Primerica, Inc.
Q1 2017 Earnings Call Transcript

Published: 14 May 2017

[Operator:]

Good day, and welcome to the Primerica, Inc. First Quarter Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kathryn Kieser, Executive Vice President of Investor Relations. Please go ahead.

[Kathryn Kieser:]

Thank you, Nicole. Good morning, everyone. Welcome to Primerica's first quarter earnings call. A copy of our earnings release, financial supplement and presentation and webcast of today's call are available on our website at investors.primerica.com. Glenn Williams, our Chief Executive Officer and Alison Rand, our Chief Financial Officer will deliver prepared remarks, then we'll open it up for questions. We reference certain non-GAAP financial measures in our press release and on this call. These non-GAAP measures have limitations, and reconciliations between GAAP and non-GAAP financial measures are attached to our press release. We'll make certain forward-looking statements in accordance with the Safe Harbor provisions of the Securities Litigation Reform Act. The company will not revise or update these statements to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's 2016 annual report on Form 10-K, as updated by our quarterly report on Form 10-Q. Now I'll turn it over to Glenn.

[Glenn Williams:]

Thank you, Kathryn. Good morning, everyone. We continue to execute our strategy to drive growth in the first quarter. We began the year by meeting with thousands of our representatives across the US and Canada. At these meetings, we talked about the expanding middle-income market and their increasing need for the financial solutions that we provide. We are focusing on our own growth in order to meet those needs. We plan to accomplish these through business enhancements and initiatives to expand distribution. In January, I challenged our field leadership to reach 120,000 life licensed representatives by our convention in June. They accepted the challenge, and we're on track to reach this goal. At the end of the first quarter, our sales force had reached almost 118,000 life insurance licensed representatives, which led to higher Term Life sales year-over-year. Positive market performance drove record Investment and Savings Products sales and client asset values in the first quarter, and we delivered significant growth in adjusted operating EPS of 19% through solid earnings and capital deployment. Beginning on Slide 3, you can see in the first quarter of 2017, adjusted operating revenues increased 11% to $405 million and adjusted net operating income increased 14% to $52 million from the prior year period. Results were driven by a 15% increase in Term Life adjusted direct premiums, partially offset by weaker persistency in claims experience in the first quarter and also driven by 17% higher Investment and Savings Products income year-over-year. Insurance and operating expenses were seasonally higher in the first quarter, primarily reflecting annual employee incentive compensation and merit increases. Our diverse business continues to generate solid earnings and return a significant amount of capital to our stakeholders. In the first quarter, we repurchased approximately $30 million or 380,000 shares of Primerica's common stock. In May, we successfully expanded our existing redundant reserve financing transaction to add issue years 2015 and 2016 to the transaction while at the same time, negotiating a lower financing rate. With this approval in place, we plan to repurchase a total of $150 million of stock in 2017 in addition to paying stockholder dividends and to have the ability to deploy capital at this level in 2018 as well. Our unique business enables us to continue to generate annualized ROAEs that are among the best in the industry. In the first quarter, ROAE expanded 120 basis points to 17.5% versus the prior year period, and we expect annualized ROAE to be around 20% for the full year 2017. In addition to solid financial performance, we surpassed the very strong distribution results achieved in the first quarter of last year. On Page 4, you can see our life licensed sales force grew 9% from the prior year period. Recruiting of new representatives increased 12% and new life insurance licenses were 13% higher, indicative of continued high recruiting levels and licensing focus. On a sequential quarter basis, recruiting increased 18% following the typically slower holiday season. New life insurance licenses slightly declined from the prior quarter, reflecting seasonally lower recruiting levels in the fourth quarter. On a full year basis, we continue to expect the ratio of new life insurance licenses to recruits to be in the 17% range. On Page 5, you can see the growth in the size of our life insurance license sales force as well as productivity of 0.20 policies issued per life insurance license representative per month, led to a 6% increase in Term Life policies issued year-over-year. Productivity was moderately lower than recent quarters as is typical in the first quarter. Growth in issued policies continued to significantly outperform the industry, which reported a 5% decline in life insurance applications year-over-year. As we see on a sequential quarter basis, Term Life insurance policies issued declined from the fourth quarter. A lower number of new life insurance applications are typically submitted during the slower holiday season, which leads to fewer policies issued in the months following. We remain well positioned to outperform the life insurance industry by effectively serving frequently ignored middle-income families with one of the largest exclusive life insurance sales forces in North America. Our educational approach provides these families with the financial roadmap to help make prudent financial decisions about protecting their income and saving for retirement. We achieved record Investment and Savings Products sales in the first quarter and 15% growth year-over-year, reflecting positive market performance. US retail mutual fund sales grew 25% while variable annuity sales lagged the first quarter of 2016, consistent with recent industry trends. Managed account sales accelerated during the quarter as we prepared our representatives for the launch of the new Primerica Lifetime Investment Platform. Canadian mutual fund and segregated fund sales were also strong in the first quarter. ISP net flows were positive $320 million and client asset values increased to a record $54.9 billion at the end of the period. Our priority continues to be acting in the best interest of our clients. We believe in client choice, whether that means a mutual fund with an upfront sales charge or an advisory account with an asset-based fee. While awaiting further policy decisions, we're in the process of preparing for the partial implementation of the Department of Labor Fiduciary Rule on June 9. We're in ongoing communications with our senior sales force leaders and working closely with our top ISP producers. We'll be training representatives on the impartial conduct standards and fiduciary requirements as well as expanding our internal oversight and review. We will continue to review our practices to ensure that the support we received from our product providers complies with the transitional rule. This is a fluid situation, and we continue to play an active role in the review of rule, and we are working with other industry stakeholders, trade associations and public officials to assure that the rule comes out in the right place. We're encouraged by the president's directive that the DOL review the rule to ensure hardworking middle-income families can continue to receive the assistance they need to plan for retirement. As we get into the second half of the year, we continue to be laser-focused on company growth and are using the proven levers like our convention and ongoing enhancements to drive growth. We're also looking at unique opportunities to add high-impact initiatives involving digitization to improve client experience and deepen relationships as well as facilitate representative success. Our business fundamentals are strong, and we are well positioned to continue to achieve solid distribution growth and operational results for our stakeholders. I feel good about where we are right now and our opportunities for the future. Now I'll turn it over to Alison.

[Alison Rand:]

Thank you, Glenn. Good morning, everyone. My comments today will cover the earnings results for each of our business segments and then conclude with a company-wide review of insurance and other operating expenses and taxes. Starting on Slide 6. In the first quarter, Term Life income before income taxes grew 6% year-over-year and revenue growth remains strong. Adjusted direct premiums increased 15%, reflecting continued strength in Term Life production as well as growth in the imports business not subject to IPO-related coinsurance agreements. During the quarter, we experienced weaker persistency and higher claims than expected. Insurance expenses, which are typically highest in the first quarter, were also higher year-over-year, but were in line with our expectations and consistent with the prior year as a percentage of adjusted direct premium. The impact of lower persistency is most notable in the DAC amortization ratio, which increased to 16.8% in the quarter versus 15.8% in the prior year period. We estimate that general weakness in persistency impacted DAC by about $2.5 million in the quarter, while there was about another $1.5 million impact from a specific block of Louisiana policies. In August 2016, Louisiana's Insurance Department requested that certain life insurance policies be restricted from lapsing due to severe flooding. When this restriction was removed in the first quarter, many of these policies ultimately lapsed. If persistency returns to normal seasonal trends for the remainder of 2017, we'd expect the DAC amortization ratio to be slightly above 15% on a full year basis. The industry often reports unfavorable claims experienced in the first quarter. While we have not seen this in our book of business in the last few years, we did see it in 2017. The unfavorable experience was due to a combination of higher claims frequency and a higher level of claims in Canada from issue years where our YRT reinsurance program was not in place. The US YRT program has been in effect since 1994, but it was not put in place in Canada until 2012 when YRT pricing became more reasonable. A key objective of our YRT reinsurance program is to minimize volatility such as we saw this period. The higher claims experience was partially offset by lower reserve increases from weaker persistency for a combined impact to benefits and claims of about $3 million. While quarterly volatility is expected, annual claim trends have been very stable, and we do not believe this quarter results are an indication of a negative trend for claims. We continue to expect the benefits and claims ratio to be in the 58% to 59% range for the full year 2017. While there could be fluctuations in quarterly results due to persistency, mortality and expenses, the Term Life business generally produces steady and predictable long-term earnings. We continue to expect attractive adjusted direct premium growth in the mid-teens as a result of recent and continuing strength in policy issuance combined with the coinsurance transactions we entered into at the time of the IPO. On an annualized basis, we expect the insurance expense ratio to show slight improvement from 2016 levels and the Term Life margin to be around 19%, reflecting the weaker claims in persistency in the first quarter. Moving now to our Investment and Savings Products segment. On Slide 7, you'll see both ISP revenues and income before income taxes has strong year-over-year growth, 12% and 17%, respectively. Sales-based revenues increased 8% year-over-year, but the sales-based net revenue ratio declined as there was a product mix shift from variable annuities to U.S. mutual funds, which have lower sales-based earnings. Asset-based revenues increased 17% year-over-year, in line with average client asset value and the asset-based net revenue ratio was consistent year-over-year. Account-based revenues grew year-over-year, largely due to a change made in our account-based fee structure in 2016, the full year impact of which was recognized in the fourth quarter 2016. Additionally, we had a higher number of accounts than in the prior year period. We anticipate the level of account-based revenues recognized this quarter to be indicative of a new run rate going forward. On Slide 8, you can see the corporate and other distributive product segment. Adjusted operating revenues were $30.6 million and adjusted operating losses before income taxes were $11.4 million in the first quarter of 2017. The mark-to-market on the deposit asset backing an IPO-related reinsurance agreement was negligible this quarter, whereas there was about $1 million positive mark-to-market adjustment in the year-ago period due to a strong rally in bond prices in that period. Invested assets portfolio yields were lower this year versus last, but the average size of the portfolio has increased year-over-year, somewhat offsetting the yield decline. We continue to maintain a relatively short overall portfolio duration at less than four years, as we have not seen significant incentive or opportunity to add yield by extending the duration of our portfolio. Primerica has a strong balance sheet and conservative portfolio comprised of high-quality invested assets. Our reliance on investment return is low, with a ratio of invested assets in cash to stockholders equity at 2.1x and net investment income representing less than 5% of our adjusted operating revenues in the first quarter. Now I'll move to a discussion of the company's insurance and other operating expenses. On Slide 9, you can see our first quarter expenses of $90.4 million or $10 million higher than the first quarter of last year and in line with the estimate we shared in - on our fourth quarter earnings call. The year-over-year exchange primarily reflects a $4.5 million increase in employee-related expenses from a combination of annual merit increases, higher annual incentive compensation and growth in our employee base. Elevated expenses also include about $2 million of incremental spend driven by business growth as well as another $2 million of spend from continued deployment of technology platforms with the latter largely being offset by the year-over-year increase in other net revenue. Looking ahead to the second quarter, we expect insurance and other operating expenses to be at a more normalized level of about $83 million to $84 million, reflecting the typical sequential decline in our annual employee-related expenses. As we described last quarter, we adopted a new accounting standard in the first quarter of 2017. As a result of our - as a result, our effective tax rate was 30.4% in the first quarter of 2017, down from 35.7% in the prior year period, largely due to $3.3 million of excess tax benefit. This standard requires the excess tax benefit or expense for the difference between the stock price of equity award at the time of grant investing to be recorded in the income statement rather than directly to equity in the balance sheet. We see the largest impact in the first quarter as that is when the bulk of our annual awards granted to employees vest. However, our income tax expense will continue to be affected by the future market prices of our common stock as sales restrictions last on equity awards granted to our independent sales force. At our current stock price, we expect a tax benefit from the new accounting standard of approximately $1 million each quarter for the remainder of 2017, which would result in an effective tax rate of about 34.5% in the second quarter. As I wrap up, let me say that we remain committed to maintaining a strong balance sheet and continue to demonstrate a strong capital position with Primerica Life Insurance Company's statutory risk-based capital ratio estimated to be around 440% and holding company liquidity of $82 million at the end of the first quarter of 2017. Now let's open it up for questions.

[Operator:]

[Operator Instructions] Our first question comes from Sean Dargan of Wells Fargo Securities.

[Sean Dargan:]

I just wanted to ask about the claims experience. Sometimes, investors, when they hear frequency as opposed to severity, get nervous. Can you just go over what was going on with your Canadian YRT business and how that might have impacted the claims experience in the quarter?

[Alison Rand:]

Sure, absolutely. Specifically with Canada, one of the things we talked about quite frequently is that we use YRT reinsurance extensively because we do look at our sales as a distribution company more so than just an underwriter, and we really do like to lock-in our mortality exposure and avoid these kind of volatility experiences. The interesting thing - so that program has been in place since 1994 in the U.S. But for many years in Canada, the marketplace just wasn't as reasonably priced for this kind of business. So we really did not introduce that program extensively in Canada until 2012. So what we saw this period was, there was a handful of claims in Canada. And when I say handful, it really is just a handful. But there were some claims in Canada that fell in the years where we did not have that YRT coverage, and so it created a little more volatility than what we would see normally. With regard to their frequency versus severity, you are correct. It wasn't a severity issue. It was a slight frequency issue. I think I should highlight that really we saw most of this in January and a lot of it normalized out in February and March. So I really do think it was just a situation that you normally do see in the industry. Like I said, we haven't seen it in the last few years. But if you do go back in time since we've been a public company, there were several years where we did in fact see the spike in the first quarter. So I really do think it's pretty much normal volatility.

[Sean Dargan:]

Okay. And would you be able to comment on what the experience has been in April?

[Alison Rand:]

Yes, we've - like I said, the issue is really in January. February, March and April have all been pretty consistent with our expectation, I should say.

[Sean Dargan:]

Okay, great. And just on the run rate with asset-based revenue. So are you talking about net revenue here, so commissions and fees, less sales commissions?

[Alison Rand:]

That is correct. So it's the ratio that we have in our financial supplement, which is what you described.

[Operator:]

Our next question comes from Ryan Krueger of KBW.

[Ryan Krueger:]

Alison, how much did the XXX transaction free up in capital and how much will the cost go down based on the renegotiated financing?

[Alison Rand:]

Okay. Well, the latter - I'm not sure I can actually share with you, I think that is nonpublic information, but the cost itself wasn't all that significant in the first place. So I think I'll get a number for you, but let me guess around $1 million for the year, but I will come back to you with that. Again, it's not a significant number in the first place. On the how much does it free up, I think what we've said in the past is that if you look at any one of these issue years, the maximum amount of capital - or I should say, the maximum amount of redundant reserves that we hit is a couple of hundred million dollars. That doesn't happen right away, and that's not all available for free up right now. But over a period of time, these transactions tend to accelerate about that much. We do have two blocks in here. But right now, there's not a whole lot necessarily available because those reserves, as you well know, do build up over time. So obviously, very brand new blocks. So it will take a little bit of time until there's sort of that full capacity. Our plan is to go ahead like we've always done and move as much as we can based on ordinary dividend capacity out of Primerica Life. Remember, with Massachusetts, there is sort of a 12-month rolling rule. So we do just take out as much as we can each quarter. And as Glenn mentioned, what we are comfortable saying is that we do feel - given that we have this new transaction in place or the extended transaction in place, we are very comfortable with $150 million both for this year and for next year.

[Ryan Krueger:]

And then on the Term Life margins, is there any change in your go-forward expectation? I think, last quarter, you talked about 19% to 20%. I think you're saying 19% now. Did that just reflect what happened in the first quarter? Or is there any change in the future expectation?

[Alison Rand:]

Yes, that's a great question, and it does reflect what happened in the first quarter. So those weren't the things where we had necessarily anticipated when we put out the range. We were - quite frankly, we were in the middle of that range, somewhere in that middle of the range when we put it out. So we do think the first quarter did take a bit of a toll, but we still think we're going to be at about 19% if all things move according to plan for the rest of the year.

[Operator:]

Our next question comes from Dan Bergman of Citi.

[Dan Bergman:]

I was just hoping you could provide some more color around the turnaround and Investment and Savings Products sales during the quarter. Really, just any sense of how much of that improvement was due to maybe better equity markets versus other factors. Really, any color on that and whether we should expect that improvement we saw in the first quarter to be sustainable going forward would be much appreciated.

[Glenn Williams:]

Great, Dan, love to do that. Yes, as you know from our experience in 2016, we saw a strengthening of that business every quarter as market returns improved throughout the year and some of the uncertainty worked its way out of the system. And so we just can't see it. We saw that trend continue in the first quarter. It was a very strong quarter - record quarter for us in sales, and we continue to see that the fundamentals are sound, continue to have a positive feelings about the market and the direction of the market, which is always critical. We don't have any undue disruption. I'm sure we'll get to the DOL rule in a few minutes, but we're - the uncertainty there is still out there, but it's not as great as it has been in the past and the perceived impact of the rule is not as great as it might have - as it would have been under the full rule. So you've got some tailwinds there, some positive direction. And we continue to see that our sales leaders are leading in an incredible way, and we're seeing good returns in the products they're selling. So I think we've got a very strong kind of fundamental situation for us to be able to be positive about the future. The rate of the growth and exactly what amount of that rate because it was an extremely strong growth quarter. How much of that is sustainable quarter-after-quarter is always up for question, but I would say we're pointed in a positive direction.

[Dan Bergman:]

Great, very helpful. And then maybe just changing gears a little bit. It look like the sales were up, nonrenewal rate increased somewhat during the quarter from where they've been running entire quarters. So I just want to see if there's any additional color you can give on what you've been seeing in terms of nonrenewals and maybe what we should expect there going forward.

[Glenn Williams:]

We obviously saw that as well. And as you know, our normal run rate is about 8% a quarter, and we do believe that is the run rate. You've got some lumpiness in the numbers quarter-by-quarter because we deal with 65 jurisdictions on licensing and renewals. They - some have 2-year licenses and some have 1-year, and so you get kind of clumps of nonrenewals coming through the system in various months or various quarters. And so it was up a little bit in the first quarter, but we do expect our run rate to continue to be around 8% a quarter on nonrenewals.

[Operator:]

[Operator Instructions] Our next question comes from Adam Klauber of William Blair.

[Adam Klauber:]

A couple of questions. Mutual funds had a great quarter. As you mentioned, the variable annuities were still - they weren't down, but they were more flattish. Do you think part of that is that are the reps still trying to figure out what DOL could have an impact or the variables more impacted by that? What's causing that disparity between mutual funds doing real well and variables lagging?

[Glenn Williams:]

Yes, Adam, I think you're exactly right, and I think we're tracking very close to the rest of the industry on this. We're still seeing pressure on variable annuity sales as we were down about 5% in the quarter in sales, tracking in - it's certainly in the same direction. I don't know about all the industry data this early, but all the reports we're getting is they continue to see pressure, and that's creating mix shift over to mutual funds sales. It certainly what I believe is happening. And I think it's for the reason you described, I think there continues to be uncertainty about exactly the fit that variable annuities will have in the new fiduciary world. And in abundance of caution, people are saying I want to get used to the - what I think the new way will be even before it arrives. And so I think that's exactly what's driving this. There continue to be a place for that product, no question. But at the same time, I think you're going to see some continued pressure. It does look like it's easing a little bit the sales or loss of production. It looks to be slowing down some industry-wide to me, but they're still probably a little pressure left out there now.

[Adam Klauber:]

Okay, okay. And then on growth of recruits, about '15 and '16 - sorry, life distribution recruits, '15 and '16 were extremely strong. And I know you did a lot of work to generate that, you changed the platform. It really, really helped with some live intel, helped with the testing. As we look at '17 coming off a much higher number, I mean, last year, you had almost 270,000 recruits, it's going to be tough to sustain that 15% to 20% growth in recruits just coming off that higher number.

[Glenn Williams:]

Yes, there's no question. That's quite a lift after a couple of years of those kinds of numbers. As you heard in our report that we've had a very strong start to this year, and we do believe that our fundamentals continue to be sound. We've got - I think we've been successful and kind of disciplined use of our incentives. So as we build growth, we're looking for sustainable growth rather than a roller coaster ride. And we even see it in our plan around our convention. We - historically, over many years, we would see big spikes in this. You'd see it lull in business before convention and a spike in business right after convention. We worked hard to make that more consistent with stronger growth going in and continued an even stronger growth going out, but more of a - kind of a smooth trajectory rather than a roller coaster ride, and that's what we're attempting to do again this year. We're very successful at it in 2015, and so we do believe we still have some levers out there such as the convention that can help us sustain growth even after the strong two years. But you're exactly right, the comparables become more and more difficult as you go. But we had a great first quarter, very strong in the distribution front, and we're working hard to continue that.

[Adam Klauber:]

Okay, great. And then, Alison, this part is for you. As part of the life margin, you had nice expansion last year. If revenue growth - we don't know, but sort of in that similar range, is there just inherent margin with built-in to that higher level of revenue growth?

[Alison Rand:]

Well, there is with regard to the operating expense and the insurance expense component because so much of that is really pretty fixed in nature. But the other items really will move - will grow theoretically, variably with the growth in the premium. So persistency and mortality are the other key drivers. And they're just - our book is very large, and it's a homogenous book of business. So as we said earlier, normally, this is a pretty - over the longer term, I should say, this is a pretty very predictable business. So in and of itself, they don't drive anything. I will say some things that I've highlighted in the past are sort of underlying the trend. So specifically, we did have some reinsurance rate improvement back in 2014. And so as of those blocks of business continue to age, we continue to get the benefit of that. So there are some things moving that can help drive the margin incrementally up. Obviously, when we have a specific bad quarter or good quarter for that matter, it will move it outside the norm. But I'm not sure if I answered it completely, but that would be my feedback.

[Operator:]

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

[Glenn Williams:]

Thank you, everyone.