Primerica Inc (PRI) 2012 Q3 法說會逐字稿

Good morning and welcome to the Primerica reports third quarter 2012 conference call. (Operator Instructions). I would now like to turn the conference over to Ms. Kathryn Kieser, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining us today as we discuss Primerica's results for the third quarter 2012. Yesterday afternoon we issued a press release reporting financial results for the quarter ended September 30, 2012. A copy of this release is available in the Investor Relation section of our website at investors.primerica.com.

With us on the call this morning are Rick Williams, our Chairman and Co-CEO; John Addison, our Chairman of Distribution and Co-CEO; and Alison Rand, our CFO.

We reference certain non-GAAP financial measures in our press release and on this call. These non-GAAP measures are provided because management uses them to making financial, operating and planning decisions and in evaluating the Company's underlying performance. We believe these measures will assist you in assessing the Company's underlying performance for the periods being reported. These non-GAAP measures have limitations and reconciliations between non-GAAP and GAAP financial measures are attached to our press release. You can see our GAAP results on page three of the presentation.

On today's call we make forward-looking statements in accordance with the Safe Harbor Provisions of the Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may project, indicate or imply future results, events, performance or achievements and may contain certain words such as expect, intend, plan, anticipate, estimate and believe or similar words derived from those words. They are not guarantees and, as such, statements involve risk and uncertainties that could cause actual results to differ materially from these statements. For a discussion of these risks please see the Risk Factors contained in our Form 10-K for the year ended December 31, 2011.

This morning's call is being recorded and webcast live on the Internet. The webcast and corresponding slides will be available in the Investor Relations section of our website for at least 30 days after the presentation. After the prepared remarks, we will open the call to questions from our dial-in participants. Now I will turn the call over to Rick.

Thank you, Kathryn, and good morning, everyone. Welcome to Primerica's third quarter 2012 earnings call. Our strong third quarter results were marked by solid core performance across the business segments.

As you can see, beginning on slide four operating revenues increased by 7%, and net operating income increased 21%, over the prior year period. Net operating income per diluted share increased 46% to $0.72 from a year ago. These results were driven by the continued building of recurring Term Life income, our investment and savings product sales and client-based earnings benefited from favorable market performance and the Canadian segregated fund DAC amortization was favorably impacted by the positive equity results resulting in a $2.6 million year-over-year reduction in DAC amortization. Year-over-year results also reflect net investment income enhanced by $2.8 million of certain unusual items that included securities called from our bond portfolio and recovery of defaulted interest during the quarter. The benefit of these items offset the expected pressure of lower invested assets following our stock repurchases over the past 12 months as well as lower market yields.

We feel good about the net operating income return on adjusted stockholder equity increasing to 15.1% from 10.9% in a year ago period. Achieving this level of ROE within two and a half years from our IPO was accomplished through effective capital management, the layering of new term life premium, strong investment and savings product performance and active expense management.

We continued capital redeployment in October with the $60 million share repurchase from Warburg Pincus, completing the 75 million share repurchase program that began in the third quarter. Prior to the Warburg Pincus transaction, we repurchased approximately $14 million of shares in the open market. We were able to retire a total of 2.6 million shares of common stock through our repurchase program that will be accretive to earnings per share and return on equity. We also increased our shareholder return in the third quarter by raising our stockholder dividend to $0.07 per share increasing our dividend yield to approximately 1%, as we continue to work towards our longer term goal of a dividend yield more in line with our peers.

Primerica is uniquely positioned to sell profitable Term Life insurance and third party key based products to vast and underserved middle income market. Our diverse sources of recurring income coupled with prudent capital management should enable us to maintain a strong ROE on a long-term basis. We still plan to execute $130 million to $160 million ordinary dividend payment from Primerica Life in 2013. This will allow the Life Company to remain well capitalized to fund future business while enabling us to further enhance shareholder value by redeploying capital. Our investment and savings product sales increased 3% in the third quarter from a year ago quarter primarily reflecting new product sales growth. We are pleased with the results of our new products including the $113 million of fixed indexed annuity sales in the third quarter and year-over-year growth in managed account client assets from $53 million at the end of the third quarter last year to $478 million at the end of this quarter.

Variable annuity sales resulting from clients transferring their older variable annuity contracts to the current Prime Elite IV variable annuity have normalized from the high levels in the prior year period. Without these prior year elevated transactions, total investment savings product sales would have increased 10% year over year. Our total client asset values at the end of the third quarter increased 17%, to $36.9 billion and grew 5%, compared with the June 30, 2012 in line with the US and Canadian markets. Sequentially investment in saving product sales declined 9% from the second quarter reflecting strong prior quarter retirement savings sales typical of second quarter trends during the IRA and RRSP season.

In our Term Life business, issue polices were 18% lower than the prior year period as we returned to a normalized productivity level of 0.20 policies issued per Life license representative per month from the elevated 0.24 productivity level in the prior year period. The leads generated by the post convention recruiting surge drove Life insurance productivity in the third quarter of 2011 above our historical range.

Productivity has since returned to our historical range, and we anticipate it will remain there. Sequentially Term Life insurance policies issued were 12% lower than seasonally strong second quarter. Our average policy issued premium of $782 in the third quarter remained consistent with both the second quarter of 2012 and the third quarter of last year.

John will now discuss our distribution results.

Thanks, Rick, and good morning everybody. After our post convention recruiting surge in 2011, it became apparent that we needed to refocus the front end of our business on licensing in order to build and grow distribution. Over time our monthly incentives combined with the economic downturn had shifted the focus of our sales force leaders.

A new recruit is a source of both new license distribution and sales leads. After the surge, it became clear that the sales force had shifted more towards a recruit being a source of a sales lead to hit monthly production targets than as a new potential license to build long term distribution.

In order to build healthy new distribution for the future of our Company, we needed to adjust this focus, so this year we launched several initiatives to shift this mind set. We re-calibrated our messaging and incentive programs to put more focus on licensing. We also introduced a streamline Life licensing plan for new recruits. These initiatives improved our licensing ratios, but negatively impacted recruiting levels in the second and third quarters. The impact on recruiting was anticipated, but necessary to change the long term behavior for the organization.

As we anticipated last quarter, the size of our Life license sales force in the third quarter remained consistent with the prior quarter and the prior year period, despite the challenging year-over-year recruiting and licensing comparisons. Last year's results were elevated by the short term recruiting initiative launched at our convention in June 2011. Approximately 25,000 of the incremental recruits in the third quarter of 2011 were a result of this convention incentive. As you can see on slide five, year-over-year recruiting declined 43%, and new Life licenses declined 7% in the third quarter of 2012. Sequentially new Life licenses declined 12% from the second quarter.

Our recruiting experienced downward pressure in the second and third quarters due to increased focus on licensing. This emphasis over the past two quarters has resulted in an increase in the percentage of recruits who obtain a Life license.

Our goal is to maintain a healthy balance between licensing and recruiting. Now that the licensing ratios have improved, we need to increase recruiting in order to feed the licensing pipeline and grow the size of the sales force. We anticipate being able to maintain the size of our sales force in the fourth quarter.

Last quarter we implemented a strategic initiative to modify our Life insurance compensation system. We wanted to more directly incentivize our sales force leaders' behavior to focus on developing new people rather than just hitting a monthly sales production target. Our compensation system has historically paid a combination of daily per policy commissions and a monthly sales bonus.

We introduced our new compensation system last quarter. Approximately one-third of the monthly bonus compensation was moved into the daily commission grid. We believe this will incentivize regional vice presidents to focus more on activities to build new leaders rather than just trying to hit monthly premium bonus targets.

This adjustment should also incent promotions at all levels in order to ultimately build more regional vice presidents. It is too soon to gauge the success of this modification, and as with any change you battle paralysis analysis, but I am proud of our leaders and how they are embracing the change.

As part of our continued efforts to position Primerica as a premium provider of financial services to Main Street families, we recently conducted a joint study with the Consumer Federation of America about the financial condition of middle income families. Last month at the National Press Club in Washington I spoke about the findings of the report entitled The Financial Status and Decision-making of the American Middle Class.

Since advertising is not a significant component of our corporate strategy, we believe this is a cost-effective way to increase our profile as a company that understands the financial needs of middle income families. The study was covered by over 200 unique print, broadcast, and online publications including the major networks CNBC, CNN and The Wall Street Journal and The New York Times, The Washington Post and many others.

What the report revealed is something we have known for a while -- that families without a lot of resources are balancing difficult and expensive priorities such as saving for college and retirement or paying off mortgage and consumer debt. When you consider these demands in the context of the last decades of falling incomes, the financial condition of most middle income families is challenging and they need help navigating for the future.

Since Primerica is one of the only companies still successfully and profitably providing financial services to this market, we are uniquely positioned to capitalize on this vast opportunity. The initiatives we have executed this year have laid additional ground work needed to achieve longer term sales force growth and facilitate our distribution of financial services to more Main Street families. Our strategic focus continues to be on growing the size of the Life insurance sales force to generate long term organic growth.

Now I will turn it over to Alison Rand.

Thank you, John. Good morning, everyone. Today I will start with a discussion of the earnings result for each of our segments including insights into our term life subsegments, then I will review Companywide insurance and operating expenses and conclude with an overview of invested assets and net investment income.

Starting with slide six our 16% year-over-year growth in Term Life operating revenues is driven by net premium growth of 17%, as the new term block continues to build. Likewise the growth in required statutory assets allocated to term life increases segments' net investment income year-over-year. As Rick mentioned earlier, net investment income also benefited $2.8 million from called securities and a recovery of interest from a previously defaulted bond of which about $1.9 million was allocated to term life with the remainder recorded in the Corporate and Other segment.

Term Life operating income before income taxes increased by 22% over the prior year period, driven by the solid revenue growth I just described and higher commission deferrals which primarily benefited New Term. Results also reflect growth in premium related expenses and higher interest expense related to the Redundant Reserve Financing we executed earlier this year.

During the quarter, incurred claims were consistent with a year ago period while persistency experienced was slightly lower for New Term and moderately higher for Legacy. On a sequential quarter basis, operating income before income taxes declined by 6%, primarily reflecting second quarter strong seasonal persistence and lower incurred claims.

Since the IPO, the Term Life segment has shown robust growth. While direct premiums grow slowly as Legacy premiums run off and are replaced by the layering of new term premiums, net premiums grow much faster. This results from new term being a recently issued block of business that is only subject to yearly renewable mortality reinsurance. The ceded premiums to which are low in early policy relations.

Conversely our Legacy business is a mature heavily co-insured block with 80% plus of the economic benefits remaining with Citi. The mix shift in net premiums towards new term can be seen on slide seven. Over time, we have seen the rate of net premium growth begin to normalize from 31% year over year in 2011 to 22% in 2012 on a year-to-date basis as new term becomes an ever-increasing component of the total enforce block. We expect to see this dynamic continue in 2013.

Margins reflected in our financial statements for New Term and Legacy are moving in opposite directions. Current New Term profit margins are increasing as the enforce block grows and effectively leverages the fixed cost within our expense space. Current profits for New Term have also increased due to the compensation changes we made at the end of 2011, allowing a higher a percentage of the cost to be deferred. It is important to note that deferrals impact the timing of profit recognition but not the overall profitability assumed when the product is priced at issue.

On a year-to-date basis New Term pre tax operating income has moved from a negative 6% of direct premium in 2011 to a positive 11% in 2012. On the other hand, Legacy income has been running off slightly faster than net premium, causing Legacy pre tax profits to decrease from 8.8% of direct premiums in 2011 to 8.3% in 2012. These New Term and Legacy profit trends should continue into the future.

On slide eight you will see our investment in savings products operating revenues increase 4%, and operating income before income taxes grew 18% year over year. Sales trend remain modestly positive in the quarter with sales based revenue increasing by 2%, largely due to success of our new fixed index annuity product.

We also continued to experience a moderate shift in sales mix towards managed accounts which provides ongoing asset-based revenues rather than sales-based revenue. Managed account asset-based revenues are higher than asset-based revenues received on our other products that also have a sales-based revenue component. During the quarter market performance drove a 5% increase in our average client assets value that along with the change in client asset mix contributed to the 9% increase in asset-based revenue from the prior year period.

In the third quarter DAC amortization declined $2.6 million from the prior year period as market returns on the invested assets underlying our Canadian Segregated Funds improved from the market losses experienced in the prior year. In comparison to the second quarter investment in savings product revenues declined 2%, and operating income before income taxes increased 7%.

In the third quarter we reported lower DAC amortization and higher client asset values from market performance and continued growth in managed account assets. These items partially offset the lower sales in the third quarter versus second quarter sales that were elevated by the IRA and RRSP seasons.

On slide nine you can see that Corporate and Other distributed products operating revenue decreased $6.7 million from the prior year and the operating loss before income taxes increased $3 million. These trends reflect decreases in both premiums and benefits from premium rate actions taken to improve the loss ratios on the short term disability product underwritten by our New York subsidiary as well as lower net investment income of $3 million following our key noted share repurchase through the third quarter of 2012. As we continue to optimize our balance sheet invested assets allocated to the Corporate and Other segment should decline along with the corresponding net investment income.

Now let us turn to insurance and operating expenses. On slide 10 you will see $2.7 million year-over-year expense reduction related to our prior year decision to no longer carry inventory in our print shop as well as an additional $0.9 million expense reduction related to the record-keeping pricing structures changes in the ISP segment that have been mentioned in previous quarters. Absent these items you will see our ongoing expense base increase year over year by $2 million related to employee merit increases and an additional layer of management stock compensation awards plus another $1.4 million of premium growth related expenses.

In comparison to the second quarter, our third quarter expenses benefited both this year and last from annual employee benefit accrual true up of approximately $2 million.

As we look toward 2013 we expect our core insurance and operating expense space to increase for annual adjustments to salary and benefits, IT and other infrastructure investments, and general inflation. In addition we will continue to see increases consistent with those we have experienced in 2012. These include the runoff of Legacy expense allowances and growth in premium related taxes and fees of about $5 million as well as a third and final layer of stock compensation to correlate with our three year vesting provision of about $3.5 million.

In 2013 we will see the last of the increases from coming off Citi structure contracts particularly in the IT area of about $2 million.

Finally as we have mentioned in the past, in March we will move to our new campus which will increase our 2013 costs by $4.6 million, half of which will be onetime in nature.

Turning now to slide 11, our investments in cash totaled $2.18 billion as of September 30, 2012, up from $2.02 billion at June 30, after executing a $375 million inaugural debt offering in July. The proceeds of this transaction were used to repay the $300 million note from Citi, and commence a $75 million stock repurchase program in the quarter. At the end of the third quarter our debt to capital ratio remained relatively low at 21.9%.

The new money rate on our purchases for the quarter was 2.64%, down from 3.46% in the second quarter, primarily due to a higher proportion of purchases at the Holding Company as we invested the net proceeds of our debt issuance in shorter duration investments to fund share repurchases. The lower reinvestment rate had the impact of decreasing the average book yield of our investment to 5.3% from 5.48% at June 30th.

As we mentioned last quarter in 2013, the low rate environment will put some modest pressure on our investment income. We expect about $200 million of our investment portfolio to mature next year at an average book yield of around 5.3%. While we will actively manage our investment decisions we do not feel any change in our overall investment strategy is necessary at this time. Furthermore we do not expect to take any product pricing action for interest rates in 2013.

The liquidity profile of our holding company continues to be very good. As of September 30, the holding company had invested assets in cash of $134.9 million, $65 million of which has since been deployed in share repurchases since quarter end.

Finally, Primerica Life statutory risk-based capital ratio is estimated to be in excess of 570% as of September 30, 2012, remaining well positioned to support existing operations and fund future growth.

With that, I will turn it back over to Rick.

Thanks, Alison. Our third quarter results highlight that Primerica is not a typical life insurance company. Our focus is on generating distribution profits through the largest life insurance sales force in North American. While our balance sheet may look like an insurance company, we write profitable Term Life insurance that requires low investment leverage. We also lock in the mortality risk with extensive use of mortality rate insurance, making Term Life income look more like distribution profits. And our substantial fee-based income from the investment and savings product segment generates distributable free cash flow. Our strong third quarter results were marked by solid core performance across business segments. The emergence of long-term recurring life insurance revenues coupled with positive investment and savings product performance and our share repurchases has continued to drive EPS and ROE expansion underscoring the strength of our franchise.

Now we will now open it up for questions.

Thank you, Mr. Williams. (Operator Instructions). Our first question will come from Jeff Schuman of KBW. Please go ahead.

Thank you. Good morning.

Good morning, Jeff.

I was wondering if we could go down in the weeds a little on some of the expense guidance, Alison. First of all, you do suggest there will be some growth in premium-related taxes. Are these taxes are going to grow in proportion to premium or is there something beyond that?

They will grow in proportion to premium, but understand as well that they will grow more closely in proportion to net premium and new term because we lose an allowance if you will for what is running off on Legacy. So overall, we do not expect any increases in our premium tax rate. It is just we will, one, see growth in our overall direct premium, and two, have a little bit more of a shift towards what we fund versus what is covered by a Citi expense allowance.

Okay. So, once again the expense allowances have been pretty much running off in proportion to ceded premiums in Legacy, so that trend basically continues.

That is a correct. Both of those trends are very consistent with what you have seen throughout 2012 and, for that matter, 2011.

Okay. That is helpful. And then on the IT expenses and occupancy costs, any help there in terms of timing next year?

Sure. The IT expenses you will actually see throughout the entire year. We have actually negotiated really the last of the major contracts already, and in fact we are under those new contracts beginning in the fourth quarter of this year. So that will be ratable throughout the year. We obviously incur that expense over the period over which we have the benefit of utilizing the software or the licenses, so that will be ratable throughout the year.

On the building, we intend to move into or begin taking occupancy of the new building in March. So really you will not see much of the increase happening in the first quarter. It will really start to emerge very late first quarter but be predominately seen in the second through fourth quarters.

Okay. And then lastly, the IT and the occupancy I assume those expenses geographically would be distributed throughout the segments?

That is correct. I will say the onetime cost associated with the new facility, so about half of the $4.6 million that I quoted, we do intend to leave in Corporate and Other because it is really a onetime overhead type of expense. Other than that, the occupancy costs themselves will be shared by the segments as they have been in the past as well as the IT costs.

Okay. Thanks for the help.

You're welcome.

Our next question will come from Sean Dargan of Macquarie. Please go ahead.

Thank you, and good morning.

Hi, Sean.

I have a couple of questions about your capital position. Your debt to total capital ratio is in the 21% range. Does that imply you have capacity to issue more debt?

The answer is yes it would, although as I mentioned with the dividend from Primerica Life next year we will be lowering the shareholder equity number as we intend to use that money to buy stock back. So, although it shows excess capacity at the moment, we will eat into that as we take the dividend from Primerica Life and repurchase stock.

Okay.

We have said and do believe a longer term debt to capital is about 25%. So yes, the answer is there is a little bit of room there.

Okay. It looks like tax rates on dividends are going up Would your Board ever consider declaring a special dividend before this year is over?

I cannot answer for the Board on that. That is something that has come up in conversation, but I cannot answer for the Board one way or the other on that.

Okay. Thank you.

Our next question will come from Paul Sarran of Evercore Partners. Please go ahead.

Good morning.

Hi, Paul.

How much did you benefit in the number of terminated agents this quarter from changes in procedures that you implemented earlier this year? And a more general question about the sales force. As we move forward how do you expect to balance building recruiting with maintaining license yield as we go forward from here?

Rick will do the first part of it, and, this is John, I will handle the second part.

Let me comment on terminations because I noticed several of you in your comments last night raised that as a question. The way we look at termination is we look at terminations as a percentage of the beginning sales force for that quarter, and if you go back to 2009 -- and it does change by quarter depending upon states that come up for renewal. If you go back to 2009 that percentage was 9.2%, 2010 it was 9%, 2011 it was 9.8%, and this past quarter it was 8.8%. So the 8.8% is actually not that out of line relative to 2009 and 2010 experience, although it is about 900 less terminations then what we had in 2011 just to put that in perspective for you.

Relative to the change in process, I said last quarter the improvement was about 1,200 quarter-over-quarter termination or non renewals. I said about half came from the new process and about half of the 900 came from the new process as well.

I will take the second part of it and stuff. You asked the million dollar question that I sit around and deal with all the time in Primerica.

I have said many times to most of you in conferences and questions that Primerica is an aim and adjust business. You are moving a very large battleship. And you make mistakes when you start trying to change things very fast because you never see the effects of what you did because it has to be aimed and adjusted. It was clear, as I said in my opening remarks, that after the surge post convention last year and seeing the results of that, which by the way were not all bad. We made a lot of life insurance sales. Sales lead is not a bad --. It is not like our sales force was doing anything bad. It was just we were not driving toward really getting people licensed.

We had to restructure that infrastructure and focus. One of the things I have learned in this business is what you focus on grows, and you have a shelf space of things to get people to focus on. We stepped back this year and we did a lot of things. Whether it was within the incentives for our contests and what I would do every month to drive recruiting that we took a lot of excesses out there. We made a significant modification to our compensation program which was very focused on longer term building, not short term hitting targets. We made a lot of very strategic decisions as we related to that, and we have improved the ratio.

I say a lot in life you have to learn to walk and chew gum at the same time. You cannot say we are going to do this and not do the other. As we are now heading into the closing part of this year and beginning the real planning for next year as we build toward our convention next year in the Georgia Dome, it is we want to shift more to a recruiting focus, okay? But the challenge there is I have a list of ideas that I could get on TV and scream a few things and jump recruiting, but probably licensing ratios would go back the direction they went.

What we want to do is maintain and build on our licensing ratio and grow recruiting in a healthy way. We are working right now as we head into -- I had a meeting the other day where I told people, in 2012, we did a lot of alterations. We changed a lot of things. And any time you change people tend to discuss change. In 2012 we want to improve and grow versus change and discuss, and we want to focus things very much more toward recruiting. But I believe that is one of the things we will build into the first quarter of next year. But we want to do it in a healthy way and not just ramp up recruiting and have licensing go back the wrong direction again. So that is what we are working on right now.

Okay. Thank you.

(Operator Instructions). The next question will come from Steve Schwartz of Raymond James.

Good morning, everybody.

Hi, buddy. How are you doing, Steven?

All right. How are you doing?

Doing good, partner.

Good. A couple of questions here. John, going back to the topic of the lapse of the terminations of agents. It sounded to me like the description of moving forward to daily kind of the monthly bonus might help with terminations as well, is that accurate?

Steven, I do not really think that will have a significant effect on it. The terminations really are more driven by -- I do not even like the word termination because it is really non renewals by and large. Going more from the bonuses to daily commissions really is more of an effect on our regional vice presidents, our full time people and what their focus is, and it really does not have a significant change to the part time people who are the people that make up that number.

Okay. Moving on, Alison, all in what is the, realizing it changes by state, but what would be your premium tax rate?

We accrue something shy of 3%, somewhere between 2% and 3%. And it is not just a premium tax, it has municipal taxes. A lot of things that we normalize into a per premium dollar rate, but they are actually fixed charges. It is in the 2%.

Okay. Given the interest rates environment it seems everybody is raising their prices I am not sure you are or not maybe that is something you can address. I was wondering if reinsurance costs might be going up?

Sure. On the first question the answer is no. When we launched the current product back in 2011 we were already in a pretty tight interest rates environment, so obviously our pricing took that into consideration and obviously because we sell term life insurance interest rates in and of themselves are not a large component of the our profitability. The rates we assume will impact the timing over which we recognize earnings, but not really the aggregate earnings on the product itself. Obviously what we have available to us from net investment (Inaudible) capital, et cetera, is subject to the downward pressure. From a reinsurance perspective we have not seen any pressure for pricing increases at all, let alone specifically for interest rates. Again since we use predominantly YRT type reinsurance, we are not really borrowing the reinsurer's capital per se, like you have in a co-insurance relationship. So I think there's a less susceptibility to interest rate volatility.

Okay. And one more if I may, maybe for Rick. Rick, maybe you can update if there is anything to update what is going on regulatorily with regards to captives?

I am sure you are following the NAIC subgroup came out with a somewhat negative report, relative to using captives for the Triple-X reserves. We are working with the ACLI that is taking a position opposite that, thinking that there is a valuable role for captives in there. And we will follow it and see how it goes.

Clearly the industry finding a mechanism for financing Triple-X reserves is critical to the industry and to the ultimate client. They will be discussed, but I am pretty confident they will get to the right answer there.

Okay. Thank you, guys.

Ladies and gentlemen, that will conclude our question-and-answer session. We thank you for attending today's presentation. The conference has now concluded. You may disconnect your lines.