not related to the normal operations of the business and not indicative of past performance or future prospects of the insurance operations. That's why we put them below the line.
Andrew Kligerman (Managing Director)
Thanks very much.
Operator (participant)
We will take our next question from Wilma Burdis, Raymond James. Your line is open. Please go ahead.
Wilma Burdis (Equity Research Analyst)
Hey, good. Does the higher life margin in the second half of 2025 imply a more favorable run rate in 2026 and beyond, or how should we think about that? Thanks.
Frank Svoboda (Co-CEO)
Yeah. I think after you end up making the assumption changes, I think from a policy obligations perspective, you would expect it to be a little bit higher run rate going forward. Keep in mind that we are continuing to still see over the next couple of years, at least probably into 2026, some of the increases in amortization expense just because of the transition to LDTI that we've talked about in the prior calls, as well as kind of the renewal commissions. There is probably a little bit of a tick up in the amortization that we're still going to see over the next couple of years. I think looking forward, it's probably somewhat of.
It's probably in the range. Yeah.
Tom Kalmbach (CFO)
Yeah. Probably similar range to what we've seen in the first half of 2025. We anticipate in the first half of 2025.
Frank Svoboda (Co-CEO)
Yeah.
Wilma Burdis (Equity Research Analyst)
Okay. Life sales were below full year 2025 guides in the first quarter, but you maintained the full year outlook. Could you just talk about some of the dynamics in the quarter and what you're seeing over the balance of the year? Thanks.
Matt Darden (Co-CEO)
Sure. Really, January was softer than we anticipated. As we've talked before, a little bit of recruiting and sales on the agency side is kind of a momentum game, as they would say. With the holidays, both Christmas and New Year's falling in the middle of two weeks running, it really started all of our agencies off to a little bit of a slow start in January that ticked up through the remainder of the quarter. As I mentioned in answer to an earlier question, we also looked at what was going on in April. April sales are consistent with our expectations, as well as our agent count growth in April as compared to March or as compared to the prior year-end is higher. It's about 3% higher just in the month of April, our agent count across all three agencies.
That trend that we were seeing in the last half of Q1 is continuing now here in the first part of Q2. I'll have the caveat of one quarter, I mean, one month does not a quarter make, but the trends continue to be positive. That gave us the confidence to reaffirm our sales guidance for the year for all of our various distributions because we're really not seeing anything significantly different than what our expectations were.
Wilma Burdis (Equity Research Analyst)
Okay. Thank you.
Operator (participant)
We will take our next question from John Barnidge, Piper Sandler. Your line is open. Please go ahead.
John Barnidge (Equity Research Executive)
Thank you for the opportunity. You talked about intention to have an opportunity to reduce commercial paper this year. Where do you intend to get it to? Thank you.
Tom Kalmbach (CFO)
Yeah. Our commercial paper balances historically have been in that $300 million range. We are kind of looking to bring it down from where we are today, right around $410 million, closer to that $325 million range.
Frank Svoboda (Co-CEO)
Yeah. John, if you kind of look back at a few years back, 2022, 2023, we were probably running around 3% of our total capitalization, including the short-term debt. It is about 3%. Last year, we ran that up a little bit more, and it is closer to 4%. Probably looking at bringing it back closer to that level, that 3% level.
Tom Kalmbach (CFO)
John, we're looking at a debt-to-capital ratio at the end of the year, right around 25%, which is kind of in the midpoint of our normal operating range for debt-to-capital ratios.
John Barnidge (Equity Research Executive)
Thank you for that. That's helpful. My follow-up question is the increase in health usage more frequency or severity driven? I was reading about some human bandage fraud article recently, so curious about that. Thanks.
Tom Kalmbach (CFO)
It's a great question, John. Utilization is the big driver, but one of the causes of utilization increase is related to claims related to bandages, these specialty bandages, which does have a higher claim cost to it. It is adding a little bit to the average claim cost as well. That is something that we are taking action on to mitigate the impact of any fraud that is apparent from those billings. We are taking actions there to help manage those costs.
Frank Svoboda (Co-CEO)
Yeah. I think one of the challenges on that, John, is that given some of those new procedures, and I think the article that was out there kind of talked about that, is that they tend to be higher cost until they really get worked through, and then they become kind of more of the standard Medicare reimbursement rates. That will tend to bring the rates down over time. At least that is at least one of the drivers. We are seeing a few other procedures that are being done in the doctor's office that are also giving rise, at least to some of our higher costs. Yeah.
Matt Darden (Co-CEO)
I was going to say I think that's some of the things that give us confidence that we can manage through this, like we've done for the decades that we've been writing this business, is that a lot of our trend is associated with a few specific procedures in the office. As we work through that, as Frank mentioned, the adjustments that most likely will happen on the allowables as these new procedures get into the CMS allowables, then going forward, coupled with continued rate action, I think we'll be able to manage through that. It just may take us one more cycle.
Frank Svoboda (Co-CEO)
Yeah. As Tom mentioned, this is actually one of the areas that we're really trying to spend some time and looking at how do we use some artificial intelligence, use our data to really try to identify areas of potentially fraudulent claims that are coming through, working with CMS to try to stem some of that, really taking a look at where we might have some of that. Not always can we get it done before we end up paying a claim because of the way we're connected with CMS, but we continue to make advances on where we can reduce some of that fraud cost on our side.
Matt Darden (Co-CEO)
All those trends are industry trends. They're not unique to United American.
John Barnidge (Equity Research Executive)
Thank you.
Operator (participant)
We will take our next question from Tom Gallagher, Evercore. Your line is open. Please go ahead.
Tom Gallagher (Senior Managing Director)
Good afternoon. My first question is just in your guidance for 2025 on health margins, are you assuming that this claims frequency issue stabilizes at current level, gets better, gets worse? What is the trend assumption you're using? It sounds like you got your arms around the rate increase earning, but what about on the claim side? What are you assuming?
Tom Kalmbach (CFO)
Yeah. We're assuming that stays elevated at least through the second quarter and then expected to moderate just a little bit in the second half of the year, which it tends to moderate generally as deductibles are used up, that the trend would tend to moderate a little bit in the second half of the year.
Tom Gallagher (Senior Managing Director)
When you say remains elevated, so at a comparable level to Q1?
Tom Kalmbach (CFO)
Yes. Yep.
Tom Gallagher (Senior Managing Director)
Gotcha. Then.
Tom Kalmbach (CFO)
Again, just to be clear, the level of Q1 from an obligation perspective doesn't reflect the premium rate increases that are coming into play for the remaining three quarters of the year.
Tom Gallagher (Senior Managing Director)
Understood. My follow-up is, how do we think about what all of this means for 2025 statutory earnings? Because the reserve release that you, the $60 million-$100 million, that GAAP only, or is there any statutory impact for that? Because I presume the stat earnings on the health side are going to be consistent with GAAP, meaning they'll be weaker. But life, I'm a little less clear on whether you will see some kind of benefit, or is that a GAAP only? Meaning, long-winded way of asking, is 2025 stat earnings likely to be weaker than 2024?
Tom Kalmbach (CFO)
That's a great question. The $60 million-$100 million is a GAAP assumption unlocking, so it's GAAP only. When we see favorable claims trends, 100% of that benefit comes through on the statutory side, where on the GAAP side, generally, there's a smoothing mechanism that spreads good claims or bad claims over the future. We should see favorable mortality will impact statutory results in a favorable way as well.
Frank Svoboda (Co-CEO)
Yeah. The one thing that.
Tom Gallagher (Senior Managing Director)
Got it. Sorry, go ahead.
Frank Svoboda (Co-CEO)
As we think about 2025 statutory earnings versus 2024 statutory earnings, I think I just wanted to make clear as well, I agree with Tom that the favorable experience that we're seeing will work its way through statutory income as well. Remember that we did have that reserve revaluation adjustment in 2024. As Tom has talked about on the last call, while we still anticipate some continuing benefits from that in 2025, we do not anticipate seeing them at the same level that we had them in 2024. There will be a little less statutory income generated from that reserve valuation adjustment, probably to the tune of roughly $75 million or so.
Tom Gallagher (Senior Managing Director)
Great. Thank you.
Operator (participant)
We will take our next question from Ryan Krueger, KBW. Your line is open. Please go ahead.
Ryan Krueger (Managing Director)
Hey, thanks. Good morning. I had a related follow-up. I think you gave the free cash flow for the rest of the year. I was trying to back into, I think, the first quarter, but figured I would just ask. Do you just have the full year free cash flow expectation for this year?
Tom Kalmbach (CFO)
Yes. Excess cash flow is expected to be $785 million-$835 million for the full year, unchanged from where I remember last time.
Ryan Krueger (Managing Director)
I guess just kind of coming back to what you were just talking about, so that for when thinking about the moving pieces next year, you won't have the reinsurance benefit, and then you'll have less of the valuation manual benefit. Are those the two key moving pieces we should think about?
Frank Svoboda (Co-CEO)
Yes. The reinsurance benefit we won't have, and then less of an impact on the valuation manual changes, but also a favorable impact to just growth of the business and the favorable mortality trends that we're seeing. Kind of in my estimation, run rates for excess cash flows would be in the $500 million-$600 million range kind of going forward. I am thinking more midpoint of that range.
Ryan Krueger (Managing Director)
Okay. Perfect. Thank you.
Frank Svoboda (Co-CEO)
Yep.
Matt Darden (Co-CEO)
We will take our next question from Wes Carmichael, Autonomous Research. Your line is open. Please go ahead.
Wes Carmichael (Senior Analyst of US Insurance)
Hey, thank you. Good afternoon. On the remeasurement gains and assuming $60 million-$100 million with the 3Q review, are those pretty much baked in your view, or could there be some deviation? I guess it's not that small of a range at $40 million. What might drive that higher or lower in the next couple of quarters? Really, is that the determinant of where you come in in your EPS guide, do you think?
Tom Kalmbach (CFO)
It's definitely included in our guidance range, right? That is part of what's incorporated in there. On the pluses and minuses, it really is a very detailed process to go through setting the assumptions. The assumptions are very—what am I going to say?—detailed with regards to issue years, issue ages, attained ages, genders. There are a lot of pluses and minuses that go across. Until we actually put those into our valuation systems, that will kind of determine exactly what that result will be. I think until we do that, that's why we have a bit of a wider range as far as where we think that estimate will be. It's really kind of the implementation of changes and the final determination and judgment around what changes are made.
Frank Svoboda (Co-CEO)
Yeah. The one thing I would just add to that is that, I mean, that's kind of what we've seen here through the first quarter, as Tom kind of mentioned before. We'd really like to see, again, how does mortality and losses really prove out in second quarter because that'll have some influence on it. It's not a final determination on it, but it's the ability to kind of test those final assumptions and where they kind of land. Because the reserves are as big as they are, minor changes to some of those assumptions can move that number around a little bit. While there's some pretty good confidence within that range, it definitely can move just a little bit of what we see here in the second quarter and how that kind of influences those final decisions.
Wes Carmichael (Senior Analyst of US Insurance)
Great. That's helpful. I guess just a quick follow-up, but the rate increases that you're going to have in health and med sub, do you expect some elevated losses as policyholders receive those rate increases?
Tom Kalmbach (CFO)
We definitely see a little bit of drop-off when we do rate increases, but in general, I think they value the coverage that they have, and they're fairly persistent.
Frank Svoboda (Co-CEO)
Yeah. I think that goes back to the comment that was made earlier is that what we're seeing really is not unusual as far as I don't think it's limited to just United American. It is an industry situation. We would anticipate that other carriers would be raising rates as well. That is where maybe the med sub or, excuse me, the Medicare Advantage dynamic comes into play a little bit, that there's still some issues out there we are seeing with acceptance with Medicare Advantage and where that coverage is going and dropping doctors in networks and things like that. Where that's been perhaps a little bit of a tailwind this past year, we'll have to see where that kind of it's a little bit of a wild card where that goes.
That is why we do not really anticipate that there would be a large-scale drop-off or lapse if, in fact, we were to as we put in our rate increases.
Matt Darden (Co-CEO)
I think the industry's seeing trend, and everybody's pricing for it accordingly.
Wes Carmichael (Senior Analyst of US Insurance)
Yeah. Great. Thank you.
Operator (participant)
We will take our next question from Suneet Kamath, Jefferies, your line is open. Please go ahead.
Suneet Kamath (Senior Research Analyst)
Great. Thanks. It sounds like some of the confidence you have in terms of maintaining the guidance for sales and such is April results. I am just wondering, just given how quickly things sort of changed in April, normally when you see these shocks, is there a little bit of a lag between kind of the environment changing and then when it impacts your customer behavior, or does it sort of catch up, or does it kind of show through pretty quickly there?
Matt Darden (Co-CEO)
Yeah. Let me start with it's not just April. It was the trend that we were seeing throughout Q1. As I'd mentioned, January was softer than we anticipated, but looked at how February and particularly March performed, and we were seeing that trend continue through April. It is really the results of multiple months. How we think about that is we look at the momentum in our agent count with recruiting and growing our overall agents that are producing and submitting business. That is really a precursor, a leading indicator to ultimate sales growth. We are also seeing as I've mentioned before, we track our agent onboarding recruiting pipeline before they ever start producing business.
People that are in the early stages of that pipeline before they get a license and start selling, we're seeing double-digit growth in what we call our hires or people that are starting in that process. That bodes well for future growth as well. On the consumer side, we generally do not—we've talked about this before—see significant impacts based on economic factors to our customers. I think that really gets back to our customers value our products. They have a need for that. More than 50% of our demographic does not have our coverage. The affordability of our policies where it is $30 or $50 or $60 a month still makes that affordable.
What we really see is that as long as our customers have jobs or are employed, they still find value in the products that we're offering, as well as the cost of what they're trying to cover from an experience perspective. As those costs go up, we see them taking out more coverage. What I continue to be encouraged about is if I look at the trends of just the premium on a per-policy basis, those trends are up in Q1 compared to last year. People are paying a little bit more to take out a little bit more coverage for their needs. We're really not seeing any weakness there. I'd say that's consistent. We go back to the 2008 through 2010 timeframe, 2020, 2021.
We had double-digit growth in our agent count, and we had double-digit growth in sales across those timeframes. I think that bodes well. One last comment I was going to make and kind of circle back to—I realized I did not completely answer Wilma's comment, which I think will also—or question, which I think will also get to part of your question as well—is that I failed to mention our direct-to-consumer channel. I'll say that as we anticipated on our annual sales guidance that that would kick in in the latter half of this year. Q1 results are not dissimilar from what our expectations were. That is why you see we reaffirmed our overall sales guidance for our direct-to-consumer channel.
A lot of that is based on some of the things that we've been working on for quite some time related to underwriting automation and some other tools and data that we're using in that organization. We've been testing that for quite some time and anticipate that coming more fully online in the latter half of the year. That will really help with our issue rates and really help us increase there. That is why our guide is low single digits overall for an annual basis for DTC is some of the good things that we're doing there. It relates to some of that technology spend we've been talking about for quite some time, seeing that come into fruition.
Suneet Kamath (Senior Research Analyst)
Okay. That makes sense. I'll just have one more. Thanks for going over a little bit. Just on the reviews, I mean, I know you said that there's nothing new to update us on, and I get that's fine. Is your expectation still that at some point we will get sort of an all-clear and any sense of how close we are to something like that?
Matt Darden (Co-CEO)
We do anticipate, and that's what we're working through these processes of having a finalization that we can communicate. That is definitely our goal in that area. It is hard to handicap the timeframe. Just you're dealing with, as we've mentioned before, governmental agencies that don't have a lot of transparency in where they are in the process. I would venture to say that there's been a little bit of distraction in the government system, so to speak, over the last several months. That may bode well from a long-term perspective for us from a lower regulatory burden. In the near term, it might cause a little bit of slowdown in some processes. Hard to handicap time, but we definitely anticipate having the opportunity to be able to report out conclusions on those matters.
Suneet Kamath (Senior Research Analyst)
Okay. Thank you.
Operator (participant)
There are no further questions on the line. I will now hand you back to your host for closing remarks.
Tom Kalmbach (CFO)
All right. Thank you for joining us this morning. Those are our comments. We will talk to you again next quarter.
Operator (participant)
Thank you for joining today's call. You may now disconnect.