Primerica, Inc.
Q4 2020 Earnings Call Transcript

Published: 10 Feb 2021

[Operator:]

Good morning. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the Primerica Inc. Q4 Earnings Results Conference Call . Please note, this event is being recorded. Thank you. I would now turn the call over to Nicole Russell, Head of Investor Relations. You may begin your conference.

[Nicole Russell:]

Thank you, Kate, and good morning, everyone. Welcome to Primerica's fourth quarter earnings call. A copy of our earnings press release, along with materials that are relevant to today's call are posted on the Investor Relations section of our Web site at investors.primerica.com. Joining our call today are Chief Executive Officer, Glenn Williams and our Chief Financial Officer, Alison Rand. Glenn and Alison will deliver prepared remarks, and then we'll open the call up for questions.

[Glenn Williams:]

Thank you, Nicole, and thanks to everyone for joining us. I'll start my prepared remarks today with some highlights from 2020, then I will provide a review of our most recent quarter and end with a few observations as we start the new year. In many ways, 2020 was a record year for Primerica. We began the year with strong production momentum across our business. In January, February and the first half of March, prior to the onset of COVID-19, we had significant growth in recruiting, licensing, life sales and investment sales. As the pandemic began to impact our production, we saw a brief disruption followed by record demand for our financial solutions and our business opportunity. For many middle income families, the disruption revealed the weaknesses in their financial financial game plan and their career outlook. Primerica’s ability to quickly adapt and meet this demand resulted in annual production records across our business, including annual term life placed in force of over $109 billion, investment sales of over $7.8 billion and client asset values totaling $82 billion at year-end. In addition, the uncertainty in job stability and business sustainability led to record recruiting. The disruption to state and provincial licensing processes negatively impacted our permanent license pull through rates and slowed the growth of our permanently licensed sales force. These production results led to strong financial results. Starting on Slide 3 of our presentation deck, you can see we reported yet another strong quarter, which when added to the first nine months of the year, led financial results in 2020 to an all-time high. Looking first at fourth quarter results. Adjusted operating revenues of $595 million increased 12% compared to the fourth quarter of 2019, while diluted adjusted operating income per share of $2.45 increased 10% compared to the fourth quarter of 2019. Full year results set new records with adjusted operating revenues of $2.2 billion, growing 9% and diluted adjusted operating income per share of $9.70 growing 15%. Adjusted operating ROAE during the quarter was 23.4% compared to 23.7% in last year's fourth quarter, while full year adjusted operating ROE was 24.7% compared to 23.5% in 2019.

[Alison Rand:]

Thank you, Glenn, and good morning, everyone. Starting on Slide 7 with our term life segment. Operating revenues of $369 million increased 16% year-over-year, while operating income of $89 million grew 9%. The term life operating margin, which is typically lower in the fourth quarter due to seasonal persistency trends was 18.2%, down from 19.2% in the prior year period. COVID continued to have an impact on the quarter's results as did our annual actuarial assumption setting for 2020 business. Starting with COVID, the fourth quarter saw a significant rise in COVID related death claims combined with continued demand for life insurance in the form of both new sales and strong policy persistency. The number of policies issued increased 22% year-over-year, with the company reaching a record level of base amount issued in 2020. Higher sales, along with favorable persistency throughout the year, move the growth rate in adjusted direct premiums up to 15% year-over-year and added about $7 million to pretax income in the quarter. Persistency remained strong across all policy durations, with fourth quarter lapse rate nearly 30% lower in the aggregate year-over-year. Higher persistency resulted in $23 million lower DAC amortization and $13 million higher benefit reserve increases being recognized for a net contribution of $10 million to pretax income in the fourth quarter. We continue to attribute the strong persistency as well as elevated sales volumes to fears driven by the pandemic and expect levels to normalize as the risks associated with COVID subside.

[Operator:]

The first question is from Mark Hughes of Truist.

[MarkHughes:]

Alison, you have in the past, given some indication on operating margin within the term life business, you clearly described a lot of moving parts and a lot of uncertainty. I just wonder whether directionally if you could talk about the expectations. Maybe when you think about Q1, you've described the $21 million in incremental mortality. But presumably, there are some offsets around DAC. So I'm sort of curious how that shakes out for Q1 and then thoughts perhaps for the full year.

[AlisonRand:]

Mark, you are correct, I do normally give that. And as I said in my prepared remarks, this year is unusually difficult to predict what's going to happen, especially as the year unfolds. So we're focused very much on trying to keep you very current in our guidance based on what we kind of feel very more comfortable knowing. The $21 million that I quoted for life plans, what would likely come along with that and quite frankly, what we have seen in January is that we continue to see strong results on both sales and persistency. That persistency component is important because it's the one that will obviously drive the impact on GAAP and to a lesser degree, the reserve. So if you look at what happened this particular quarter, net-net we ended up at about a $3 million positive. I hate to say positive due to COVID, but the net result or impact of all the COVID items was about $3 million increase to the bottom line -- pretax income. So I can't say for sure whether the persistency offset will be complete to that $21 million, but we do expect it to provide a lot of positive in the form of DAC amortization and growth in adjusted direct premiums. So I do think there are definitely offset. At this point, I cannot really predict what will happen for the remainder of the quarter and certainly not for the rest of the year. And I do wish it was different, but as we've learned throughout COVID, the expected is completely unexpected and vice versa. So at this point, that's about as much information as I can provide.

[MarkHughes:]

And when we think about persistency in the latter part of the year, if persistency, say, normalizes, that's not necessarily a bad guy, it's just the absence of a good guy. Is that the right way to think about it?

[AlisonRand:]

So it really depends on whether you're thinking about things in pure economic terms or in turns in comparison to just the prior year. So in, say, the third quarter of 2020, we had exceptionally strong persistency. And so the impact on DAC in that period was noticeable. So while we might revert to a more historical level, it would look potentially negative on a year-over-year basis, but I would categorize it as still being very positive kind of reverting to normal, and in fact, reverting to something that's even a little stronger than normal. Given now the real awareness, if you will, towards the population towards owning life insurance and protecting their families, I think are the things that we're striving to achieve. So again, even though it might look financially like a negative year-over-year, just the way that works, reverting to our historical levels, especially the ones that we were starting to see, I'd say, really just prior to the onset of COVID, in my opinion would be positive.

[MarkHughes:]

So the mortality, the benefits expense would normalize, if that normalizes, maybe net-net, this quarter is $3 million impact. Maybe net-net, those are little bit of a headwind if it plays out that way later in the year. Is that the right way to think about…

[AlisonRand:]

Again, definitely, with regard to year-over-year, it's difficult, yes.

[MarkHughes:]

But on the other hand, you've still got the tail from the strong sales growth, it's driving the top line and the…

[AlisonRand:]

Absolutely. And that's actually because so much of that activity is a little baked in based on what happened in 2020, that's why we were a little more comfortable giving you a forward projection on growth in adjusted direct premiums. And it just gets obviously a lot more difficult as we think about the COVID related claims and then the impact on persistency associated with the pandemic.

[Operator:]

The next question is from Jeff Schmitt of William Blair.

[JeffSchmitt:]

Question on the benefit ratio. Alison, you'd mentioned maybe that goes back to that 58% to 59% maybe in the second half of this year. And I think you'd mentioned on the prior call that a lot of these sort of benefit payments this year, maybe as high as like 90% are sort of pulled forward from basically what would have happened over the next five years. So as we look out to 2022, 2023, could that conceivably move below that historical range?

[AlisonRand:]

And I forgot it's already 2021. So when you said 2022 and '23, for a moment, I thought that was really far in the future. 2020, I realize it's all of us. So we have been seeing somewhat of a decreasing trend. There's a lot of nuances about it. So I think the simpler way to put it is we could see the trend be closer to the 58% versus the 59%. I guess, given COVID and not knowing when it's going to end and then what the ongoing potential impacts might be, it's just hard to predict. But there has been just one other thing, not that we would see a whole lot of this because of our reinsurance, but there have been some changes in the population with regard to mortality improvement. It had slowed down for a period of time. I believe it is back developing again, but a lot depends on sort of what the mortality improvement trends are in the population itself.

[JeffSchmitt:]

And then just turning to the ISP segment. Obviously, you held up really well this year. Net flows were well above historical levels. Are you seeing any shift in some of the agents maybe wanting to sell investment products? I mean, is that something you're kind of marketing more, you're seeing more interest there given how well that's done?

[GlennWilliams:]

Jeff, you see our reps' attention. They're attracted to what's working at any one moment, which is normal human behavior. And clearly, we've got some real strength in that line of business right now, which is positive for us. Because we believe one of the beauties of our business model is having those two complementary main lines of business allows our company and our sales force to flex and find an area that has the momentum that they can take advantage of at the moment. So there's definitely a halo effect from the positive things happening in our investment business. But at the same time, we're actually seeing the same thing happen because of the client awareness on the life insurance side. So we're having those that may have majored in investments, take a look at life insurance, those that may have major in life insurance take a look at investments, which is a really positive dynamic to have going on. And as I alluded to in my remarks, what we believe happened in 2020 is not that a need that had never existed before it was created. We believe that the circumstances of 2020 reveal the need that had always been there and will continue to be there. And make people more sensitive to their need, both for protection, for investing for the future to get out of debt, our mortgage business that Alison referenced and also, obviously, our opportunity, it made all of those a higher priority. And so that's really the message that we're giving right now is to make sure positive in all areas of our business right now, Jeff, it's really a pretty unusual situation doesn't usually happen exactly like this.

[Operator:]

This concludes the question-and-answer session as well as the conference. Thank you for attending today's presentation. You may now disconnect.