Primerica Inc (PRI) 2018 Q3 法說會逐字稿

Good morning, my name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Primerica Third Quarter 2018 Earnings Results Conference Call. (Operator Instructions) Thank you.

I will now turn the call over to Kathryn Kieser, Executive Vice President of Investor Relations. You may begin your conference.

Thank you, Krista. Good morning, everyone. Welcome to Primerica's Third Quarter Earnings Call. A copy of our earnings release, financial supplement, presentation and a webcast for 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 will also make 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 events to differ material from those expressed or implied are discussed in the company's 2017 annual report on Form 10-K, as updated by our quarterly reports on Form 10-Q.

Now I'll open the call to Glenn.

Thanks, Kathryn. And good morning, again. We're pleased to report another strong quarter of returns of Primerica. We continue to execute our strategy to drive growth and enhance performance by expanding distribution and prudently deploying capital.

On Page 3 of our presentation, you can see our adjusted net operating income grew 27%. We also achieved a 32% increase in adjusted operating EPS, and a 200 basis point increase in adjusted operating ROAE, compared with the third quarter of 2017. The solid foundation we've built over the last few years has focused on growing our sales force and meeting the expanding needs of middle-income clients. At the same time, we've been working on incremental enhancements across the business to produce positive financial returns, including an increased focus on the investments and savings business. The middle-income market's need for retirement and saving products is greater than ever, and the strength of the economy has created more discretionary income. More of our representatives are embracing this opportunity. The size of our mutual fund licensed sales force has grown 4% year-over-year to over 25,000 representatives.

The success of our Lifetime Investment Platform has also generated excitement among our registered investment advisors, as well as interest for mutual fund license representatives to obtain Series 65 license. Our number of investment advisor representatives has increased to over 3,500 up 6% from the end of the third quarter of 2017. We're working to enhance our client's experience as well as expanding distribution capabilities for our representative. By year-end, we plan to launch an Investment and Savings Product sales tool called EZ-Key. This will allow our representatives to seamlessly move from a mobile life insurance application to prefilled information in a mobile ISP application. This will streamline the investment decision. EZ-Key will help guide the client through the investment decision process and ultimately provide investment alternatives based on the client's individual situation. We expect that the tool will provide our representatives more confidence in executing investment transactions and encourage more representatives to consider obtaining a mutual fund license. This new digital capability should also create efficiencies and drive long-term productivity in our high-touch distribution model, as additional features are added to aid our top ISP producers.

In addition to strategic initiative to drive organic growth, we remain committed to increasing stockholder value by actively deploying capital. Our strong diverse earnings streams continue to generate significant distributable free cash flow, enabling us to deliver strong returns, which are among the best in the industry. We continued optimizing our balance sheet by repurchasing $33.5 million of shares in the third quarter, for a total of $167.3 million of common stock repurchased year-to-date through September 30, 2018. We plan to repurchase about $200 million for the full year 2018. Our confidence in our business and future prospects should provide us with the ability to deploy at or above $200 million of capital in 2019 in addition to stockholder dividends.

Shifting to distribution results on Page 4. The size of our life insurance licensed sales force increased 5% year-over-year to almost 130,700 representatives at the end of the third quarter. As you may recall in the third quarter of last year, we incentivized our representatives in hurricane-impacted areas to remain engaged in the business by waving the independent business application fee of new recruits in FEMA-designated disaster areas. Those efforts generated around 17,000 fee-waived recruits in the prior year period, which did not recur in the third quarter of 2018, largely resulting in the recruitment of new representatives declining on a year-over-year basis. The number of representatives obtaining a life insurance license declined from the third quarter a year ago, following recruiting levels in recent periods.

In 2019, we expect the size of the sales force to grow in the mid-single-digit range, and anticipate both the new life licensing and nonrenewal ratios to remain consistent with 2018 on a full year basis. While the size of our life insurance licensed sales force continues to grow, you can see on Page 5, our Term Life productivity has pulled back from the breakout levels we experienced in the past 3 years. In the third quarter, productivity was in the historical range at 0.19 policies issued per life licensed representative per month. As a result, Term Life issued policies remain near the high levels achieved over the past few years, although, they declined on a year-over-year basis. Term Life estimated annualized issue premiums grew versus the prior year period, as we continue to use initiatives to meet our clients' changing needs after our initial interaction with them. We offer clients the ability to add an increasing benefit rider to their policies, which automatically increases their total amount of coverage by 5% or 10% annually. Today, most of our new clients accept this rider, which has an additional premium as benefits grow throughout the life of the policy.

In April, we launched a new process offering an automatic increase in the amount of life insurance coverage a client can receive. For the same amount of premium quoted at the time of the sale, if a client qualifies for a better underwriting class they can increase their coverage rather than receiving a premium refund. This new systematic offering has resulted in additional issued premiums year-to-date. We're constantly monitoring the momentum in all facets of our business from distribution growth to life insurance to our investment business. We look for trends and momentum and adjust messaging and incentive programs frequently to help recalibrate where necessary. One of the great strengths of our business model is our complementary term life and investment and saving product segments and the ability to deliver solid returns, even as momentum shifts between the business segments. Shifts can occur for many reasons including new product introductions, market performance, economic and environmental factors to name a few. Right now, we're seeing Term Life sales stabilize as our sales force leaders refocus after the record growth of the past few years. While we're in the process of executing levers to drive growth, we estimate 2018 Term Life issued policies will be down around 3.5% compared with 2017 on the full year basis. We expect issued policies to increase by about 3% year-over-year in 2019. At the same time, our investment business has gained momentum as a result of a more favorable market and regulatory environment as well as recent product enhancements.

Our strong Investment and Savings Product segment performance in the quarter was driven by both sales and client asset growth. Total ISP sales increased 23% versus the year-ago period. Variable annuity sales increased 63% from the prior year quarter, reflecting recent product enhancements by our product partners that offer more attractive client benefits. The continued success of the Lifetime Investment Platform resulted in 52% growth in managed accounts sales year-over-year. Positive market performance also drove 10% growth in ISP average client assets to a record $63.4 billion in the third quarter.

Market volatility in the fourth quarter is pressuring average client asset values, but we are not seeing a negative impact on sales. Since the majority of our client's investments are in retirement accounts, we educate them on dollar cost averaging, and the value of a long-term investment strategy that focuses on time in the market rather than timing the market.

So when there's a short-term volatility in the market our sales are slightly more insulated and our redemption rates are generally better than firms that work with clients with higher assets. We excel at providing financial education and products to middle-income families and our commitment to them is unwavering. We continue to focus on expanding distribution and enhancing productivity to better serve their increasing needs. We have a proven track record of success, and continue to execute a strategy to deliver growth and long-term value for all of our stakeholders.

Alison will now walk you through our financial results.

Thank you, Glenn, and good morning, everyone. My comments today will cover the earnings results for our core business segment and then conclude with a company-wide review on insurance and other operating expenses and income taxes.

Starting on Slide 6, Term Life continue to achieve strong financial results with 12% growth in both revenues and income before income taxes versus the prior year quarter. Adjusted direct premiums increased 13% in the third quarter, and the business continues to perform well, generating a pretax margin of 19.6%. On a full year basis, we expect adjusted direct premiums to grow by around 13.8% in 2018, and Term Life margins to be around 18.8%.

In the third quarter, benefits and claims were favorable to historical trends by approximately $2 million, which we attribute to normal claims volatility. The benefits and claims ratio of 57.8% was consistent with the prior year period, which reflected a similar level of favorable claims experience. We expect the benefits and claims ratio to be around 58.2% for the full year of 2018.

The DAC amortization ratio was 15.8% this quarter, also consistent with the prior year period. Persistence in the quarter was generally in line with 2017 levels and we expect persistency to remain at this level, adjusted for typical seasonality in the fourth quarter. The DAC amortization ratio also reflects a small increase related to insurance commissions, resulting from a change made to our 2018 sales force equity program that modestly shifted commission expense from deferred to non-deferred expense. On a full year basis, we expect the DAC amortization ratio to be around 16% for 2018.

The net insurance expense ratio was generally consistent year-over-year and reflects about $1 million of incremental spending on business initiatives in the quarter. The full year, we expect the Term Life net insurance expense ratio to be around 8%. As we look towards 2019, we anticipate that adjusted direct premiums will grow by around 11%. While this is lower than the growth we've seen in adjusted direct premiums in the last few years, we should continue to compare favorably to others in the industry.

As we've discussed in the past, the main drivers of adjusted direct premium growth have been the IPO coinsurance transactions, including the retention of policies that continue beyond their initial policy term starting in 2017 as well as the level of sales -- policies issued over recent years. To a lesser degree, exchange rates have also impacted results.

The top chart on Slide 7 shows how these main drivers have contributed to the growth in adjusted direct premiums, and the composition of the 11% growth estimate for 2019.

The IPO coinsurance transactions continued to positively impact growth. Although, the benefit has been diminishing as expected due to growth in the post-IPO block coupled with the runoff of the pre-IPO block. The bottom chart on Slide 7 illustrates this dynamic. The retention of policies that continue beyond their initial policy term provided additional growth in 2017 and '18, but is now reaching steady-state with future incremental growth considered modest. As these 2 drivers normalize, the level of life insurance policies issued will become an increasingly meaningful driver of adjusted direct premium growth. The step up in life insurance policies issued in 2015, '16 and '17 has provided ongoing value as earnings emerge over the life of the policies. Earlier in the call Glenn discussed that we are targeting growth in issued policies around 3% for 2019. While this will only have a small impact on 2019 results, it will help sustain our overall growth in adjusted direct premiums into the future.

From profitability perspective. In 2019, we expect the DAC amortization and benefits and claims ratio to be very consistent with the levels reported in 2018 at around 16% and 58.5%, respectively. We expect a modest increase in the insurance expense ratio, as we continue to invest in platforms and technologies to build the business. Look for the impact on overall segment margins to be relatively minor.

Moving to our Investment & Savings Products segment. On Slide 8, we continue to achieve very strong results. ISP revenues and income before income taxes grew 18% and 15% respectively, over the prior year period. Total product sales increased 23%, primarily reflecting a significant increase in managed accounts and variable annuity sales previously discussed. Sales-based revenues net of commissions increased 22%, in line with revenue-generating product sales. Positive net inflows and year-over-year market performance led to a 9% increase in asset-based revenues net of commissions in the third quarter.

Provisions made to our record-keeping platform contracts last year resulted in account-based revenues and other operating expenses both increasing year-over-year, with a positive impact on pretax income of about $1 million this quarter. Also impacting our account-based earnings has been the reduction over the past few quarters in the number of accounts for which we earn record-keeping fees. As our clients have moved from the life -- to our Lifetime Investment Platform from our Freedom Managed Account portfolios. We expect to see this trend stabilize in 2019, as the full transition to the Lifetime Platform is completed.

Now I'll move to a discussion of the company's insurance and other operating expenses. On Slide 9, you can see our third quarter expenses of $96.6 million or $13.5 million higher than the third quarter of last year. The changes to our ISP record-keeping contract increased expenses by $5.7 million, but as I already mentioned, this was more than offset by incremental revenues. We also had $5.8 million of additional expenses to support growth in the business. Looking ahead to the fourth quarter of 2018, we expect expenses to be about $98 million.

As described in previous earnings calls, we are making incremental investments in digital development and other technology initiatives. During 2018, we laid the groundwork for a multi-year initiative to modernize end-to-end systems, data gathering and processes to enable continuous delivery of innovation. Year-to-date, we have incurred around $4 million of costs to support these initiatives with $2 million incurred in the third quarter. We anticipate spending around $7 million on a full year basis, which is less than our original estimate of $10 million, largely due to timing. We're finalizing our plans for 2019 initiatives to be reviewed with our board later this month. We plan to provide a fuller picture of our 2019 expense expectations on next quarter's earnings call.

In the third quarter of 2018, the effective income tax rate was 23.6% and the operating effective income tax rate was 24.5%. The rates differed due to an adjusted made during the quarter of $1 million related to the transition impact of tax reform that has been excluded from the operating effective income tax rate. The full year 2018 operating effective income tax rate is expected to be 23.6%. As I wrap up, let me say that we remain committed to maintaining a strong balance sheet and capital position.

On Page 10, you can see Primerica Life Insurance Company's statutory risk-based capital ratio was estimated to be around 450% withholding company liquidity at about $100 million, at the end of the third quarter. We will continue to take out ordinary dividends from Primerica Life to the extent available with the goal of maintaining our near-term RBC ratio in a low to mid-400% range.

Now let's open it up for questions.

(Operator Instructions) Your first question comes the line of Mark Hughes from SunTrust.

The variable annuity sales are quite strong in the quarter. When you have a product launch like that or a big spike in sales is that something that usually you might see a follow-through impact in subsequent quarters? Is there a kind of a catch-up effect and people get excited and so it may just be a 1 or 2 quarter phenomenon? How do we think about that?

I think that rate of growth is something that happens around the perfect conditions. I don't think it's something that you have a contraction in following quarters to kind of makeup for it. Because we do see our product partners are doing a great job. We represent the major players in the industry and they are doing a good job improving their products to meet clients' needs in a better, more efficient way, a more attractive way. And so, you're right Mark, that does create excitement at the point those new product features are rolled out. We really don't have a lot of brand new products, but there are new features and improvements to the chassis of the products we already have. And that does add to the momentum, it adds fuel to the fire, if you will, and then you would expect things to normalize down the road somewhere. We expect continued strong performance but you will see spikes in it if new products are rolled out around the excitement, so I'd say it's not exactly as you described it, but directionally you're correct.

The anticipation of 3% growth in Life policies issued in 2019, is that just sort of a reversion or stabilization in productivity?

Yes, you've got a number of factors that are happening to our business at all times and so as we look forward into the future and we try to take everything that's going on into consideration, the pros and the cons of our business, we try to look and see where we think that would be in a year from now or within a year from now. And that's our best shot at where we think we'll be, I do think there's some normalization from the extraordinary growth rates of the past. At the same time, we're always working to take advantage of every opportunity that presents itself, so it's where we see things from where we stand right now looking into the future.

And final question, on the term life business, Alison, you've given us a number of metrics for 2019, I think you said the net insurance expenses might be up a little bit perhaps but not a big impact. Would we look for the margin -- the, I guess the, adjusted direct margin, I think, to be relatively steady year-over-year in that Term Life business?

Yes, and the reason I caveat is the expenses, is we're obviously meeting with our board later this month to go through our anticipated budget for 2019. So once we see where those final decisions land, a lot of it really depends also on how we allocate between the segments. So we usually like to talk about operating expenses less on a segment basis more on a holistic basis. I'm not exactly sure how the split will end up between the segments, so we really wanted to focus you on what I would consider the core drivers of how that block of business is doing, which of course are DAC and benefits and claims. That being said, we will obviously have to allocate some of what we anticipate towards Term Life as it's a large component of our business. And that may bring the margin down a little bit, but I'd say the 2 critical drivers, the 2 sort of fundamental components of that segment are remaining extremely stable, we believe, with 2018.

Your next question comes from the line of Ryan Krueger from KBW.

I just had a question on Term Life policies issued, I guess if we take your 2018 guidance, I think down 3.5%, it implies a fairly meaningful decline in the fourth quarter. I guess, is that just kind of normalizing towards the lower end of the productivity per rep in the fourth quarter relative to a good year-ago quarter?

Yes, that's exactly what it is Ryan. You know as we stated in the prepared remarks, the strength of our business is the complementary nature of our product lines. And so we're supporting our field leadership, as they do 3 very important things, they build distribution, they sell life insurance, and they also sell investments. And of course, we work to create success in all 3 of those over the long term. But they don't always move in the same direction at the same pace. And so you see, right now, a lot of natural momentum in our ISP business. And of course, we're leveraging that opportunity because it presented itself. And the momentum cycles are different in the other areas, Life and distribution tend to move more in tandem, the same direction at the same time to a certain extent, and the ISP business has a little bit different cycle. And so those are the things that we're managing at all times. You'll see spurts of growth that will then normalize. Sometimes you'll see a little lag that will later normalize. But the 3 interact with each other. And you do it kind of with our field leadership get to a bandwidth limitation at some point, where their attention is focused on what's working well right now, and it creates a little bit of headwind on where the -- where there is not as much natural momentum. But then over the long term, that tends to all correct itself. So we're just seeing some of that give and take dynamic that we're accustomed to in our model.

And then on ISP. Is the -- has it mostly been just higher productivity of the existing licensed agents? Or are you also seeing some traction in terms of getting more of the field force licensed to sell investment products?

It is both. I mean, as we reported in the prepared remarks, we had a 4% increase in our sales force size, on the investment side, the ISP, the mutual fund, Series 6 side, and so -- and that's been lagging behind some of the strong numbers on the life side, and is actually beginning to catch up and normalize as we anticipated it would. So when the business is working, in this case, the ISP business, it not only provides great momentum for the people that are involved in that business it becomes more attractive to the people that are not yet involved in that business. And so we've been working hard to lay the foundation to make it more attractive, to produce the results and then that makes it a very fertile ground to get more people to get licensed and engage in the business. SO we're actually seeing both.

Your next question comes from the line of Daniel Bergman from Citi.

It looks like the nonrenewal rate for the sales force increased in the third quarter, somewhat elevated rate versus where it had been in recent quarters. So I just wanted to get a sense, if you can provide a little bit more color around the dynamics in the quarter? And whether you expect this is anomaly or part of a trend? Any thoughts on that outlook would be helpful.

Absolutely. Well, in our licensing pipeline, when you look at anything on a quarter basis, you get a lot of noise in there, based on when the quarter ended, how many weekends were in the quarter, when various states or provinces that are large had renewals in certain quarters and others. Also whether states and provinces are caught up in their workload. And so anything that we're seeing right now, we would expect as we've said both our pull-through rates from recruit to licenses, and our termination rates over the -- a full year period to stay in their traditional ranges. And so I think you've got a little bit of an anomaly there on terminations in the third quarter. You also had some timing on the front end of our business on new licenses, where the second quarter was particularly strong and took some out of the third quarter. But if you look at us year-to-date on any of those metrics, I think we're very much in line with our expectations with the past.

Got it. Very helpful. And then maybe just the guidance for -- I believe you said 11% adjusted direct premium growth in 2019. You know that was down a decent amount from the 2019 (sic) [2018] level, so I just wanted to see if you can provide any more color around what that glide path might look like post 2019, just in terms of how quickly we should be thinking about that moderating maybe closer to the pace of the sales growth?

Sure. And I do think the chart that we added in the presentation is useful. So I would definitely use that as a point of reference. It's on Page 7, I believe. So we do see it coming down and it has more to do quite frankly if you look at what's happening from -- less from the sales side and more from the maturation of the IPO transactions as well as the stabilization of this sort of end-of-term block. So on the IPO piece, we've been following a fairly consistent trend. It's following off a little bit more we see in 2019. But that's not really much of anything. And I do think, you can sort of try to trend what you think's going to happen and whether that will continue to gradually come off over the next couple of years. It really -- really what happens is the reason you get some spikes in the fall-off is when you get big blocks of business running into their end of term. That is what really will change how fast it does or does not run off. We did really have that added benefit that started in 2017, from the end-of-term block that we were retaining and that's sort of the offset, if you will, for the runoff in the IPO transaction. And you can see where both of those are, and then really you have the sales piece. And so I think what becomes completely meaningful or really meaningful is what we can do with sales as we move forward. I don't expect it to drop another 3 points in 2020. But I will say that one of the big things will be is can we maintain our levels of sales. So I think you're going to see the first 2 items on that chart continue to run off at a pretty relatively slow pace but at a pace that does have pressure on the overall number. And then growth in sales to be what can really drive a meaningful change.

Your next question comes from the line of Mark Hughes from SunTrust.

I'm curious if you have any early read on maybe asset or sales-based revenue when you look at the market volatility here early in the fourth quarter really different from kind of the operating environment you've been facing the last couple of years, few years. How do you think that kind of volatility influences your sales?

Historically, what we've seen, if the volatility is relatively brief and not too dramatic, we do have a bit of an insulation from it in our business model. It seems that our clients aren't plugged in minute-by-minute to exactly what's happening in the market. And so a lot of times, we'll kind of skip across a little rough water, if it's relatively brief and not too major. And so far, as I've said in my comments on our sales, that's kind of what we've seen. So far we haven't seen the volatility really have a noticeable impact in the sales momentum we're experiencing. On the other hand, obviously, as the market drops it does impact our AUMs. And so the speed and amount with which it recovers will be important on that front. But we -- I think we do -- our model and our marketplace and our clients just don't react quite as quickly or as radically as maybe the more traditional Wall Street firms might see.

Then on the managed accounts. You had a very good growth again in the third quarter. How much internal push are you -- is there to shift folks over to those managed accounts. Is that, that kind of 40%, I mean is that just sort of naturally happening? Or how much emphasis are you putting on that? You kind of -- how can we expect that to play out? Should there be a sustained elevated growth?

Yes, well, of course, we entered that business some years ago and then improved to the Lifetime Investment Platform because of the opportunity that we felt like we were not capturing. As we have middle-income clients that do business with us longer and longer they amass larger and larger assets and need other options and then of course there are new clients in that part of kind of the upper end of the middle market as well. And so we're focused on capturing a new opportunity because we believe it's out there and something that we haven't had the product line and the sales force in place to meet. So we are capturing new business that would not have been captured rather than just simply moving sales from one product to another that we would have normally seen anyway. That said, we were starting from 0 and had tremendous trajectory in the growth numbers, that will normalize over time. So you will see those number come down, but we do -- we are very excited about the continuing opportunity that really we're still in the first few years of and we expect that market to -- all the industry numbers are that's the fastest growing part of the investment business and so we want to capitalize on more on that.

We have no further questions at this time I will turn the call back over to the presenters.

Thank you for your time today everybody. We appreciate you joining us. Everybody have a great day.

And this concludes today's conference call. Thank you for your participation. And you may now disconnect.