Primerica Inc (PRI) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Primerica, Inc. third quarter of 2013 financial results webcast and Conference Call. (Operator Instructions). I would now like to turn the conference over to Katherine Keiser, Senior Vice President of Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining us today as we discuss Primerica's results for the third quarter of 2013. Yesterday afternoon we issued our press release reporting financial results for the quarter ended September 30th, 2013. A copy of the press release is available in the investor relation's 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 Chairman of Primerica Distribution and Co-CEO and Alison Rand our CFO.

We referenced certain non-GAAP financial measures in our press release and on this call. These non-GAAP measures are provided because management uses them in making financial operating and planning decisions and in evaluating the Company's 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 will make Forward-looking statements in accordance with the Safe Harbor Provision of the Securities Litigation Reform Act of Securities Exchange Act of 1995. Forward-looking statements include any statements that may project, indicate, or imply future results, events, performance or achievements, and may contain words such as expect, intend, plan, anticipate, estimate, and believe,or similar words derived from those words. They are not guarantees and such statements involve risks 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 on our Form 10-K for the year-ended December 31st, 2012. This morning's call is being recorded and webcast live on the internet. The webcast and corresponding slides will be available in the investor relation's section of our website for at least 30 days after the presentation. After the prepared remarks, we will open the call for questions from our dial-in participants. Now I will turn the call over to Rick.

Thank you, Katherine, and good morning everyone. Beginning on page four, during the third quarter of 2013, our operating revenues grew 8% driven by strong investment and savings products performance and higher term life net premiums. Net operating income declined by $1.6 million in the third quarter due to a $4.8 million decline in net investment income reflecting share re-purchases as well as certain items in the prior period.

Alison will discuss these items as well as the year-over-year increase in operating expenses in a minute. Although net operating income experienced some downward pressure, share re-purchases over the past 12 months drove a 9% increase in operating income per diluted share to $0.78 compared with the third quarter a year-ago. Results also reflect $2.1 million of legal fees and expenses associated with the Florida retirement system matters that reduce the net income - - net operating earnings by $0.02 per diluted share in the third quarter.

We believe these cases are without merit and continue to vigorously defend them. In the third quarter, net operating income return on adjusted stockholder's equity increased to 15.8% which is the highest it has been since we went public three and a half years ago. Some of the dynamics driving the sequential increase in ROE were lower-than-anticipated operating expenses, and the full quarter benefit of the $155 million of shares retired in the second quarter of 2013.

Going forward, ROE will experience downward pressure as our recurring income accumulates and stockholder's equity builds until capital is re-deployed. Over the course of the net 12 to 18 months, ROE should be in the 14% to 15% range assuming we execute our stated capital strategy and assuming FRS expenses come in at expected levels. As we discussed last quarter, our plan is to execute another redundant reserve transaction in mid-2014 in order to execute our multi-year capital strategy.

Over the next two to three years, we anticipate being able to return approximately $150 million of capital to shareholders annually in addition to the shareholder dividends currently paid on an annualized basis. Now turning to segment results, in the third quarter term life net premium increased 11% year-over-year while term life insurance policies issued increased 1% in the year-ago period, andwe are down 6% in a historically strong second quarter.

Productivity in the third quarter up 0.19 policies issued per-life license representative per month was consistent with historical ranges. Sequentially, productivity declined from the 0 .21 policies issued for licensed representative per month and the historically higher second quarter.

During the third quarter, our average issued face amount per policy increased 3% and annualized issued premium per policy increased 4% to $813 compared with the prior-year period. Year-over-year, our investment and savings product sales were strong driven by 19% growth in retail mutual funds and 17% growth in variable annuity sales. Managed account sales were up 53% and managed account clients asset values more than doubled as of September 30, 2013 versus the year-ago period.

Sequentially, investment and savings product sales were down 5% from the typically higher sales during the IRA season in the second quarter. Strong market performance drove our total client asset values to $42.18 billion at the under of the third quarter which was a 14% increase over the year-ago period and a 5% increase from the end of the second quarter. Now, John will discuss the distribution results.

Thanks, Rick, and good morning everybody. As I mentioned last quarter, our goal coming out of this year's convention was to generate momentum and drive long-term sustainable growth by building distribution. Our efforts were successful with the size of our sales force, the size of our life insurance licensed sales force growing to 94,529 reps, up 2% over - - on a sequential basis and a 3% increase year-over-year versus the third quarter of 2012.

This is the largest size of our sales force in the last two and a half years. As you can see on slide five, initiatives launched at the convention led to the recruitment of over 51,000 new reps in the quarter an 8% increase over a year-ago period. New life insurance licenses were up 12% year-over-year and increased 9% from the second quarter due to the enhancements we made to our licensing process in 2012 and our continued sales force focus.

Licensed ratios have significantly improved since the 2011 convention. The ratio of new recruits obtaining life licenses in the third quarter of 2013 was 19%up from a 14% ratio for the full year 2011.

We continue to work on initiatives in order to maintain the recruit to license ratio in the 18% to 20% range going forward. Fewer non-renewals in the third quarter positively impacted the size of the sales force on both a prior-year period and prior quarter basis. We expect the percentage of license for non-renewals and terminations in relation to the size of the sales force will remain in the 8% to 9% per quarter in the future.

The size of the life - - the size of the life license sales force should increase slightly by year-end. As we drive towards 2014, we are working on initiatives and business enhancements focused on supporting our sales force. This will help grow distribution and help more middle income families navigate their financial futures. As discussed on slide six, middle income families which makeup approximately 58 million households in the US have been all but abandoned by financial institutions as they have shifted their focus to more affluent and mass affluent markets.

The number of individual life policies sold in the US on an annual basis has dropped 43% over the past 30 years even as the number of households with children rose more than 21%. Over the same period of time - - over the same time period if you adjust for inflation, the average face amount of an issued policy grew 183% as more companies targeted higher net worth clients. According to a recent limra study, 35% of households have not purchased life insurance because no one has approached them, and 50% of the under- insured households say they are considering more insurance.

Not only do these families need more life insurance, but 49% of Americans are not saving for retirement according to limra. Primerica's unique distribution model in educational sales approach positions us to fill these financial gaps for hardworking middle income families. As stewards of this business, we will continue to aim initiatives at growing core distribution and expanding product offerings to meet the needs of middle income families in order to enhance shareholder value. With that, I will turn it over to Allison.

Thank you, John, and good morning, everyone. My remarks today will begin with our segment operating results followed by an overview of our invested assets as well as insurance and operating expenses. Starting with the term life segment on slide seven, in the third quarter term life operating revenues increased 9% driven by an 11% increase in net premiums.

Net investment income allocated to term life grew with required assets, however, it remained flat year-over-year due to certain prior-year period specific items including and unusually high volume of called securities and the recovery of interest on a previously defaulted bond. This coupled with higher insurance expenses, which I will discuss later, were key contributors to operating income year-over-year growth lagging revenue growth.

Net premiums factored into amortization reflecting general improvements in persistency while benefits and claims grew inline with net premiums as claims experienced was consistent with expectations. None deferred commission expense continued the declining year-over-year trends resulting from changes in income incentive programs. In aggregate operating incomes before income taxes grew 5% year-over-year.

On a sequential basis, operating income declined $1.8 million from the second quarter primarily attributable to historically strong persistency in the second quarter and relatively higher incurred claims in the third quarter.

Looking to next quarter, note that fourth quarter persistency experienced is typically the least favorable of the year with DAC amortization expected to grow faster than net premiums sequentially. On a sub-segment basis, new term year-over-year results reflect the continued building of the enforce-block as well as the other factors I just described. In legacy, pre-tax operating income was 7.1% of direct premium during the current quarter which was consist with the previous quarter and declined from 7.8% in the prior-year period.

As we have noted in the past, legacy profit margins will decrease over time with some quarterly fluctuations related to mortality persistency in expenses. In 2014, we expect the legacy profit margin to decline to the mid 6% range. The 13% decline in pre-tax operating income in the third quarter versus the prior-year period largely reflects lower allocated net investment income related to prior year positive items I mentioned earlier. Since most of the assets are allocated to legacy, the net investment income variance is larger in legacy than it is in new term.

On slide eight, you will see our investment in savings products operating revenues increased 13% and operating income before income taxes remained consistent with the prior year period reflecting gross in sales in average client asset values offset by higher DAC amortization and operating expenses. Excluding the legal fees and expenses related to the FRS matter that Rick mentioned previously, IFC operating income before income taxes would have increased 6% to $33.6 million year-over-year. Each quarter, we adjust Canadian segregated funds DAC amortization to reflect our anticipated future revenues based on current asset values.

Redemptions in market performance were inline with DAC amortization assumptions in the third quarter. However, since the third quarter of 2012 benefited from favorable amortization expense there is a $1.1 million increase in DAC amortization year-over-year. Sequentially DAC amortization was $1.3 million lower than in the second quarter due to market performance in the prior quarter period.

Our broad array of IST products enables us to meet clients' needs due to market schedules and generate diverse sources of revenue and income. The relationship between ISP growth in sales revenue and income can vary from period-to-period based on mixed of product sales and underlying asset performance. For example, this quarter the 14% growth in ISP sales led to a 20% increase in sales based revenue year-over-year primarily due to a strong new variable annuity sales in the quarter versus an elevated level of variable annuity internal transfers that generated lower commissions in the prior-year period.

ISP active base revenue and income dynamics are driven by the underlying performance both the US and Canadian markets as well as specific product performance. Our client asset values are primarily equities with a small fixed income component. In the third quarter , average clients assets grew 15% and active-based revenue increased 12% while asset-based commissions grew 21% year-over-year.

Canadian segregated funds average client asset values were flat with the prior-year period creating mild pressure on revenue due to their higher relative rate of revenue generation than other sources of asset based revenue. As is noted in the past, we recognized asset-based revenues on Canadian-segregated funds the commission expenses associated with this product are recognized over time as amortization of DAC and insurance commissions. Asset-based revenue and asset-based commissions growth are more closely aligned if Canadian-segregated funds were removed from asset-based revenues in the comparison.

On a sequential basis, ISP revenues increased 1% in operating income before income taxes increased 15% compared with the second quarter. Results reflect assets-based revenue growth, lower legal fees and expenses, and lower Canadian-segregated fund DAC amortization. On slide nine, you can see that corporate and other distributed products operating revenues declined $3.7 million and the operating loss before income taxes increased $5.3 million from the prior-year period.

Net investment income allocated to corporate and other declined $4.8 million. Contributing to the decline were growth in term life required assets and certain prior-year period specific items. The key driver is the continued optimization of our capital base through share repurchases.

While such correct actions suppress net investment income, they are catalysts for both ROE and EPS expansion. In our New York subsidiary benefits and claims increased $4.4 million as a result of increases in policy reserves for certain non-term life insurance products. Insurance expenses at our New York subsidiary decreased $2.8 million due to the release of certain state assessments accruals within our non-term life insurance business.

Neither of these items are expected to impact future results. Turning to slide ten, our investments in cash were $1.91 billion as of September 30th, 2013 up from $1.88 billion at June 30th.

Our net unrealized gain was consistent at the end of the period at $112.9 million compared with June 30th and the level of growth unrealize losses was a low at $14 million. The average book yield of investment excluding cash at quarter-end was 5.19%, down from 5.29% at June 30th ashigher-yielding maturities will replace the lower current market yield.

The average yield on purchases was 3.78% for the quarter, up from recent periods. While the increase in interest rates over the last six month has allowed us to increase the yield on recent purchases, we dot not expect to be able to replace the yield on our maturities at current market rates, and therefore will continue to experience downward pressure on the yield of our portfolio.

Over the next 12 months, approximately 13% of our portfolio will mature with an effective yield of around 5.5%. The liquidity profile of our holding company continues to be strong. As of September 30th, the holding company had invested assets and cash of $53.8 million. Now let us look at trends in insurance and operating expenses on slide 11.

Last quarter, we provided guidance that third quarter insurance and operating expenses would be in line with second quarter levels or at about $73 million. Actual results for considerably less at $66.4 million. The nearly $3 million release of state assessment accruals in corporate and other was not foreseen in our guidance.

The guidance also assumed that FRS-related legal fees and expenses would be in the $3 million to $4 million range while actuals were about $2 million, largely due to the rescheduling ofsome arbitration hearings. Year-over-year overall insurance and operating expenses increased $5.8 million primarily from the FRS-related legal fees and expenses, $2 million in annual merit increases, and an additional land-stop compensation, $1.3 million of premium and growth related expenses, and $1 million of incremental expenses primarily from IT infrastructure.

Insurance and operating expenses also benefited from the state assessment accrual lease in our New York subsidiary mostly offset by our prior year $2 million annual employee benefit accrual true-up was not necessary in 2013. In Q4, we anticipate total insurance and operating expenses to be approximately $68 million to $71 millionassuming FRX-related legal fees and expenses continue in the $22.5 million to $3.35 million range. Now, I will it turn it back over to Rick.

Thank you, Alison. Third quarter results were marked by solid core performance across business segments. Our recurring income base and positive investment savings product performance coupled with prior year shares repurchase - - prior share repurchases continue to drive expansion of operating earnings per share and ROEunderscoring the strength of our franchise.

As we look toot future, we will continue to execute initiatives to grow distribution capabilities, increase earnings, and re-deploy capital in order to drive long-term shareholder value. Now, I will open it up for questions.

(Operator Instructions). Our first question will come from Steven Schwartz of Raymond James. Please go ahead.

Hello. Good morning, everybody. A couple here. John, first on the Asian persistency. You did note that it was lower then the target you were looking for. Was there - - every time this happens it seems there is something going on, somebody delays renewals or things like that. Did anything happen in the quarter?

I am going to let Rick handle that because he is staring at a sheet with all of the answers on this thing.

Okay. Steven, actually, no, there was nothing unusual in the quarter. We are pleased to see the numbers coming in lower than what we had originally guided everyone to.

Over the course of the last year, we have implemented a whole series of programs, the intent is to improve our licensing rates and enhance the recruit success rate. Success now our new licensing system, the new comp system, our field equity program, a lot of programs could be impacting that non-renewal rate. In truth we are not sure whether the low rate relates to those programs or potentially just the economy improving.

As John mentioned, as we get additional evidence that it is low, we have changed our guidance from 8.5%to 9% down to 8% to 9% for non-renewals on a quarterly basis, and the only caveat I will add to that is for the first quarter of 2014 there will be somewhat higher because of year-end processes, but we are pleased with it, and there is nothing unusual going on in the number.

Okay. Great. And then, Rick, while I have you maybe - - I am sure you have people in Washington. The Department of Labor seems to have backed off its fiduciary standards, but maybe you could touch on what is going on in Washington right now on that.

Yes. I would not say they have backed off. They have continuously said that they will re-propose - - originally it was going to be in the second quarter of this year, then it was going to be in October of this year, then it was going to be at the end of this year. They keep pushing it back, but their intent at some point is to re-propose. The question is when and sort of what will they re-propose because they have indicated they are making substantially changes from what was originally proposed. We watch it and are waiting, but we will see what happens.

Any movement in Congress on the investor - - Retail Investor Protection Act?

No.

Okay. All right. Thank you.

(Operator Instructions). And we have a question from Jeff Schuman of KBW. Please go ahead with your question.

Morning.

Hello Jeff.

I was wondering the rescheduling of the arbitrations was this just sort of a fairly normal thing or - - I was puss wondering if there is a possibility that the plaintiffs were sort of r-grouping, I guess, in light of this very limited success they have had so far?

No. I think that is just sort of the normal course. The arbitrations - - the ones that have happened have taken longer than originally anticipated and as a result of them taking longer, it just pushes the other ones back, but we have no evidence that they have reconsidered positions at this point.

And do you have the current count of arbitrations pending?

Yes, I do. There are 23 pending arbitrations. There are 32 lawsuits pending in state trial courts and one lawsuit in federal court currently on appeal. There are 81 total claimants in those pending arbitrations and lawsuits which is down from 91 at the end of the second quarter. That will all be in the 10-Q, but those are the new numbers.

Okay. Thank you.

And our flex question will come from Dan Bergman of UBS. Please go ahead with your question.

Hello. Good morning.

Good morning.

Just wanted to see if there is any color you can give on kind of the sales impact of the new variable annuity and fixed index annuity products from Lincoln that you had launched recently? (inaudible)on the interplay between that new Lincoln products and kind of the reduction in income benefits on your existing net products would be helpful.

Sure. I mean the Lincoln product has been very well received by the field. We did a roll out with a road show and wholesaler support just to give you a feel for it. In August, the Lincoln product accounted for 39% of VA sales and in September accounted for 61%. So it is - - as a percentage of the total it is a substantial piece. I will say MetLife sales have also held up quite well and better than we had expected as well.

Okay. Great. And the only other one I had I just want to see if there is any sense you could give on how much if at all the July incentive impacted both term life and investment and savings sales? Just trying to see if we should think of the reported 3Q figure as answered of go forward run-rate or was there any positive benefit from that July Incentive in there?

At the end of the day, remember we had a convention, and so conventions are always, the every two-year convention is always a positive kind of recharge and re-energizer for our sales force. The thing we feel the best about in the quarter from a standpoint of the sales force was - - and you will remember from our previous calls before the convention, that after 2011 we kind of did a half price recruiting thing, and by the way it was not all negative. We had a huge jump in recruiting and it led to good production, but that was really when we focused on the fact that the licensing ratio was absolutely not strong enough, and we made some of the adjustments.

We had our incentive this year, and our view is it led to a very healthy increase in recruiting, but from our perspective of building distribution more importantly we - - it did not lead to a degeneration in our licensing ratio of those people. Clearly in the fourth quarter , we do not have a convention, and as I have guided to and said before, that our goal is to in the fourth quarter have year-over-year growth in recruiting, to continue to have that, and to keep our licensing ratio up.

So that our view is the sales force should grow slightly in the fourth quarter, but our goal is to continue to have year-over-year growth in recruiting and to have a strong licensing ratio and to drive sales force growth that way.

Yes. Just a comment. We do not believe that investment sales were impacted by the convention or - - any incentives that we are running. That is much more attributable to our long-term focus on the business and also the strong market itself.

Thank you. Very helpful.

And, ladies and gentlemen, that will conclude our question and answer session. This will also conclude today's Primerica conference call. We thank you for attending today's presentation ,and you may now disconnect your lines.