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Presentation

Primerica, Inc. beats earnings expectations. Reported EPS is $3.49, expectations were $3.47.

Operator: Greeting and welcome to Primerica’s First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nicole Russell, Head of Investor Relations. Thank you, you may begin.

Nicole Russell: Thank you, Maria, and good morning, everyone. Welcome to Primerica’s first quarter earnings call. A copy of our earnings press release along with materials relevant to today’s call are posted on the Investor Relations section of our website. Joining our call today are our 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 your questions. During our call, some of our comments may contain forward-looking statements in accordance with the Safe Harbor provisions of the Securities Litigation Reform Act. The company assumes no obligations to update these statements to reflect new information. We refer you to our most recent Form 10-K filing as may be modified by subsequent Forms 10-Q for a list of risks and uncertainties that could cause actual results to materially differ from those expressed or implied.

We will also reference certain non-GAAP measures, which we believe provide additional insight into the company’s operations. Reconciliations of non-GAAP measures to their respective GAAP numbers are included at the end of our earnings press release and available on our Investor Relations website. I would now like to turn the call over to Glenn.

Glenn Williams: Thank you, Nicole, and thanks everyone for joining us today. We’re encouraged by our first quarter performance reflecting positive results from our focus on growing distribution capabilities and improving the attractiveness of our products. Our unique ability to meet the financial needs of middle-income families is attracting more people to our entrepreneurial opportunity. These dynamics have created momentum in recruiting and licensing, resulting in sales force growth. In addition, both our clients and our sales force have reacted positively to our new series of Term Life products, leading to growth in sales. Although securities market conditions continue to create resistance to growth in our ISP sales, clients desire for financial guidance remained strong.

Starting with a quick recap of our financial results. Adjusted operating revenues of $695 million remain largely unchanged year-over-year, while adjusted net operating income of $129 million grew 10%. These results reflect the continued growth in Term Life premiums, the benefit of higher interest rates on net investment income and our progress in improving the results of our Senior Health business. The quarter was also negatively impacted by persistent inflation and continued equity market volatility that pressured ISP and Term Life sales and led to a modest increase in policy lapses. On the capital deployment front, we repurchased $85 million of our common stock and paid $24 million in regular dividends during the first quarter. Given the strength of our capital and liquidity positions, we believe we will meet our targeted repurchases for the year of $375 million.

Recognizing the importance of growing the sales force both the home office and field leadership teams are focused on its key components, recruiting and licensing. Starting with recruiting, momentum remained solid with approximately 93,500 individuals joined Primerica during the first quarter. This represents a 10% increase over the prior-year period. Licensing results were similarly strong with more than 11,000 new life license reps added during the quarter, which represents an 11% increase year-over-year. We ended the quarter with 136,430 life licensed reps which was slightly elevated due to delays in processing about 800 terminations by the State of Florida. These terminations should all be processed during the second quarter and we continue to believe that we can grow the sales force around 3% in 2023.

Turning next to our production results. The new Term Life insurance products introduced last fall have given the sales force an increased degree of enthusiasm. By introducing more rate classes, we’re able to better match risk and price which allows our clients to potentially purchase more insurance coverage. During the quarter, we issued 84,500 new life insurance policies, which represents an increase of nearly 2% year-over-year after adjusting the prior year figure to reflect a one life per policy issued equivalent. Productivity at 0.21 policies per life license rep per month remained in our historical range of 0.20 to 0.24. In addition to issued policies, we believe estimated annualized issued Term Life premiums and issued Term Life face amounts provide useful information about our Term Life business.

These figures capture the amount of protection in newly issued policies as well as additions to coverage in force policies. During the quarter, estimated annualized issued Term Life premiums were $89 million, up 6%, while newly issued face amount of $28.1 billion grew 14% year-over-year. Looking ahead, we believe the high cost of living will moderate sales growth in the near-term, where we believe full year growth in issued policies will be in the mid-single digit range. Turning to the Investment and Savings Products segment, sales of $2.3 billion declined 25% compared to the first quarter of 2022, which was our largest sales quarter ever. Client asset values ended the quarter at $87.6 billion, up around 4% since the beginning of the year, but down 6% versus March 31, 2022.

Volatility in the equity market continues to negatively impact large transactions such as rollovers. However, we see very little change in the number of automatic monthly investment transactions or redemption activity. Net inflows during the quarter were $642 million. We believe that our client’s continued focus on long-term goals along with systematic monthly investing sets Primerica apart from many other distributors. Considering the current market environment, we expect second quarter ISP sales could decline as much as 7% to 10% year-over-year, but ongoing uncertainty makes it difficult to project too much further ahead. We turn now to our Senior Health business. Results for the quarter were in line with our expectations and our efforts to maintain controlled growth during the fourth quarter’s AEP and this quarter’s OEP.

Progress has been made on our goal of improving unit economics, first quarter LTV to CAC ratio was 1.1. As we discussed last quarter, we deliberately entered the 2022 enrollment in the 2023 renewal periods with about half the number of agents compared to the previous year and they focus on agent productivity. The early results of these efforts are encouraging. We are also pleased that lead sourced by Senior Health certified Primerica representatives represented 10% of first quarter sales volume, up from 4% last year. These leads remain attractive in terms of conversion rates and early indications are more favorable persistency. We’re encouraged by the progress of the e-TeleQuote team over the last three quarters. It is clear that we need to keep working towards scaling the business and we will continue to evaluate how best to do so.

While it’s still early, our efforts to grow judiciously are consistent with our plan to achieve adequate volume supported by reasonable and growing margins while controlling the capital required by the business. Finally, I’m proud of the Primerica team and the steady progress we are making, executing against our plan to grow the size of the sales force. It’s clear that middle-income families need help navigating these uncertain times. The current economic conditions underscore the important role that Primerica representatives play in providing education and guidance to their clients, keeping them focused on the future and working toward financial independence. Now, I’ll ask Alison to add her comments.

Alison Rand: Thank you, Glenn, and good morning, everyone. A quick housekeeping item to mention before I review our first quarter financial results. Last Tuesday, we filed a Form 8-K which provided financial results for the year ended December 2021 and for each quarter of 2022 under the new accounting standard for long-duration targeting improvements or LDTI. The revised results also recognize all net investment income in the Corporate and Other segment. An adjusted version of our fourth quarter 2022 financial supplement can be found on the Financial Info tab of our Investor Relations website. Starting with the Term Life segment. Operating revenues of $421 million during the quarter increased 3% year-over-year and pre-tax operating income of $127 million increased 7% compared to the first quarter of 2022.

The pre-tax operating margin during the quarter was 21.4% versus 21.2% in the prior-year period. Adjusted direct premiums grew 6% year-over-year in the first quarter in line with expectations. Assuming the mid-single digit sales growth, Glenn discussed earlier, combined with the size and stability of our in-force premium days, we expect ADP growth of around 6% to continue for the remainder of 2023. The DAC amortization ratio for the quarter was 11.8% versus 11.7% in the prior-year period. As discussed in the last earnings call, we expect the DAC ratio under LDTI to be very stable from period-to-period and around 12% each quarter. Moving to the benefits and claims ratio. The first quarter ratio was 58.7% compared to 58.9% in the prior-year period, reflecting the stability we expected from LDTI.

The benefits and claims ratio came in slightly higher than the preliminary estimate of around 58% we provided during our fourth quarter earnings call. As we finalized all of our processes related to the adoption of LDTI, we found a modification that was needed to properly reflect the disability incident rate under our waiver of premium rider. Since the liabilities for future waves policy premium versus a death benefit, it is not subject to YRT reinsurance, and therefore, led to a disproportionate increase in the benefits and claims ratio. We expect the full year 2023 benefits and claims ratio to generally be in line with first quarter results. With the adoption of LDTI, the benefits and claims ratio now includes the future policy benefit remeasurement gain loss.

This line item reflects the cumulative effect of assumption changes and experience variances back to the latter of the 1/1/21 transition date or the policy issued date on the current period beginning with reserve balance. Given our proximity to the transition date, in the near-term, assumption changes and experience variances will largely be recognized in future periods by unlocking the rate at which benefit reserves are accrued. Given the weighted average duration of our future policy benefit liability, we should reach a steady-state about 50% of assumption changes and experience variances being reflected in the period of occurrence in 2028 or 2029. The remeasurement gain loss was de-minimis in the first quarter as claims experience for the period was largely in line with LDTI assumptions.

While persistency deteriorated slightly versus pre-pandemic levels, it does not have a significant impact on the net liability for future policy benefit nor as we discussed last quarter, does it have a significant impact on DAC under LDTI. If current trends continue, we do not anticipate any meaningful revisions when we perform our annual unlocking of reserve assumptions in the third quarter. Insurance expense ratio was slightly higher in Q1 than we expect it to be for the remainder of the year. Given this and the consistency in the DAC and benefits and claims ratios from period-to-period, we expect the full year Life margins to be near 22%. Turning next to the Investment and Savings Products segment. First quarter operating revenues of $210 million declined 13% compared to the same period last year, while pre-tax operating income of $56 million declined 16%.

Market volatility continues to put downward pressure on both sales and client asset value. Year-over-year revenue generating sales declined 29%, which led to a 30% decline in sales-based revenues and commission expenses. Asset-based revenues, which benefited from a mix-shift towards products on which we earn higher asset-based fees such as managed accounts and mutual fund sales under the PD model in Canada declined 1% year-over-year, while average client asset values declined 8%. Asset-based commission expenses were generally in line with asset-based revenues after excluding revenues from segregated funds for which asset-based expenses are recognized as insurance commissions in DAC amortization. Continuing with results in our Senior Health segment.

As Glenn mentioned earlier, we continue to make progress building a sound Senior Health business and our profitability metrics are improving. LTV’s per approved policy for the quarter were $856, generally in line with expectations. Both the charge-back rate on business sold during the fourth quarter AEP and the renewal rate for the January 1st annual renewal cycle were in line with our revenue assumptions and therefore we did not need to recognize a negative revenue tail adjustment this quarter. We believe this is indicative of both our significant progress in refining our revenue recognition model as well as a stabilization of churn trend in the marketplace. CAC per approved policy improved to $814 during the quarter, reflecting our progress in managing leads selectively and efficiently.

Looking ahead, we expect normal seasonality to pressure CAC as there is a limited number of seniors who can enroll in Medicare during the second and third quarters. We expect to incur modest losses in the second and third quarters and a profit in fourth quarter during AEP. On a full year basis, we expect segment losses to be around in the $5 million range. Currently, we do not expect that the Senior Health business will require capital from the holding company to fund operations in 2023. The Corporate and Other Distributed Products segment adjusted loss of $11 million decreased $3.5 million year-over-year. The improvement was driven by significantly higher net investment income partly offset by lower mortgage loan sales and volatility in the small block of discontinued business in our New York subsidiary.

Adjusted net investment income increased $10 million compared to the prior-year period. Growth in the portfolio contributed to the increase in NII, but the rise in interest rates over the last year had been the primary driver. We’ve seen both steadily rising average book yields in our fixed maturity portfolio as well as rising yields for our cash and money market balances, which alone added $5 million NII in the quarter year-over-year. If the rate environment stays consistent, we expect NII to be around $32 million per quarter for the remainder of 2023. On a year-over-year basis, we expect NII to be favourable by about $9 million in 2Q and continued to be favourable for the remainder of the year, but to a lesser extent given the rise in rates began last year.

As we’ve noted in the past, given the nature of our business, we are not constrained by our liability duration in choosing how best to invest our portfolio. We are focused on optimizing our income while also maintaining a conservative portfolio that does not subject us to undue risk. On a regular basis, we review the relative value of purchase opportunities in various asset classes and durations looking for those that we feel pay us for the risk. Inversion of the yield curve has allowed us to invest at attractive levels without extending duration. Our new money rate of almost 5.6% is up more than 200 basis points compared to the first quarter of 2022, while the average duration of purchases remained relatively short at 4.3 years. Commercial real estate has received a lot of attention recently particularly office space.

We do not write any direct mortgages and most of our exposure is in syndicated CMBS and publicly traded REITs, which combined account for about 8% of our portfolio. Office space exposure is estimated to be less than 3% of the portfolio. With respect to our CMBS holdings, our average rating is AA minus with a weighted average loan to value of about 60% and weighted average debt service coverage of 2.4 times. Our public bond issued REIT have an average rating of BBB plus. There’s also been a lot of attention paid to stress in the regional banking sector. With respect to regional banks, we have limited exposure at around $25 million or less than 1% of the portfolio with an average rating of BBB plus. We hold the small position less than $3 million in Silicon Valley Bank bonds, on which we took a $2 million credit impairment during the quarter.

We continually review our holdings and have not identified any other issues that would prompt us to record any impairment. Moving to consolidated insurance and other operating expenses, the total incurred for the quarter of $151 million increased $6 million or 4% versus the prior-year period. We experienced higher technology spend during the quarter after a slower start last year and are also seeing higher employee and growth related costs that are in line with the overall growth in the business. The year-over-year comparison benefited from lower sales force leadership event cost in the current period as we resumed our typical two per year event cadence after holding an additional event in 2022. Looking ahead, we expect second quarter insurance and other operating expenses to increase 2% to 3% year-over-year, driven by continued growth in the business, technology spend and employee-related costs.

We will also benefit from $5 million lower costs associated with sales force leadership events due to the convention in the prior year. We remain on pace for full year insurance and other operating expense growth rate of 4% to 5%. Liquidity at the holding company remains strong with invested assets and cash of $330 million and Primerica Life statutory risk based capital ratio was estimated to be 455% as of March 31st, 2023. We continue to take ordinary dividends from Primerica Life as available and plan to modestly reduce our RBC over time. With that, operator, I’ll open the line-up for calls — for questions.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Dan Bergman with Jefferies. Please proceed with your question.

Operator: Our next question comes from Wilma Burdis with Raymond James. Please proceed with your question.

Operator: Our next question comes from Ryan Krueger with KBW. Please proceed with your question.

Operator: Our next question comes from Andrew Kligerman with Credit Suisse. Please proceed with your question.

Operator: Our next question comes from Mark Hughes with Truist. Please proceed with your question.

Operator: We have reached the end of our question-and-answer session. This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time.