Primerica, Inc. (PRI) Q1 2017 Earnings Report, Transcript and Summary

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.

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.

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.

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. -: 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. -: 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 Instructions] Our first question comes from Sean Dargan of Wells Fargo Securities.

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?

-: 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.

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

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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?

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

Our next question comes from Ryan Krueger of KBW.

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

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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?

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Our next question comes from Dan Bergman of Citi.

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.

-: 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. -: 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.

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.

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

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-: 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. -: 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.

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-: 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. -: 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. -: 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.

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