Primerica, Inc. (NYSE:PRI) Q1 2024 Earnings Call Transcript May 7, 2024

Primerica, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Primerica's First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nicole Russell, Head of Investor Relations. Thank you. You may begin.

Nicole Russell: Thank you, operator, and good morning, everyone. Welcome to Primerica's first quarter earnings call. A copy of our earnings press release, along with other materials relevant to today's call, are posted on the Investor Relations section of our website. Joining our call today are Chief Executive Officer, Glenn Williams; and Chief Financial Officer, Tracy Tan. Our comments this morning may contain forward-looking statements in accordance with the safe harbor provision of the Securities Litigation Reform Act. We assume no obligation to update these statements to reflect new information, and refer you to our most recent Form 10-K filings as may be modified by subsequent Form 10-Q for a list of risks and uncertainties that could cause actual results to materially differ from those expressed or implied.

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

Glenn Williams: Thank you, Nicole, and thanks, everyone, for joining us today. Our first quarter's results reflected the fundamental strength of our main lines of business, Term Life and Investment and Savings products as well as the continued growth of the sales force. The resilience of our model is illustrated by our ability to deliver this growth in the face of ongoing economic pressures facing middle-income families. Starting with a quick recap of our financial results. Adjusted net operating income of $137 million increased 4% compared to the prior year period, while adjusted operating income per share of $3.91 increased 10%. The earnings power of our core businesses was partly offset by the underperformance of our Senior Health business, which incurred a $14 million loss during the quarter.

On the capital deployment front, we repurchased $109 million of our common stock and paid $26 million in regular dividends during the quarter. As noted in our release, the Board recently declared a $0.75 per share dividend payable in June. We are pleased with our sustained momentum in growing our distribution capabilities. Our representatives played an important role in educating middle-income households and helping them find appropriate financial solutions. During the first quarter, we recruited over 110,000 individuals, representing a year-over-year increase of 18%. New life licenses continue to benefit from the strong pipeline of new recruits. During the quarter, nearly 13,000 reps obtained a new life license, up 16%, fueling 5% year-over-year growth in the size of our sales force to end March with a total of 142,855 life licensed reps.

The appeal of our business opportunity continues to resonate, and the current economic uncertainties can be a catalyst to motivate individuals seeking additional income opportunities or an alternative to their current employment. Our model is unique. Recruits who already have a life insurance license become part of Primerica at no cost. Unlicensed recruits pay a licensing fee of $99 to cover the cost of the entire exam preparation and licensing process for both life insurance and securities licenses. The vast majority of our new reps also pay a technology fee of $25 per month, providing communications, training, recordkeeping and transaction capabilities. Both the licensing and technology fees offset the company's hard costs. None of our representatives are compensated from these fees.

We continue to see good traction in recruiting, and we have a solid process in place to help new recruits prepare for their licensing exam, which leads us to anticipate full year growth in the size of the sales force in 2024 will be above 3%. Let's look more closely at sales results. During the first quarter, we issued 86,587 new term life policies, representing a 2% increase over the prior year period. We believe household financial pressures from compounding increases in the cost of living may be causing some headwinds to new sales. Productivity, as measured by the number of issued policies per life license rent per month, was 0.20 compared to 0.21 in the prior year period and within our historical range. Looking ahead, we anticipate full year growth in the number of policies issued to be around 3% to 5%.

First quarter total investment product sales were $2.8 billion, up 20% compared to the prior year period. We are seeing strong demand for products across the board, including U.S. and Canadian mutual funds, variable annuities and managed accounts. Preliminary results show that April sales are similarly strong. However, we remain mindful of the impact that current economic uncertainty can have on middle-income families. Barring an unexpected change in the market sentiment, we anticipate full year sales to increase by as much as high single digits during 2024. Ending client asset values continue to benefit from strong equity market appreciation, ending the quarter at $103 billion. This marks the first time in our history that client assets have exceeded $100 billion, and serves as an important reminder of the role that Primerica plays in helping middle-income families save for the future.

The latest Department of Labor fiduciary rule is now final, with an effective date in late September 2024 and a 1-year period for complete implementation of the rule. With almost 75% of our ISP business in retirement accounts, we made changes to our process in response to the 2020 version of the rule. For example, we already acknowledged fiduciary status for most retirement recommendations. We're reviewing our sales force programs and will consider making adjustments as needed. Should the rule become effective on schedule, we expect no more than modest additional changes in our sales processes if changes are needed. Turning next to Senior Health sales results. The number of approved policies during the quarter declined 18% year-over-year. As we saw last quarter, some of the pressure on new sales was due to us having 16% fewer e-TeleQuote agents compared to the first quarter of 2023.

There were also headwinds due to an issue verifying the eligibility of applicants for both Medicare and Medicaid because of a service disruption at Change Healthcare that impacted the entire industry. The second quarter showing sales growth with more improved policies in April year-over-year, which represents the first time we've seen year-over-year application growth since acquiring e-TeleQuote. Early indicators from our revised agent recruiting and onboarding process are showing promising results, and tenured agent attrition is down 40% compared to last year. Our first quarter financial results were adversely affected by a $7.8 million negative revenue tail adjustment to reflect lower renewals. An increase in policy churn was created by certain carriers making modifications to plan benefits this year, driving up competition and plan switching.

Some of the switching occurred among applicants who were e-TeleQuote clients both before and after the switch, but are still included in the churn calculation. As I noted last quarter, we've been carefully studying how to grow e-TeleQuote into a profitable long-term business. We retained a global management consulting firm to help us thoroughly understand the opportunities and challenges in this business. We concluded that the senior health industry remains attractive, with an aging population that will continue to need assistance in selecting a health care plan appropriate for their situations. It's also clear that Primerica representatives serve as a valuable source of referrals for e-TeleQuote and provides us with a unique advantage. However, the industry is continuing to evolve and unknowns remain, such as the recent CMS rule making and competition among carriers to attract new clients.

With the first quarter results final, we expect a loss of around $25 million to $30 million in 2024. We are taking measured steps as we continue to evaluate this business, and we do not anticipate a need to contribute capital to the business during 2024. At the end of the quarter, we confirmed that a $50 million payment will be made to us under our representation and warranty insurance policy that we purchased in connection with our acquisition of e-TeleQuote, the full amount we sought under the policy terms. Agreements provided for the payments have been signed, and we expect to receive the fund shortly. The proceeds of the claims will be recognized as a gain in earnings in the second quarter and excluded from the company's adjusted operating results to provide comparability to the prior year results.

We've seen tremendous change in the senior health industry since acquiring e-TeleQuote, and its financial results are lagging our expectations. However, the results for our core businesses -- business segments are strong. Primerica is solid, and our business is well balanced. Finally, excitement is building as we head into our convention in July. The event is possibly current momentum, and we expect strong activity afterwards. Our convention is an important element of our larger vision to continue to grow and serve middle-income families across North America. With that, I'll hand it over to Tracy.

Tracy Tan: Thank you, Glenn. Good morning, everyone. Starting with the Term Life segment. Year-over-year operating revenues of $440 million increased 5%, driven by 6% growth in adjusted direct premiums, while pretax operating income of $138 million rose 6%. Looking at our key financial ratios, both the benefits and claims ratio at 58% and the DAC amortization ratio at 12.2% were consistent with the prior year period and stable as expected under LDTI accounting. The insurance expense ratio was 7.8% in the current year period, generally consistent with the prior year period. The segment operating margin was 22%, unchanged compared to the prior year period. As we noted over the last few quarters, mortality remains generally in line with our expectations.

We continue to see higher lapses across multiple durations. We believe that the current higher cost of living likely continues to put financial stress on middle-income families, leading to those higher lapses. Persistency on policies issued over the last year was generally in line with our assumptions. Our guidance for full year 2024 remains unchanged. We expect ADP to grow approximately 5% to 6%, and our financial ratios to remain stable, with the benefits and claims ratio around 58% and gas amortization ratio around 12%. We are also reiterating our full year guidance, with the operating margin to be around 22%. Although I want to remind investors that insurance expenses are subject to some seasonal variations. Turning next to the results of our Investment and Savings Products segment.

Operating revenues of $244 million and pretax operating income of $66 million increased 16% and 17%, respectively, benefiting from very strong sales and growth in the size of client asset values. Sales-based revenue of $89 million rose 23%, due to 24% higher revenue-generating sales, while asset-based revenue of $129 million rose 15% in line with a 15% increase in average client asset values. Sales commissions for both sales and asset-based products increased in correlation with revenue. In the Senior Health segment, we incurred $14.2 million pretax operating loss which included a $7.8 million negative tail adjustment. Excluding the tail adjustment, the loss was $6.4 million compared to a loss of $3.8 million in the prior period. The current quarter was pressured by lower sales volume and a higher cost of acquisition related to the -- relevant to the number of approved policies, primarily driven by the cost of third-party technology providers and investments in hiring and training new agents.

LTV, which included marketing development funds in the calculation, was 8% lower than the prior year period after reallocating marketing development funds through LTV in the prior year period. This is a result of increased policy churn as certain carriers modify plan benefits, which encourage switching. The C&O segment recorded a pretax adjustment operating loss of $11.7 million versus a loss of $11 million in the prior year period, as higher net investment income was offset by higher operating expenses, which I will describe further in a moment. Finally, consolidated insurance and other operating expenses were $164 million during the first quarter, up 9% year-over-year and in line with our prior guidance. This reflects typical higher seasonal expenses as a result of timing of equity compensation vesting.

The expense growth in the Term Life segment was more modest, due to the redirection of technology resources that supported our new Term Life product offering last year, two more infrastructure-related activities in our C&O segment this year. Overall, our expense increase was driven by growth in the business and increase in employee compensation as annual merit increases took place and the carryover effect of higher employee costs layered in the later part of 2023. We maintain that our full year 2024 insurance and other operating expense growth expectations is still on track for a year-over-year increase of around $40 million or 6% to 8% in 2024. Our investment asset portfolio remains well diversified and has relatively short duration of 4.7 years.

The average rate on new investment purchases was 5.7% for the quarter with an average rating of A. The portfolio has a net unrealized loss of $231 million at the end of March, slightly higher than prior year-end, as rates increased during the quarter. We believe that the remaining unrealized loss is a function of interest rates and not due to underlying credit concerns, and we have the intended ability to hold these investments until maturity. With that, operator, I open the line for questions.

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