Q3 2020 Primerica Inc Earnings Call
[music]. Good morning, My name is Keith and I'll be your conference operator today.
This time I would like to welcome everyone to the primary Inc. Q3 earnings results Conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad.
If youd like to withdraw your question press the Star key followed by the number two thank you.
This call is being recorded I would now like to turn the conference over to Nicole Russell head of Investor Relations. Ma'am you may begin your conference.
Thank you and good morning, everyone. Welcome to primary care second excuse me third quarter earnings call a copy of our earnings release, along with materials relevant to today's call are posted on our Investor Relations section of our website at investors day, primarily dotcom.
Joining our call today are our Chief Executive Officer, Glenn Williams, and our Chief Financial Officer, Alison Rand, Glenn in House, and we will deliver prepared remarks and.
Then we will open the call up for questions.
During this call some of our comments may contain forward looking statements in accordance with the Safe Harbor provision of the Securities Litigation Reform Act. The company does not assume any duty to update or revise these statements to reflect new information.
We refer you to our most recent form 10-K filing as modified by subsequent 10-Q filings for a list of risks and uncertainties that could cause actual results to materially differ from those expressed or implied.
We will also reference reference certain non-GAAP measures, which we believe provide additional insight into the company's operations.
Regularly reconciliation of non-GAAP measures to their respective GAAP numbers are included at the end of the earnings press release and are available on our Investor Relations website.
I would now like to turn the call over to Glen.
Thank you Nicole and thanks, everyone for joining us today, Allison and I will share the highlights from our most recent quarter, including financial results and how the pandemic continues to impact our business are.
Third quarter was exceptionally strong with solid financial growth and sustained production momentum our ability to adapt and gain experience in this environment is continuing to contribute to our success. However, COVID-19 disruptions are influencing us both positively and negatively.
Some of the positive impacts of the pandemic include consumer sentiment that results in stronger demand for both insurance protection and for our business opportunity. This led to a significant increase in new life sales continued strong persistency in growth in recruiting.
Depend demick is also creating headwinds, including market uncertainty, which has a negative impact on ASP sales, although third quarter results were stronger than originally projected.
Life insurance licensing and renewals continue to be the most disrupted by the pandemic as states and provinces work through testing and processing backlogs in other temporary measures that were put in place because of cold at night team.
Starting on slide three our financial results show year over year growth across the board adjusted operating revenues of $567 million increased 9% adjusted net up net operating income of $111 million increased 16% and diluted adjusted operating income per share of two days.
Were 78 cents increased 23%.
Operating ROE was 28% compared to 24.9% in last years third quarter.
As I noted earlier demand for protection products and interest in our business opportunity are at an all time high however, covert disruptions requires to navigate some unique operational challenges let me expand on these starting with our distribution results on slide four.
Includes about 5200, covid temporary licenses and around 4800 licenses with extended renewal date.
Early indications are that approximately 40% of the individuals with covid temporary licenses will eventually obtain a permanent license.
Each state has its own process for extending renewals, which makes an overall renewal rate difficult to project.
What we believe the current blended rate of extended renewals that will ultimately renew is also about 40%. This right reflects a unique situation in Illinois.
Illinois has extended its renewal of expired licenses every month since April and we now have over 2000, Illinois licenses with extensions, which could expire with less than one month's notice.
We assume that 90% of this block will not renew which at some point in the future we will reduce our sales force size by roughly 2000.
While we're planning for this event as we run our business. It will eventually create noise in our sales force counts.
Our term life results on slide five reflect the feels quick response to navigating the challenge brought on by COVID-19, and our clients desire to protect their families.
During the third quarter, we issued 100199, new life insurance policies, an increase of 36% year over year.
Our productivity rate at two five policies for life insurance license representative per month remains well above our historical range of 0.18222.
Hi, productivity when combined with a larger Salesforce helped drive record life sales results.
Face amount during 2020 this is a new record for us.
While third quarter ISP sales were stronger than previously projected increasing uncertainty is now pushing some investors to pause with so much uncertainty in the markets. We think investors may stay on the sidelines for much of the fourth quarter.
We expect fourthquarter ISP sales to be down in approximately 5% compared to the fourth quarter in 2019, a full year 2020, ISP sales to be relatively flat compared to 2019 results.
Finally, our mortgage distribution business continues to progress we have corporate licenses in seven states in our corporate license as pending an additional states. We continue to see strong demand from clients to refinance mortgage and consumer debt and will receiving excellent support from our partner Quicken loans. In addition, we're seeing good traction in both.
<unk> of licensing and sales with that I'll turn it over to Allison.
Thank you plan and good morning, everyone. I will begin this morning by walking you you made a quarter key earning Skiver by segment, followed by review of Companywide insurance and other operating expense.
So I will highlight where COVID-19 has impacted and likely will continue to impact our financial results.
I will end my prepared remarks, with a discussion at our invested asset portfolio and capital and liquidity position.
Our net contribution of 14 million to pre tax income.
For comparison, the net income of favorable persistency on pre tax income in the second quarter was $4 million.
October results continued to show favorable persistency levels and if these trends continue through the end of the year, we estimate persistency will add about $8 million to fourth quarter earnings.
We do not believe this level of policy retention is permanent and fully expect persistency to normalize once the pandemic risk subside.
The timing of this normalization remains uncertain as does the level at which persistency will ultimately land.
Prior to pandemic, we were experienced improving trends in early duration persistency as a result of company retention initiatives.
We believe these actions combined with the awareness that has been created about the value of life insurance will be positive factors in determining where post pandemic persistency rates settle.
As Glenn discussed policy issuance levels levels were strong in the third quarter and when combined with the considerably higher policy persistency led to a 14% increase in adjusted direct premium year over year. This.
This added another $2 million to the third quarter's pretax earnings.
Year to date adjusted direct premiums have grown 12% and we expect the growth rate to be between 12, and a half and 13% on a full year basis.
Death claims is another recurring kovats themes that impacted the quarter's results.
We recorded $9 million of unfavorable claims experience in the third quarter $8 million of which we attribute to coated related deaths with the remaining being normal volatility.
Our GAAP rate rose somewhat in comparison to the rate experienced overall in the USA and Canada likely due to a decrease in the average age of coated desks in the population during the quarter.
CDC data showed a portion of covered gas for ages under 65 increased from 20% to 23%, which increased our exposure.
Assuming the same demographics are impacted by co late in the fourth quarter and using the current estimate of about 85000 debt, we expect to incur about $9 million in Kobe two related claims next quarter.
One last point to highlight about term life results for the quarter is that insurance Commission.
Which is a component of the DAC ratio increased by approximately two and a half million as a result of special licensing incentives and other non deferrable programs.
The increased funding for these programs largely came from the cancellation of Salesforce events, which have historically been reflected in insurance expenses.
This redirection of funding coupled with the impact that cobalt has had on general expense levels led to lead the term lines expense ratio to decline to 6.7%, 7.7% in the prior year period.
As I mentioned earlier, we saw a strong increase in the term life operating margin this quarter and on a year to date basis. The margin is 20.7% versus 19.5% in the prior year period.
A lot of uncertainty due to the pandemic remains true.
Taking into consideration fourth quarter, new business assumption, setting, which is expected to reduce pre tax earnings by about $3 million, we estimate that on a full year basis. The 2020 term life margin will be around 20%.
Turning to slide eight iced tea segment operating revenues of $176 million increased 2%, while pre tax income of 51 million grew 5%.
Sales based revenues declined 5% in line with revenue generally generating sales, while an 8% increase in average client asset values drove the increase in asset based revenue.
Expenses from both sales and asset base commissions were largely in line with their respective revenue Q.
Canadian segregated fund DAC amortization slightly favorable as a result of market performance of the underlying funds.
As Glenn mentioned, we expect fourth quarter IC sales to be lower than the prior year by about 5%.
Based on the current sales mix this equates to a year over year decline in sales based net revenue of about $1 million in the fourth quarter.
We cannot predict how the markets will react to the election during the fourth quarter, but as a reminder, at the current asset mix every 1 billion dollar change in average client asset value results in a $500000 change in asset based net revenue per quarter.
On slide nine companywide insurance and other operating expenses of $105 million during the third quarter increased 6% year over year and were largely in line with our prior guidance.
Our priorities around strategic investments remain unchanged, we continue to invest in technology infrastructure and digital initiatives to modernize our business.
In addition to these ongoing initiatives expenses were higher due in part to employee related expenses, including a year over year impact of the annual true up of our employee health benefits that takes place typically in the third quarter as well as continued investment in the expansion of our mortgage distribution program.
Lower expenses from COVID-19 restrictions continue to offset a portion of these increases.
Looking ahead, we expect insurance and other operating expenses to come in at approximately $114 million in the fourth quarter.
Let's move now to investment income and our invested asset portfolio on slide 10.
Adjusted net investment income on a consolidated basis was down slightly year over year as the impact of lower yield on the portfolio were largely offset by and by a combination of growth in the size of the portfolio and income from called Securities.
At the segment level, we continue to see more investment income allocated to the term life business to support the growth of the block of business.
Which is offset by lower income in the corporate and other segment.
Our invested asset portfolio remains well diversified across industries in issuer.
Despite significant actions by rating agencies over the past few months, we maintained an average credit rating of AA and our below investment grade mix remains very manageable at about 4%.
Credit spreads continue to tighten during the quarter and the portfolio ended the period with an unrealized gain of almost $135 million.
Finally on slide 11 liquidity at the holding company remains strong to that invested assets and cash of $251 million at the end of September.
Primary for life statutory risk based capital ratio was estimated to be 425% at quarter end.
We believe our capital levels are more than sufficient to meet our operating needs.
As announced our board of Directors has declared a 40 cents per share dividend again this quarter and we have completed approximately $231 million of share repurchases through the end of October with that operator, I will open the lineup for questions.
Yes. Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you're using a speaker phone. Please go ahead.
Handset before pressing issues.
To address your question. Please press Star then too.
At this time, we will pause voluntarily tell us how roster.
And our first question comes from Andrew Spinola with Credit Suisse.
Morning, Andrew.
Yes.
Yeah.
As your volume perhaps.
All right guys wanted algae responsible move onto the next question, which comes from Mark Hughes with trust or more.
Good morning, Glenn Good morning, Allison ranked morning Nicole.
Glenn when you think about.
The impact on the recruiting I think you said it was hard to judge.
Judge how much was primary versus how much was kind of cool bed and focused on as a business opportunities protection.
Any thoughts.
Why might it be acquiring Morocco.
You called it seems pretty clear on per month, which did not any expanded thoughts you've got on kind of what you're doing internally on what the.
What good beat.
Be driving.
At least some are.
Or a good portion of the improvement here sure.
Sure well I think it starts mark with the momentum we had before the pandemic started is we started seeing momentum increase.
And some of the positive results of a lot of the efforts we've put in over time at the very end of last year and of course January February in the first half of March were extraordinarily strong, which means we kind of shoot the disruption with a lot of momentum which is very positive in powering through the uncertainty in the early days.
And then of course I do believe there is some additional interest based on the time Thats. The piece that we attribute to the pandemic is kind of the consumer sentiment or or opportunity sentiment. If you will.
On the recruiting side, but we've also gotten better at telling our story in both how we described the premier to opportunity and we're much more efficient and touching more lives because I think weve leverage the capabilities of remote working and.
Zoom and other remote capabilities to tell our story to more people of course, those were created or may be magnified by the pandemic forced by the pandemic, but they don't go away at the end of the pandemic with anything we've learned and advantages. We've gained from that will continue so that's where it gets a little cloudy.
You know to to try to figure out exactly how to differentiate between the two but we're feeling very good about the things that we've done that are fundamental to the business. They can continue beyond any potential change in the in the sentiment that's out there but at the same time, we want to take advantage of the sentiment in this area because it's genuine is real and it's helpful is positive for us and we believe.
For those recruits as well so we do believe there is a strong fundamental theme underlying it and we believe we can carry a lot of that through beyond any kind of normalization that happens once we get beyond the major part of the pandemic.
You make a point about.
Your ability to reach.
Aspects using them that sort of thing the recruiting just the way your field leadership going about getting in touch with people are kind.
Kind of hitting.
Getting them enthused about the idea here just could you talk about how is how much it shifted from in person to.
More electronic or digital.
You're welcome to the resorts with the relationship marker recruit that comes primarily generally has a war market a speaker of influence that and that's where they start to work and build our business and you know in the old days it might have been a drive by visit or a telephone call are real they might have in a postcard.
Some way to initiate the contact.
And get the conversation started and then of course that would lead in pretty cold days to generally to a face to face meetings I think the front end of that works exactly the same way when somebody joins our business they contact their war market in whatever way is most convenient and.
Most comfortable for them lot of social media involved in that just reaching out to your friends on social media through a direct message got not not in mass communication, but in a one on one connection this often facilitated by social media and that's an introductory kind of conversation that's followed up with a presentation of our opportunity. This generally assisted by someone who.
He is very familiar a field training manager or someone like that to field trainer or regional Vice president joints and that's the piece that was done that that after the initial contact which is being done very efficiently today in so many different ways that first meeting is what is done more often now through xoom.
Some of the kind of web conferencing capability and of course.
Incredibly efficient.
Just as long as licenses are in place state lines and provincial board.
Borders are not as critical time in commute.
Distance is not as significant and so it's just a much more efficient way as long as we measure it make sure. It remains effective and were getting the results are doing doing 10 zoom conferences, but not getting anyone interested is not as effective as doing one face to face words permitted and having someone say I'd like to get from America truck. So we're really getting the lever.
Each kind of in that second step if you will not be initial contact with in that first meeting is being done much more frequently electronically now and I would say that our recruiters are now be caught where where regulations permit and it's.
Health protocols are appropriate or using a combination of zoom and in person to find the most effective combination and then probably differs by personality about the recruiter in the recruit.
But it gives us more options than we've ever had and those are some of the positives I think we care beyond the pandemic.
Thank you for that Allison early thoughts around expenses next year, you've got a lot of moving parts.
With co bid plus and minus and.
New investments in technology.
How should we think about next year roughly.
And it's a little early for us to share that that guidance, we're actually in the process of finalizing our budgets to present to our board at least our preliminary budgets on.
Later this month, but just some things to think about.
And again a lot depends on when restrictions that are covidien related.
We'll go away, but assuming they go away relatively soon lets say.
We think certain things go back to normal we think things like our travel I'd say three quarters or two thirds go back to normal I do believe there are aspects of things that we started to do remotely that can permanently replace having again on a plane and go places, but again those aren't super significant components of our expense base.
We are currently we have obviously in the game plan for next year.
Both the convention and an incentive trip.
What happens around those always is quite high and we're moving forward. Obviously full steam ahead I think from an expense standpoint, we should keep in mind is we fully expect to take whatever funds, we have earmarked towards those events and ensure that get pushed back into the field either via events or some incentive or the like so you might see some view.
Graffy like we've seen this year between insurance Commission then.
Operating expenses, but again, our commitment to those endeavors hasn't changed.
We've talked about so I'm not giving you numbers on giving is bunch of theories here something to consider.
We've talked about our mortgage program, that's a place where an operating expenses you will see sort of an increase there because we have to do a lot to build out our infrastructure of course that will lend itself to being something that revenue generating both next year, and then to a greater extent into the future.
And we continue to obviously invest in technologies I think the level at which we hit sort of a sort of an ongoing operating level. At this point I do think it will still be a place where you're going to see.
Now elevated increases five 6%, 7%, maybe but nothing to the tune of what necessarily we talked about in the past.
So those are probably some of the major themes that I can think of that are out there you know.
You've heard Glenn mentioned, there is a lot going on social media and making sure. We have we have ourselves well positioned from both a reputation of standpoint dealing with social media like and then dealing with any other things that are going on in the environment around US you know whether it be regulatory or just the economic so.
I can't give you a number now give you a lot of food for thought.
I would expect that when we do our our fourth quarter call in February when we gave you some numbers that you can then.
Good.
Thank you.
Thank you and once again. Please press Star then one if you would like to ask a question.
And the next question comes on Jeff Schmidt with William Blair.
Hi, good morning, Hi.
Question on the conversion rate just looking at the.
The new life license wrap ups, Tom was around 13% of total recruits.
I know, there's kind of a lot of moving parts from that right now and I think you mentioned.
Testing procedures are are still challenged but are you seeing that really start to improve even just in the last month.
A month I think you typically have kind of strong conversions.
In December I mean can that normalized fairly quickly.
Are there enough to choose where that could take a number of quarters spill.
Yes, it is getting better Jeff Theres no question.
We're seeing much better pull through a permanent licenses and fewer and fewer states or even issuing the colder temps now I think it's it peaked at about 25 usable stay till the teams we're down now to about 11.
So it is getting better as far as states that are back to issuing permanent licenses within a reasonable timeframe. The time frames are still extended unfortunately, and the longer someone recruit has to live in that zone between becoming a recruiting getting a license delays almost always heard our pull through rate so were we.
Working hard to compress those time frames as much as we can but there is some states that are just dealing with backlogs they're dealing because it's not just testing. There is also fingerprinting and some stage processing of the applications finding.
Finding proctors for remote testing.
You know it has emerged a few technical glitches in the remote testing capability of slow things down. So there's still a bunch of things out there doing so to give you a timeframe on it I think it is going to be beyond year end before we can say things are pretty much to normal, but it is proof improving and moving the right direction and we feel good about that.
Okay. That's helpful. The.
5200 sales agents with temporary license licenses Im just curious what was the type of productivity for them I mean did they sort of sign up because they had a sale.
To make or was productivity not much for that group.
It was definitely like remember as we as we think about productivity.
Of course, you have to have a license for us to be able to measure productivity or else. We can't see sales activity that you do you're not allowed to do it without a license so.
But in the states that each of these licenses they were issued very quickly and in many times that we're still training to take place. It's not just getting a state license and you're ready to go there is the training process and all the skills you need to be able to do our business.
And quite frankly, some of those licenses were so short.
We'll never got trained enough to use them. It was a very interesting set of dynamics to help people get license so fast.
But we such a short fuse that the license expires. So they were definitely less productive than going through.
A longer process, our normal process, but at the same time based on the alternative of just sitting out there waiting that's very discouraging for a new recruit and we find that that creates discouragement that leads to people, saying I'm not going to try this now I'm not I'm not interested in primary canal check back at another time, and we see them drop out quickly so.
While it certainly wasn't perfect. It was it was a huge advantage to have that alternative path. During this time.
And it helped us I believe net net retain more people and and therefore grow our business, but as you point out. It was it was a bumpy process with a lot of imperfections.
Okay.
And then could you just give us an update on on the number of sales agents that can sell investment products have have you seen that change much through the pandemic or is that been fairly flat.
It's been fairly flat, we have seen a.
A slight increase in very small numbers, we would categorize it as flat. The good news is that process was disrupted as well as you might imagine because many times is the same testing providers at the same types of providers that provide those exams and Fortunately FINRA move fairly quickly to move to remote testing and so we didn't see as much disruption.
In the pipeline of people getting license because it was they were they reacted quickly in that pipeline moves a little slower. So the good news is that we were we were able to maintain things that were flat.
There was a lot of distraction from focusing on that process with as much disruption as we had in our overall business, particularly in life licensing our field leadership to a certain extent said, we're going to focus on making sure. We keep life licensing going and we'll get back to securities licensing or mutual fund licensing later.
And so there was a focus shift toward life in order to kind of preserve the momentum that we had earlier in the year, but even through all of that we were able to maintain those numbers as flap in licensing and sales force size. So were feeling that we're in a good spot to build from here on that.
Okay Thats great. Thank you thanks for the answers certain.
Certainly Jeff Thank you.
Thank you and the next question is a follow up from Mark Hughes the truest.
Omar.
Hello, Yes, Allison reverse me again on the timing on the wired fee the reinsurance.
When you go through that process of purchasing at optimal impact on pricing with that dynamic again fair.
Actually the contract sort of self renew so we don't go out for rebid every year. We go out every handful of years, when we see that a period of time buying their thin mortality improvement or the like so it's not a process we price each year, we do from time to time have reinsure.
As we reach out to us and say you know, they're not interested in staying in the pool or they're interested in taking on a larger share on but there is no sort of set timing those all annually were new unless they they they cancel or less and change them. So.
By default they will all renew come January one we are not currently.
Really looking at any pull changes for January one at this point or anticipating any significant changes at this point.
And then on the persistency if that continues to be very good at this level how does the benefit play out over time is there impact once you lap the benefit.
Could you talk about that dynamic, yes, and I tried to address this to some degree in my.
Prepared remarks, but the difficulty is is we don't know where this will land and just to reiterate what we are seeing right now is strength in policy retention that quite frankly, we have never seen before.
It across all policy duration, so usually you get fluctuations when I talk about changes in persistency I am talking about first second third where people still are maybe not fully committed or.
They haven't invested so much time money energy in the policy that they're more willing to potentially walk away from it but when you look at the latter years, especially when somebody's container premium premium seven to 10 years.
We hardly ever see a shift in those persistency rate, we're seeing those rates go up significantly. So just as you think about how this impacts current financials. If you have a policy that bid on the books for 10 years and the weight of persistency is increasing on those on that block of policies that actually having.
Greater impact on benefit reserve, which obviously the negative you have to put up greater reserve increases then it would impact our slow down the back amortization because by then so much of the Dax amortized.
The flip is true if it happened on early iteration and that's in fact, what we're very much seeing which is why the impact on the DAC has been so substantial.
The substantial in the third quarter.
As I indicated we expect that to continue into the fourth quarter.
The concern is if in fact, there is a large shift in sentiment.
Do we lose some of these.
Current policies that are going on the books are people buying life insurance as quite frankly, a temporary measure.
We can't answer that.
We see what we are doing is we are very aware of that Glen and team are working very diligently with our sales with our salesforce extremely aware of that.
The good thing is they are partners of ours and this fifth wheel if those policies fall off it impacts them financially. So they have a very strong vested interest as well.
And again going into this whole experience and it's hard to even remember what life was like before mark but going into this whole experience. We were really seeing an improving trend in our early persistency because of these types of actions and protocol that we put in place with our sales force and so we continue to remind them of.
How important they are we continue to remind them of their responsibilities and their need how much benefit there as to making trainees clients stay on the books.
And we continue to interact with those clients to a greater extent than we ever have in the past just do our developed and we talk about technology I mentioned, it earlier and expenses a lot of that money is going towards things like client relationship management and so all the things that we're doing to continue expand how we had can reach and impact our clients on ongoing basis.
Our all meant to help maintain a good level of persistency. Once this pandemic is behind us, but there will be a disruption as I said clearly I do not expect this level of persistency to to no pun intended that persists after the pandemic.
Thank you Robert.
Thank you.
That concludes the question and answer session as well as today's call. Thank you. So much for attending today's presentation. You may now disconnect your lines.