Hello, and welcome to Globe Life Inc.'s third quarter earnings release call. My name is Regina, and I will be your coordinator for today's event. Please note this call is being recorded. After the speakers' remarks, there will be a Q&A session. If you'd like to ask a question during that time, simply press star then the number one on your telephone keypad. To withdraw your question, press star one again. I will now hand you over to your host, Stephen Mota, Vice President of Investor Relations, to begin today's conference. Please go ahead.
Thank you. Good morning, everyone. Joining the call today are Frank Svoboda and Matt Darden, our Co-Chief Executive Officers, Tom Kalmbach, our Chief Financial Officer, Mike Majors, our Chief Strategy Officer, and Brian Mitchell, our General Counsel. Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our earnings release 2025 10-K, 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 a discussion of these terms and reconciliations to GAAP measures. I will now turn the call over to Frank.
Thank you, Stephen, and good morning, everyone. In the third quarter, net income was $361 million, or $4.62 per share, a decrease of 2% over $4.73 per share a year ago. Net operating income for the quarter was $379 million, or $4.84 per share, an increase of 1% over $4.81 per share a year ago. As a reminder, both net income and net operating income are impacted in the third quarter of each year by the annual updating of our assumptions utilized in establishing our policy obligations. As was the case in 2025, we recorded a remeasurement gain related to assumption updates this quarter, reflecting our positive outlook for future policy obligations as our actual claims experience continues to be favorable as compared to those long-term assumptions.
In addition, underwriting results this quarter at United American General Agency division were adversely impacted by a process change at CMS, the government agency that administers Medicare Supplement claims, and high-severity claims at Evry, the developing group health business that is included in United American's results. Matt and Tom will talk more about these items in their comments. On a GAAP reported basis, return on equity through September 30th is 19.7%, and book value per share is $85.35, up 23% from a year ago. Excluding accumulated other comprehensive income, or AOCI, return on equity is 15.9%, and book value per share as of September 30th is $103.62, up 11% from a year ago. Now in our insurance operations. Total premium revenue in the third quarter grew 7% over the year ago quarter. For the full year, we expect total premium revenue growth to be around 6.5%.
Life premium revenue for the third quarter increased 2% from the year ago quarter to $865 million. For the full year, we expect life premium revenue to grow between 2.5% and 2.75%, driven by strong premium growth in our American Income and Liberty National divisions. Life underwriting margin was $458 million, down 5% from a year ago, primarily due to fluctuations in the assumption updates related to LDTI. Excluding the impact of the assumption updates, life underwriting margin would have increased by approximately 3%. We anticipate life underwriting margin as a percent of premium to be between 44% and 45% for the full year 2026. In health insurance, premium revenue grew 16% to $447 million, and health underwriting margin was up 7% to $116 million.
For the full year, we expect health premium revenue to grow around 15% and underwriting margin to grow in the range of 4%- 4.5%. The strong premium growth is due to premium rate increases on our Medicare Supplement business, as well as strong sales in both our United American and Family Heritage divisions. We anticipate health underwriting margin as a percent of premium to be in the range of 22%- 24% for the full year. Administrative expenses were $95 million for the quarter, an increase of 6% over the third quarter of 2025. As a percent of premium, administrative expenses were 7.3%. For the full year, we expect administrative expenses to stay at approximately 7.3% of premium, consistent with 2025.
As we mentioned on the last call, we believe that expanding AI use across the company will allow us, over time, to grow our expenses at a rate lower than our revenue growth, given the high transaction volumes inherent in our business. As such, we expect this ratio to be the same or slightly lower in 2027 and intend to reduce it over time. Finally, we are very pleased that we have received reciprocal jurisdiction approvals from our regulators, allowing us to continue with our business plan to transform how we support our growth and to provide added financial flexibility and strength as a parent by providing an additional source of dividend income. Tom will provide more of an update in his comments. I will now turn the call over to Matt for his comments on the third quarter marketing operations.
Thank you, Frank. Now we'll discuss the trends at each of our distributions, and we'll start with our exclusive agencies. At American Income Life, the life premiums were up 4% over the year ago quarter to $470 million, and the life underwriting margin was up 3% to $268 million. Net life sales were $97 million, flat compared to the year ago quarter as increased productivity offset a 7% decline in agent count from a year ago. The average producing agent count for the third quarter was 11,331, which was essentially flat compared to the second quarter of this year. On our last call, we discussed some compensation adjustments that were implemented at the beginning of the second quarter. These adjustments have helped improve agent productivity and stabilize agent count as the agent count has been relatively flat over the past couple of quarters.
Agent compensation design is inherently a complex, dynamic process, as it involves human behavior, and sometimes the behavioral changes do not occur as quickly as we would like. We are rolling out further structural compensation changes later this year to help drive growth in sales, recruiting, and retention. For the full year 2027, we expect mid to high single-digit sales growth, and I am confident that we will increase sales growth for this division as the fundamental conditions necessary for agency growth remain in place. If anything, the current economic environment enhances our value proposition to individuals looking for a better opportunity. The ability to be your own boss, set your own schedule, and create financial security. At Liberty National, the life premiums were up 4% over the year ago quarter to $102 million, while the life underwriting margin was down 27% to $51 million.
The decline was due primarily to fluctuations in LDTI assumption updates as the annual assumption update declined from $35 million in the year ago quarter to only $14 million this quarter. Absent a large decline in assumption update, Liberty's life underwriting margin would have been up 5%, and net life sales were $27 million, up 7% from a year ago quarter, due primarily to agent count growth. Net health sales were $7 million, down 13% from the year ago quarter. As we mentioned last quarter, we have implemented changes to the sales presentation to place additional emphasis on health sales. We expect this to help drive significant growth in health sales going forward.
The average producing agent count for the third quarter was 4,187, up 9% from a year ago, and I continue to be pleased with the agent count growth, and I am confident that this will drive strong sales growth going forward. At Family Heritage, health premiums increased 8% over the year ago quarter to $129 million, and the health underwriting margin increased 12% to $57 million. Net health sales were up 5% to $35 million, and it is primarily driven by increased productivity. The average producing agent count for the third quarter was 1,565, up 1% from a year ago, and agency middle management counts rose for the third quarter in a row, and we are continuing to see improvement in agent retention. These results reinforce our optimism regarding the long-term growth potential at Family Heritage.
In our direct to consumer division, the life premiums were down 1% over the year ago quarter to $243 million, and the life underwriting margin declined 1% to $113 million. Net life sales were $24 million, down 12% from the year ago quarter. As we discussed during the last call, our direct to consumer channel is in a transition period due to a shift in digital advertising, including traditional paid search volume. AI-powered search and consumer behavior are impacting digital marketing for all goods and services, including life insurance. This shift has impacted our recent sales results generated by our digital channels. However, during the second half of the third quarter, we are seeing some encouraging improvement in our inquiry rates, supported by several initiatives, including AI-enabled advertising.
We continue our efforts to adapt to this change and position digital content to be authoritative, visible, and easily interpreted by AI assistants. I am confident that DTC will successfully make this transition as we continue to meet the consumer where they want to be met. In addition, as we have discussed before, the value of this division extends well beyond DTC sales, and this is due to the support it provides to our agencies. We still anticipate that we will meet agency demands by generating approximately 1 million leads this year. Now on to United American General Agency, where here the health premiums increased 29% over the year-ago quarter to $219 million. Overall, I am pleased with the routine operations at United American.
While the health underwriting margin was - $6 million compared to a margin of $16 million from the year-ago quarter, this loss was driven by the items Frank mentioned earlier. The processing delay at CMS resulted in nearly $7 million of excess Medicare Supplement claims paid during the current quarter but were related to prior periods. In addition, we experienced an unusually high number of high-severity claims at Evry. For the quarter, Evry realized an underwriting loss of nearly $16 million. As a reminder, Evry is included in a United American Division as they market group health insurance through brokers. Evry has begun to generate strong sales activity, but as a startup, they do not yet have the scale to meet our target margins. Excluding these two items, United American's health underwriting margin would have been a positive $16 million, or approximately 7% of premium.
We anticipate as they continue to grow, they will ultimately contribute to UA's health margins as they achieve scale and generate more stable results. That being said, we are taking steps to improve margins, including pricing adjustments. Net health sales were $48 million, a 95% increase over the year-ago quarter. Sales continued to be very strong in the Medicare Supplement business, due primarily to tailwinds from the high volume of people turning 65, the movement of Medicare beneficiaries from Medicare Advantage to Medicare Supplement, and the rate increases implemented during the second quarter. Once again, I would note that we do not market Medicare Advantage plans. Now I would like to discuss projections, and this is based on our recent trends and the experience with our business.
We expect the average producing agent count for the full year 2026 to be as follows: at American Income, a decrease of around 5%; Liberty National, an increase of around 9%; and Family Heritage, an increase of around 5%. Net life sales for the full year 2026 are expected to be as follows: at American Income, approximately flat; at Liberty National, an increase of around 10%; and direct-to-consumer, a decrease of around 9%. Net health sales for the full year 2026 are expected to be as follows: for Liberty National, a decrease of around 7%; Family Heritage, an increase of approximately 10%; and United American, an increase of around 45%. Now moving on to projections for 2027. At the midpoint of our guidance, we expect sales growth for the full year to be as follows.
For net life sales, as I mentioned earlier, at American Income, we expect mid to high single-digit growth, at Liberty National, low double-digit growth, and at direct-to-consumer, low single-digit growth. For net health sales, Liberty National and Family Heritage, we expect low double-digit growth, and at United American, high single-digit growth. I'll now turn the call back to Frank.
Thanks, Matt. We'll now turn to the investment operations. Excess investment income, which we define as net investment income less required interest, was $38 million, up 3% from the year-ago quarter. Net investment income was $296 million, up 3%, and average invested assets were also up 3% from the year-ago quarter. Required interest and average policy liabilities both grew approximately 4% over the year-ago quarter. For the full year, we expect net investment income to grow around 4.5% and required interest to grow around 3.5%, resulting in excess investment income growth of 10%-11%. Looking forward to 2027, we anticipate net investment income will grow in the range of 2.5%-3.5%, while required interest will grow in the range of 3.5%-4%. Now, regarding our investment yield. In the third quarter, we invested $833 million in fixed maturities, primarily in the industrial and financial sectors.
These investments were at an average yield of 6.4%, an average rating of A, and an average life of 35 years. We also invested $94 million in commercial mortgage loans and other long-term investments with debt-like characteristics. These non-fixed maturity investments are expected to produce additional cash yield over our fixed maturity investments while still being in line with our overall conservative investment philosophy. In the third quarter, the yield earned on our total long-term invested assets, which includes our fixed maturity commercial mortgage loans and other long-term non-fixed maturity investments, was 5.52%, up from 5.46% in the third quarter of 2025. The fixed maturity portfolio earned yield was 5.33% in the current quarter compared to 5.26% a year ago. We expect the average yield earned on our total long-term investments will be approximately 5.51% for the full year 2026 and between 5.5% and 5.55% for the full year 2027.
For the fixed maturity portfolio, we anticipate the earned yield will be approximately 5.33% for 2026 and around 5.35% for 2027. While we do own some floating rate investments, they are well matched with floating rate liabilities on the balance sheet. As such, we don't expect changes in short-term rates to have a meaningful impact on our net income. Now, regarding our investment portfolio. Invested assets are $22.3 billion, including $19.6 billion of fixed maturities at amortized cost. Of the fixed maturities, $19 billion are investment grade with an average rating of A. Overall, the total fixed maturity portfolio is rated A minus, same as a year ago. Of our total investment portfolio, only 2% is in senior direct lending and asset-based finance combined, and another approximately 1% is in traditional private placements.
Our fixed maturity investment portfolio has a net unrealized loss position of $2.7 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 mostly 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 39% of the fixed maturity portfolio, compared to 43% from the year-ago quarter. The percentage is at its lowest level since 2002. As we have discussed on prior calls, the BBB securities we acquire have historically provided the best risk-adjusted, capital-adjusted returns, due in part to our ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets.
That said, our allocation of BBB bonds has declined over the past several years as we have found better risk-adjusted, capital-adjusted value in higher-rated bonds, giving the narrowing of corporate spreads. While the concentration of our BBB bonds might still be higher than some of our peers, remember that we have little or no exposure to other higher-risk assets. Below investment-grade bonds remain near historical lows at $573 million, compared to $455 million a year ago. The percentage of below investment-grade bonds to total fixed maturities is just 2.9%, similar with year-end 2025. The total exposure to both BBB and below investment-grade securities as a percentage of our total equity, excluding AOCI, is at its lowest level in over 25 years. Due to the long duration of our fixed maturity liabilities, we predominantly invest in long-dated assets.
As such, a critical and foundational part of our investment philosophy is to invest in entities that can survive through multiple economic cycles. We are well-positioned to withstand an economic downturn should one occur due to holding historically low percentages of invested assets in BBB and below investment-grade bonds as a percentage of equity. In addition, we have very strong underwriting profits and long-dated liabilities, so we will not be forced to sell bonds in order to pay clients. With respect to our anticipated investment acquisitions for the remainder of the year, at the midpoint of our guidance, we assume investment of approximately $175 million- $200 million in fixed maturities at an average yield between 6.4% and 6.5%.
Including the expected investments in commercial mortgage loans and other long-term investments with debt-like characteristics, we expect to invest approximately $250 million- $300 million across all asset classes at an average yield of 6.75%- 7%. Now I will turn the call over to Tom for his comments on capital and liquidity.
Thanks, Frank. First, I'll spend a few minutes discussing our available liquidity, share repurchase program, and capital position. The parent ended the quarter with liquid assets of approximately $110 million. We anticipate ending the year with liquid assets near the top end of our targeted range of $50 million- $60 million. During the quarter, the company repurchased approximately 1.1 million shares of Globe Life common stock for a total cost of $185 million at an average share price of $175.61. Including shareholder dividend payments of $25 million, the company returned approximately $210 million to shareholders during the third quarter and approximately $630 million to date. We will continue to use our cash as efficiently as possible. Our first priority is to ensure adequate capital is maintained at our insurance subsidiaries.
Once met, we currently believe 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 parent's excess cash flow after the payment of shareholder dividends. The parent company's excess cash flow, as we define it, results primarily from the dividends received by the parent from its subsidiaries, less interest paid on debt, and is available to return to shareholders in the form of dividends and through share repurchases. For the full year, we anticipate distributing approximately $95 million to shareholders in the form of dividend payments. In addition, anticipate share repurchases will be in the range of $725 million- $775 million, with approximately $185 million of share repurchases in the fourth quarter.
This is a $65 million increase at the midpoint of the range from what we indicated on our last call as a result of updated capital projections for the year. At this level, we anticipate the combination of shareholder dividends and share repurchases for the year will be near 70% of full-year net operating income at the midpoint of our guidance. We continue to invest in our growth by making investments in new business, technology, and our insurance operations. It should be noted that the cash received by the parent company from our insurance operations is after our subsidiaries have made these substantial investments and acquired new long-duration assets to fund their future cash needs. With respect to the capital levels of our insurance subsidiaries, our goal is to maintain capital within our insurance operations at levels necessary to support our current ratings.
Globe Life targets a consolidated company action level RBC ratio in the range of 300%-320%. Although this range is lower than many of our peers, it is appropriate given the stable premium revenues from a large number of in-force policies, the nature of our protection products with benefits that are not sensitive to interest rates or equity markets, our conservative investment portfolio, and strong consistent underwriting margins, which result in consistent statutory earnings at our insurance companies. For 2026, based on the current projections of 2026 statutory results, we anticipate our consolidated RBC for the U.S. subsidiaries within the targeted range of 300%-320%. In addition, the capital of our Bermuda subsidiaries will exceed management's target capital levels, which exceed regulatory minimums.
As expected, with regards to Globe Life Re, our Bermuda subsidiary, we received reciprocal jurisdiction approval from Indiana, American Income's state of domicile, in the third quarter. In addition, consistent with our business plan, in the third quarter, we completed new reinsurance cessions, which reinsured a portion of new business and in-force life insurance policies issued by American Income to Globe Life Re. In the fourth quarter, we intend to request a dividend distribution from Globe Life Re. This dividend distribution is subject to approval by Bermuda regulators, and if approved this year, it is unlikely to be distributed to the parent until late in the year. As such, we have not included this dividend in our 2026 excess cash flow estimates, but have included it in our 2027 excess cash flow estimates.
Now, with regards to policy obligations for the current quarter, each year, GAAP accounting standards require us to review and generally update actuarial assumptions for mortality, morbidity, and lapses. When assumption changes are made, the accounting standards require a cumulative catch-up adjustment back to January 1, 2021, which is the transition date to LDTI. This cumulative catch-up is the assumption-related remeasurement gain or loss. The assumption remeasurement gain lowers the reserve balances and indicates an improved outlook as less premiums are needed to fund reserves to meet future policy obligations. The opposite is true if there is an assumption remeasurement loss. We review and update our life and health reserve assumptions in the third quarter each year.
The remeasurement exhibit by distribution channels included within our supplemental financial information is available on our website and includes the impact of assumption changes as well as total remeasurement gains and losses, which include those related to current quarter experience results. For the quarter, the overall impact of both life and health assumption changes reduced policy obligations by approximately $120 million, with life obligations reduced by $96 million and health obligations reduced by $24 million. While this is lower than the prior year's remeasurement gain of $131 million, it continues to indicate improved outlook for future policy obligations. Total GAAP life and health reserves on our consolidated balance sheets are approximately $18 billion, with the adjustments to reserves was less than 1% in total.
To better understand the performance of the business, we believe it is beneficial to look at normalized underwriting margins, which exclude the impact of assumption changes and provide an improved basis for comparison of quarterly results. For the third quarter, normalized life underwriting margin as a percent of premium increased to 41.8% from 41.5% for the year ago quarter. Normalized health underwriting margin as a percent of premium was 20.5% compared to 27.2% for the year ago quarter, reflecting higher policy obligations at United American, primarily from the two items that Matt and Frank previously mentioned. We anticipate the impact of high-severity claims at Evry to improve in the fourth quarter. However, we anticipate loss ratios will be higher than target loss ratios for the remainder of the year.
The impact of the additional Medicare Supplement claims resulted in increased claim trends, which will be reflected in 2027 rate filings, and if approved, will be effective beginning in the second quarter of 2027. With respect to our 2026 guidance, for the full year 2026, we estimate net operating earnings per diluted share will be in the range of $15.35-$15.65, a decrease from the prior guidance reflecting the impact of third quarter results and revisions to fourth quarter margin estimates for United American. Normalized EPS growth, which removes the impact of assumption updates, is estimated to be approximately 8% for the full year 2026. Finally, with respect to 2027 guidance, for the full year 2027, we estimate net operating earnings per diluted share will be in the range of $16.10-$17.10, representing an increase of 7% at the midpoint.
At the midpoint of our guidance, we anticipate total premium revenue growth of 6%-8% for the full year, with life premium revenue growth 2%-4%, and health premium revenue growth of 13%-15%. We anticipate underwriting margin as a percent of premium for the full year to be in the range of 42%-45% for life and 20%-24% for health. Although the health underwriting margin as a percent of premium is anticipated to decline, this is primarily due to the mix of our health business. The health underwriting margin dollars are expected to grow 7%-9% given the strong sales and anticipated premium rate actions for both Medicare Supplement business and for Evry. Although 2026 statutory results are not final for the year, we anticipate parent excess cash flows to be approximately $850 million-$950 million in 2027.
This range reflects subsidiary dividends anticipated from both our U.S. and Bermuda subsidiaries, some of which are subject to regulatory approvals. After our need to support capital levels at our insurance subsidiaries, this amount will be available to return to shareholders through both dividends and share repurchases in 2027. Should this amount be used entirely for dividends and share repurchases, the cash conversion ratio would be in the range of 70%-75% of net operating income at the midpoint of our guidance. We intend to ensure capital levels at our subsidiaries are consistent with management's targeted ranges and sufficient to meet current ratings. On the next call, I'll provide an update as we get updated statutory results for 2026. Those are my comments. I'll now turn the call back to Matt.
Thank you, Tom. Those are our comments. We'll now open up the call for questions.
Thank you. We will now begin the Q&A session. To ask a question, simply press star followed by the number one on your telephone keypad. Our first question will come from the line of Ryan Krueger with KBW. Please go ahead.
Hey, thanks. Good morning. First question was, can you say how much of an assumption review benefit that you embedded in the midpoint of your 2027 EPS guidance?
Yeah, Ryan, the ranges reflect what we expect from just overall obligations as well as assumption updates. No specifics. We've tried to incorporate a number of scenarios and have incorporated that into the ranges. We really want to see how results emerge in Q4, to help guide us to further clarify how much assumption updates we'd expect. I would expect remeasurement gains each quarter, so I think you'll see those, and those will be indicative of the likelihood of an assumption update in 2027. If you look at our third quarter results, you'll see that we had actual to expected remeasurement gains for the quarter of about $20 million for the life business, which is after the update to our life assumptions. So that's indicative that mortality continues to run favorable relative to our long-term assumptions.
As we continue down that path, I would expect that we would see an assumption update.
Tom, is it safe to say, Ryan, I was going to say, I think also, as Tom mentioned, it's embedded in our ranges in a variety of scenarios, and we need to really see how experience comes in over the next couple of quarters to refine that. I'd say, overall on the margin, we would expect that, if we were going to have an adjustment, it would probably be lower in magnitude than what we had in the current year.
Got it. Then, maybe just, I guess, kind of two-part question on Evry and United American. I guess one is just more quantitative in what you're assuming for the United American margin in 2027. But then secondly, I guess just on Evry, more from a strategic standpoint, I mean, it is a different business than with a wider range of claim outcomes than your typical supplemental health and Medicare Supplement businesses. I guess I'm just kind of wondering your views on are you confident that it makes sense to be in a business like this at Globe Life long term, given that it is primary healthcare and it does differ quite a bit from the narrower kind of fixed benefit costs of the other businesses you're in?
Yeah. Tom, why don't I start with the strategic part of the question, and I'll let you do the margin. From a strategy perspective, one of the things it does help us with is that, as we go to market in United American with our limited benefit health plans, it helps to have a full range of products in dealing with brokers. So having a health plan option, there is some market synergy there. I think from a long-term perspective, it's not unexpected that as that builds the size of that book and we get more credibility and size, we would expect more stable results going forward. We do recognize it's a startup and we're going to have a little bit lumpy results here in the beginning.
I think overall, from a long-term strategic perspective, we wouldn't ever expect this to be a significant part of the overall health business if you just look at it from a contribution to our underwriting margin from a health perspective. So what we want to do is be able to grow this thing to scale so that we get more of the economies of scale from our overall results perspective and get some of the volatility back out of it. But from a long-term perspective, there is some market synergies with this type of business. Our main focus going forward will continue to be the supplemental health products that we've historically sold, and that'll be the vast majority of our underwriting margin dollars in our health lines.
I think what I would say on the margins themselves, a couple of things is we do think that the impact of high-severity claims will diminish over the course of the fourth quarter. We would really like to see where those fourth quarter results come in. The other thing is we have taken a couple actions to actually improve the overall profitability of the business. We are reflecting that business is renewable every year, so upon renewal, we are looking at rate increases on that business as well. Those are being factored in not only to renewal rates, but also to new business rates as those get quoted. I think that bodes well for margin improvement in Evry.
I think what is important as we get more stable of a size of membership, that actually the volatility around results will be better understood, and we can take the management actions. We also expect that volatility to be reduced over time. As we think about 2027, we have factored those in the range of the 20%-24% margin for the health business. That is a little bit wider range than where we have had previously, and is reflective of there is an opportunity for some additional volatility in 2027. I think we will update you next quarter. We will have the fourth quarter results and can provide some better guidance on that coming up following those results.
Yeah, I would just add that I think for UAGA itself, it is probably still somewhere in that mid to upper single digit margin percentages overall. Because even without some of the price, we are still seeing some higher utilization costs on the UAGA and on the individual med supp. We do anticipate working those additional trends into our rate filings that will take effect in 2027. Of course, as we have talked about here for the last couple of years, you have a delay before those rate increases take effect, and so you do not get the full effect into 2027. So, we do not anticipate for 2027 that they will still be reaching those longer term margins that we would expect for the long term.
One of the things I think-
Thank you.
A benefit there, though, is the strong premium growth that we're seeing at UAGA, which will add to underwriting margin dollars. Yeah.
Our next question will come from the line of Wilma Burdis with Raymond James. Please go ahead.
Hey, good morning. Just following up on Evry, maybe you can give us a little bit more color on the market synergies and the product suite. And maybe just give us a little bit more color on the financial impact there. Is it enough to offset since we've already had 20+ million of underwriting losses this year from Evry? Maybe just talk about that. Are you seeing enough financial benefit there to make that worth it? Thanks.
I'd say, from an overall perspective, the market is serving as a health plan, so you get a little bit of a volatility as we're growing that. The number of groups that were signed up this year compared to last year, is significantly different. We're in the early stages of this, so you really need to build that business to a credible amount of lives. The part that you've got to keep in mind is the premium that you charge on the book of business occurs ratably over the year. However, the claims do not come in ratably. To the extent that we've got, and that's what we have here, we have a handful of high-severity claims that are hitting in this quarter as the earned premium ramps up over a period of time.
As Tom mentioned, we really need to get this to more of a credible size block of business, and that should help from a stability of the earnings perspective.
I would say that I think it's important to note that we are pricing the business what we believe to be profitable. But again, as Matt and Tom talked about, just with some of the smaller size of groups, you end up with some volatility that we're clearly seeing right now with respect to some of those groups, and just having more high-severity claims than one would normally expect in a more mature block. So that's what's kind of driving some of the losses here a bit. I think to your point around some of the synergies around, it's the broker relationships and being able to go to the brokers with multiple types of products helps us within that.
As we're continuing to expand what we're doing in the broker area with the supplemental health plans as well, that just helps us with the relationships with those brokers, as well as providing a broader product suite and enabling us to get more of our supplemental health products into employer groups.
The nice thing I like about this business is that we can reprice every year upon renewal for experience that we're seeing and we anticipate, as well as if we need to, we can non-renew a group. That gives us a lot of flexibility on a go-forward basis to really, once we have a credible number of groups, to be able to manage those appropriately.
Okay, thank you. Is there a good buyback opportunity or a good opportunity here in the stock to lean in on buybacks? Especially given you guys cited pretty outsized excess cash flow estimates for 2027. Maybe just give us a little bit of color there. Thanks.
I think as we think about excess cash flow is that is the source of funds for shareholder dividends and buybacks. We are seeing growth in that just from growth of statutory earnings, as well as which creates dividend capacity for subsidiaries. Then also, the reciprocal jurisdiction actually provides us a little bit of one-time benefit that we should see in 2027. I think more importantly is the business that we're reinsuring to Bermuda will continue to generate earnings and dividend capacity in Bermuda consistent with what we've communicated previously on a go-forward basis. We feel pretty good about current excess capital levels and our ability to maintain that going forward. Sorry, excess cash flow levels and our ability to maintain that going forward.
Okay. Thank you.
Our next question will come from the line of Randy Binner with Texas Capital. Please go ahead.
Hey there. I'd like to actually just ask some procedural questions, if I can, about the health claims. The first is on the CMS claim delay. Can you just review for us kind of why that happened and when it happened and just, I guess, the visibility you have on the resolution of that? You mentioned, I think, it was $7 million of extra claims in the quarter, but does that go to zero extra in the fourth quarter? Just trying to understand kind of the facts that drove that situation.
Yeah. To give you a little bit of background. Medicare in the first quarter had announced two issues that delayed claims reporting and processing. The first issue was billing rates to Medicare doctors where the reimbursement rates were corrected, and so that resulted in some higher reimbursements that we needed to process through, and that was largely a second quarter event. But those higher billing rates continue into the third and fourth quarter as well. The second issue was involved in the reissuing of Medicare IDs, leading to previously denied legitimate claims, and so beneficiaries were issued new medical IDs. Physicians or hospitals who had submitted claims that were denied, they would need to obtain those IDs from those beneficiaries, which takes a little bit of time.
We didn't have good visibility into the full impact of that until this quarter, and so we feel like that's pretty much gone through the system, that those medical IDs were issued in April of 2026, and so we feel like that's pretty much gone through the system and should be normalized on a go-forward basis.
The nice thing is that based on the timing of our rate filings, as I had mentioned in my comments, a lot of those related to earlier periods in 2026, those claims that came through in the third quarter. That will be part of our claim trend that will go into our rate filing for those 2027 rates, that most of those will start being picked up starting in the beginning of the second quarter of 2027 in this additional premium.
That is helpful. That was going to be my follow-up. Certainly, the Evry claims are in your rate filings, but I guess these still count even though they are non-recurring or should even out. Just one more follow-up, though, on Evry. When you have a high-severity claim, what is it? Is there a typical type of high-severity claim you have experienced there, and what are the specifics of that kind of claim?
The claims fall what you might imagine, cancer, heart attacks, some of those type of issues. You have claimants with over $100,000 as an example, on a claim related to some of those higher severity. Now, we do have reinsurance that kicks in at some point to protect us from very large claims. To the extent we have got certain medical conditions that we are paying for with underneath that reinsurance cap, that is getting to a little bit of the severity. Back to the number of lives that we ultimately insured. If you have a handful of those, it is just a bigger percent of your total than if you have a better distribution of risk as we sign up more groups.
All right. I will leave it there. Thank you.
Our next question will come from the line of Andrew Kligerman with TD Cowen. Please go ahead.
Hey, good morning team. I wanted to follow up on the Evry and CMS, and I just want to make sure I understand the timelines. It sounds to me like the CMS issue might linger into Q4, and then it kind of evaporates. With Evry, just given you are guiding to health margins of 20%-24%, it does not sound like you are totally certain as we progress through 2027. Do you have confidence that by 2028, the Evry issue will be cleaned up? I will stop there, but just a quick sidebar, too. As I look at startups across all of the insurance sectors, it is so hard to compete with these behemoth companies with massive data and analytics. Generally, what gives you confidence that Evry can compete? Really the first part of it is just the timelines that I laid out. Thank you.
Sure, Andrew. Hey, I will start with the Medicare and the CMS piece. The additional claims that we really saw as a result of the Medicare ID issue really impacts Q3, because you end up with some out-of-period claims. When we look at the full year, those become more normalized in the overall margin and the claims activity for Medicare, and then go into how we think about the trend that we are seeing and that we are incurring on that Medicare business in 2026. Of course then, as Matt indicated, that will run its course in 2026, and then get taken into account as we think about those rate filings that we are making now, and impacting the premium rate increases for 2027 with respect to that.
It did impact, as we were incurring that in Q3, then it became evident that some of the expectations that we had for claims development in Q4 were really understated. As we had to think about that new claims trend and what impact that had on the fourth quarter, that is why we end up needing to increase some of the claims and loss expectations with respect to the Med Sup business for the full year 2026. With respect to Evry, we do anticipate that pricing actions that we are taking will help to moderate any of the claims activity that we are seeing, and with respect to that business in 2027.
As we continue to add more groups and you get a broader base, that also gives you that broader set of groups that you can absorb some higher claims in some groups that are absorbed by profitability in other groups. So to your point, we do have a broader range in 2027, so we do anticipate, or as we've said before, we price this to be profitable, but do understand that there's still some volatility that we expect in 2027, and so that there's the possibility that there still could be some level of losses in 2027 and build that into the overall range.
We'll see how that transpires over the course of the year, and we'll take necessary actions as we go forward in continuing to look at each new group as they renew and continuing to rethink about how we're pricing new groups coming in as well, and ensuring that we're pricing those appropriately. So there's at least the possibility that there's some losses. We don't anticipate that it would be as significant in 2027 as what we've actually incurred here in 2026. Because we don't see, as we grow the broader book of business, that the incurrence of the high-severity losses will lessen as a percentage of the whole.
Got it. Thank you for that. My follow-up is around American Income, the producer count, the average quarterly producers. It looks like next year, well, you've said in the guidance mid to high single-digit sales growth at American Income. But it's been a bunch of quarters that you've had to adjust and revise the compensation methodologies used at American Income. The other point I would make is, with the count, the average producer count down 7%, and I guess sequentially it was only down a half point, but bottom line, what gives you such confidence in the mid to high single digit? What's going to be different in 2027 versus 2026? Thanks.
Andrew, I guess I would point out, it's really been two quarters since the compensation adjustment has been in place. So in other words, we put that in at the beginning of Q2, and so for Q2 and Q3, what we're seeing is a stabilization of the agent count. But what we are seeing, and I've mentioned this before, when we talk about the incentive compensation structure we roll out to the agents, we're really trying to balance activity between sales activity and recruiting, training, and growth activity. So what we did see was a positive improvement on the productivity side. We had an increase of productivity of 11% this quarter, and it was 9% last quarter. So the compensation changes, the way I think about it, were effective. We got increase in sales.
We increased the requirement to achieve certain, what we call bonuses, but it is effectively incentive compensation. We increased that with the sales growth was necessary at the agent level to be able to achieve those. We are seeing that on the productivity side. We are also seeing that as we have got a stabilization of the base, we have got more people that have more experience, so they are going to produce more. Overall, the compensation adjustment, I think that went in at the beginning of the second quarter of this year was effective. It just did not quite move the needle as much as we would like on the recruiting side. We are going to put in additional changes to that structure that really focus a little bit more of that incentive comp on the recruiting and training side.
We have got a long history of doing this. We anticipate those changes will start flowing through in the beginning of next year because they are going in at the end of this year. As I mentioned in my comments, this is human behavior we are dealing with, so when we put a change in, it takes a little bit of time for everybody to migrate to the new structure that we have put in place. We recognize it takes a couple of quarters to kind of figure that out. I think we have a good base to build on, and that is why we are pointing to, we think we can be at the mid to high single digit growth for next year, because of what we are putting in here at the end of this year.
Thanks for the insights.
Our next question will come from the line of Joel Hurwitz with Dowling & Partners. Please go ahead.
Hey, good morning. Two firsts on cash generation. Just what is the expected dividend from Bermuda in 2027? Tom, could you provide some more color on what drove the increase to your 2026 capital projection?
Sure. On the 2026 capital, what I'd mentioned is, we were looking at our 2026 subsidiary capital positions and recognized that we had a little bit of excess capital in the entities. That's what kind of drove that estimate, and that keeps us at an RBC ratio right within our target ranges. We feel comfortable with that capital position. On 2027 for Bermuda, we actually have to go through approval process, so it's not definitive yet, but we'd expect that somewhere in the $150 million range for not what we're requesting in 2026, but in the combination of what we request in 2026 and 2027 would be in that range.
Got it. That's helpful. Then just a quick one on the life margin with the assumption update done this quarter. What's the expected life margin for the fourth quarter of this year?
Fourth quarter life margin is Hold on one second. 41.5% range. 41.3%.
Okay. Thank you.
Yep.
Our next question will come from the line of Suneet Kamath with Jefferies. Please go ahead.
Thanks. I want to start with Bermuda also. Have you guys done any work on which blocks of business would be, I guess, the most advantageous to move to Bermuda, between, say, life and health? And then relatedly, do you have any limits in terms of what percentage of your reserves you ultimately would want to cede to Bermuda?
We continuously look at our opportunities to reinsure to Bermuda, and we haven't set any solid limits on what those limits would be. We do think that it's important to keep reserves here in the U.S. I think that helps us from a liquidity perspective and from just an operational perspective. I think we'll have a balanced view of that and it'll merge over time as we continue to look at our business and opportunities with using a Bermuda framework.
Yeah, I would just add that the team really has done a lot of work in looking at potential blocks and which ones make more sense to be reinsured to Bermuda and which ones don't. There is definitely some art to being able to optimize which blocks you're reinsuring and which ones you aren't, just based on age and stability and a lot of other factors. I think in our business plan, and we've talked about on prior calls, I think initially, we're kind of looking at maybe around 25% of the statutory reserves being included. We'll definitely continue to take a look at that. Our primary focus is really executing on that business plan.
But then as we're doing that, continuing to look to see are there other blocks that would make sense and that have some opportunity as we think about just overall managing that business and the capital that we have in there.
Yeah, to your question on life and health, it's more on the life side that where the opportunity is. That's where you incur quite a bit of deferred acquisition costs and the treatment of that under a GAAP regime in Bermuda, along with the difference between U.S. statutory and GAAP reserves on the life business is much more substantial. Those are the two things, as we've talked about, both on the in-force blocks that we reinsure as well as on a go-forward basis, the new business that we reinsure into Bermuda will be more of the benefits are going to be on our life blocks and life sales.
Okay, that's helpful. I was trying to jot this down during your prepared remarks, so apologize if I got it wrong, but it sounded like the growth in NII for 2027 was expected to be 2.5%-3.5%, and then the growth in required interest was supposed to be higher at 3.5%-4.5%. If those numbers are right, does that imply that excess investment income will decline year-over-year, or am I not thinking about that right?
No, I think you are in the right ballpark. It is probably flat to maybe just slightly declining, depending on kind of the nuances of where that falls within that. What is really driving that is that as you think about the additional distributions that we are making out of the entities up to the parent, then if in fact those are not needed for our capital purposes, and if those are distributed out to shareholders, then that is going to reduce the amount of your average invested assets that we have available. So that is what is really driving kind of the lower growth in net investment income. While at the same time, you still have the same amount of GAAP reserves out there, so your required interest continues to grow at the same rate.
We would anticipate not much growth in net investment income, but then to the extent that those, we are able to return out to the shareholders in the form of buybacks, and we are getting the benefit from that.
Okay, thanks.
Our next question will come from the line of Tom Gallagher with Evercore ISI. Please go ahead.
Thanks. Just a few Evry questions. What are the total quarterly premiums that you have associated with that business right now, and how big are the average groups you are insuring in terms of employee size?
Yeah. In the third quarter, Evry premiums were about $11 million. It was not very significant. Next year, we would assume total annualized premium of around $100 million. That will give you some idea of the size of the business. The number of groups is we would expect to be around 50 groups next year.
You are going to more than double from a size standpoint versus where you are right now.
Right now, we have about 30 groups. We had some groups come on in the beginning of the fourth quarter. Not quite double, but close.
Got you. My follow-up is just covering some of the companies that have medical stop loss we've been watching and hearing about two-three years of high-severity claims happening. I guess, just in light of that, what gives you confidence that you're not being selected against? There's obviously re-rates going on across major medical. It's been happening for at least two years. Do you have any way of filtering out your underwriting on these groups as you grow to make sure that you're not going to see these persistently high-severity claims? Thanks.
Well, one of the things we've done is looked at just our underwriting standards, our pricing methodology. We've done a deep dive on that. We've also brought in some external expertise just to validate some of our assumptions. We do know that there's a lot of cases out there that are getting shopped, and we turn down a significant number of those trying to maintain the discipline on the pricing and underwriting side. We had over 70% of the cases that we are looking at, that we turned down, declined to quote. We're being very disciplined around what we take on and what we write from a new group perspective. That is really, again, since it's not a major piece of our business, we're really going to constrain growth.
We want to get to a credible size so that we can diversify the risk of a few large claims over a greater number of lives. We're going to be very disciplined on our pricing approach to this, and we'll moderate the growth if we need to, or we'll non-renew groups if we need to.
Got you. Thank you.
Our next question will come from the line of Maxwell Fritscher with Truist. Please go ahead.
Hi. Thank you. I am calling in from Mark Hughes. You had mentioned the higher productivity at American Income, and I believe you are only focusing on American Income, but how are productivity trends across the enterprise, Liberty National, for example, I know a smaller piece of the pie, but are you seeing similar improvement?
Yeah. You kind of just tell from aggregate, if you just look at American Income, our average agent count over the last three-four quarters been pretty stable, but we have got some sales growth or sales moderating there. That just gives you an idea of the productivity on a per agent basis is, if we have got 7% less agents this time this year than we did same time last year, but our sales are relatively flat, we are just higher productivity. You are seeing that in Family Heritage as well. We see nice productivity gains there. So the sales are a little bit different or outpacing the growth in the agent count. On Liberty, it is really pretty consistent. Our agent count growth is pretty consistent with our sales growth there, and that is what we would expect over a long period of time.
What we see sometimes is changes in, whether it is compensation or sometimes rolling out new technology like CRM systems or enhancements to sales systems or training systems. We will get some productivity gains. Overall, long term, not quarter to quarter, but long term, we are really focused on, we want to have more agents that sell more business. We like productivity gains as we think about investments in technology and investments in leads and advertising and branding and all those things. But, overall, long term growth strategy is definitely to grow our agent count.
What that gives me comfort about is it just gives us, and this is why I like having three different agencies, it really gives us a sense of the market, is that we're not seeing headwinds from an environment perspective, from an economic perspective, is that we've got agent productivity going up, we've got sales growing up to the extent we're growing our agent count. All of that, again, is what I believe is under our control to manage and achieve strong growth going forward. We'll continue to get that by focusing on growing our agent count. As a reminder, the agent recruiting activity happens out in the field, in the individual offices, and a lot of that activity happens by our manager group. As I'd mentioned in my prepared remarks, Family Heritage, what I like seeing is we've got middle management growth.
To the extent that we've got middle management growth, I know that's a forward-looking item as we think about we got more people out there recruiting and training agents, so that bodes well from a long-term growth perspective.
Very good. Thank you. I asked a similar question last quarter, but it seems like a lot has gone on in the economy in the past three months. So, I'd like to know if you have any incremental views around recruiting. Last call, you noted that the pipeline was strong, but I'd like to know if you can provide any updated views on the environment.
Yeah. I think from a recruiting perspective, we continue to see, and this would be a good example of looking at the most recent experience at Liberty, is that there continues to be a lot of people that are interested in our opportunity, and that is in the form of they feel more in control of their career. We give them flexibility, opportunity for growth. There's plenty of people that are interested in being able to own their own business someday. We provide a pathway to be able to do that. As you look at the backdrop of what's happening with college graduates, as an example, and it's hard to find that entry level job or people that are in jobs that a particular industry may not be growing and those are stagnant. Our opportunity provides opportunity for growth.
We don't see any headwinds from a recruiting perspective. We see that as strong and robust. The nice thing is that our business model does not require that we recruit from a certain segment of the population or a certain experience or background, or you got to be an experienced agent. We recruit people that have no experience in this business and have a great process for getting them up, trained and licensed and selling. That's the biggest part of the population out there, is our pool that we recruit from. I feel very good about our prospects going forward.
Great. Thank you.
Our next question will come from the line of Pablo Singzon with JP Morgan. Please go ahead. Pablo, you might be on mute.
Hello, can you hear me now? Sorry about that.
Yes.
The first question I had was on 2027 EPS guidance, which implies about 7% growth at the midpoint. How much of the growth will be driven by buybacks? I think in recent years, buybacks have contributed anywhere from 4%- 8% of incremental EPS growth versus growth in dollar earnings. I guess if we could tie everything together, right? Sounds like excess investment income will be flat to slightly down. Underwriting income could be up, right? But perhaps the premium growth offset by some slight deterioration in margins. Any high level perspective on how you see EPS progression from 2026 into 2027 would be helpful. Thanks.
Yeah, I think overall, Pablo, I think at the midpoint of the guidance for 2027, you're looking at around 7% overall at that midpoint. Actually, probably in that range of 5%- 6%, probably coming from share buybacks, is what we're anticipating. Then you're having a net underwriting, growth in net underwriting, excuse me, net operating income more in that 1%-2% range.
Okay. That's helpful. Yep.
Part of that, because as Tom mentioned and I mentioned earlier, we're anticipating some additional dividend distributions out of the operating entities up to the parent. The extent that Tom mentioned, that's really in that $150 million range or so that's being included. That is, if you will, pulling that out of the system is taking out of the growth of our invested assets, then turning into net investment income. That's a piece of that.
Then probably, if you will, the little lower growth rates still even on the, if you think about it from a life underwriting perspective and just I think the midpoint of the range that we have in 2027 on the underwriting margin percentage, slightly down perhaps, and probably just we think about some of the assumption changes that are probably going through, as Matt really mentioned, probably anticipate even though we would anticipate some assumption updates, probably less than what we had in 2026 right now. That is kind of driving, if you will, a little bit of the lower growth in net operating income.
Got it. Then my second set of questions, just a couple here. Do you think pricing will be sufficient to get the book back on track, or are there any changes in underwriting that you need to implement? Then relatedly, since you had given stats on premium sizes and counts of the groups that you have now, at what premium size or group count size do you think the book will reach better credibility from a claims perspective? Thanks.
I think on the pricing, from a volatility in the earnings, you need both. For those groups that we renewed, we put in some pretty significant price adjustments as well as I had mentioned, making sure we challenged what pricing is for new groups that would be coming on at the beginning of 2027. Also, again, if I have just a handful of groups, I really need more groups from a credibility perspective. The way I think about it is a combination of both, is more price to action in addition to just getting the volume of the business bigger to spread across the risk over multiple groups. I think more from your question of credibility perspective, we need to get it up to a certain level and more stable results and ongoing growth perspective.
We would anticipate that would happen more toward the end of 2027 or into 2028, is that as we get volume and scale, that makes some of the chances for volatility to be reduced going forward.
I think you want to have the groups on the books for a period of time to create that confidence in the experience. End of 2027 is good, but that is probably the starting point of gaining solid credibility.
Our next question will come from the line of Wes Carmichael with Wells Fargo. Please go ahead.
Hey, thank you. Just had a follow-up on capital in Bermuda, but could you just quantify the size of the additional reinsurance transaction? Maybe with reciprocal jurisdiction approval now, have your expectations around longer term cash flow uplift changed at all, or any help there would be great.
Yeah. The reinsurance transaction that we did in the third quarter was about $275 million of reserves, so it was relatively small. We also had new business that we are reinsuring a large portion of American Income Life's new business to Bermuda. On excess cash flow, our 2027 excess cash flow going from $850 millio- $950 million is the range. That actually reflects kind of an increased run rate. Over time, I would expect as we fully get the benefits of Bermuda, that could increase absent other capital needs within the insurance operations. Yeah, I think I am just really optimistic on that ability to increase the kind of the run rate on the excess cash flow as the parent company.
I think as we kind of look back over the last couple of years, before shareholder dividends, we've been in that $600 million-$700 million range, and we've been able to, through some of the transactions, been able to take out some extraordinary dividends over the past couple of years. But going forward, being able to have it in that $850 million- $950 million range, and just as business grows and our block of business grows to have that potentially increase from there, really sets us at a new level and really gives us that added flexibility as a parent to make sure that we can support the capital needs of our organization, and then have us more flexibility to use that excess cash flow for other purposes if we're able to.
Got it. That's helpful. And sorry if I missed this in the prepared remarks, but did you give an outlook for the health margin for the fourth quarter of 2026? I know there are some moving pieces in the third quarter with the claims and assumption review, so sorry if I missed that, but just wanted to clarify that.
Not specifically for the fourth quarter, but overall? 22%-24% in the-
Just the fourth quarter of 2026, yeah.
You are good. 20%-22%.
Did you say 22%?
20%-22%, somewhere in that range.
Okay, thank you. Got it. Thanks so much.
Yep.
Thank you. There are no further questions in queue. I will hand it back to Stephen Mota for our closing remarks.
All right. Thank you for joining us this morning. Those are our comments. We will talk to you again next quarter.
Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.