Q4 2020 Primerica Inc Earnings Call
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Good morning, My name is Kate and I will be your conference operator today at this time I would like to welcome everyone to the primary cause of Inc. Q4 earnings results Conference call. All lines have been placed on mute to prevent any background noise.
For the speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question. Please press Star then two please note. This event is being recorded. Thank you I will now turn the call over to Nick.
Russell head of Investor Relations you May begin your conference.
Thank you Jay and good morning, everyone welcome to Pry Americas fourth quarter earnings call a copy of our earnings press release, along with materials that are relevant to today's call are posted on our investor relations.
On the Investor Relations section of our website at investors Dock Primerica Dot com.
Joining our call today, our Chief Executive Officer, Glenn Williams, and our Chief Financial Officer, Alison Rand, Glenn and Alison will deliver prepared remarks, and then we'll open the call up for questions.
During our 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 with.
We do refer you to our most recent form 10-K as 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 will also reference certain non-GAAP measures, which we believe provide additional insight into the company's operations.
Reconciliations of non-GAAP measures to the 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.
Thank you Nicole and thanks to everyone for joining us on.
For my prepared remarks today with some highlights from 2020, then I will provide a review of our most recent quarter and end with a few observations as we start the new year.
In many ways 2020 was a record year for primary ago, we began the year with strong production momentum across our business in January February and the first half of March prior to the onset of COVID-19, we had significant growth in recruiting licensing life sales and investment sales as the.
And then it began to impact our production we sell a brief disruption followed by record demand for our financial solutions and our business opportunity.
For many middle income families. The disruption reveal of the weaknesses in their financial game plan and their career outlook, primarily for <unk> ability to quickly adapt and meet this demand resulted in annual production records across our business, including annual term life placed in force of over $109 billion.
Investment sales of over $700 8 billion.
And client asset values totaling 82 billion at year end.
In addition, the uncertainty of job stability and business sustainability led to record recruiting.
The disruption to state and provincial licensing process has negatively impacted our permanent license pull through rates and slowed the growth of our permanently licensed sales force.
Of these production results were the strong financial results.
<unk> on slide three of our presentation deck, you can see we reported yet another strong quarter, which when added to the first nine months of the year led financial results in 2020 to an all time high.
Looking first at fourth quarter results adjusted operating revenues of $595 million increased 12% compared to the fourth quarter of 2019, while diluted adjusted operating income per share of $2 45 increased 10% compared to the fourth quarter of 2019.
<unk> full year results set new records with adjusted operating revenues of $2 2 billion growing 9% and diluted adjusted operating income per share of $9 70.
Growing 15% adjusted.
Operating ROA of <unk> during the quarter was 23, 4% compared to 23, 7% in last year's fourth quarter, while full year adjusted operating ROE was 24, 7% compared to 23, 5% in 2019.
During 2020, we returned a total of $296 million in capital to our stockholders through a combination of $231 million and share repurchases of $64 million on dividends, which represents a 5% increase compared to 2019 and a total payout rate of 76% of adjusted operating earnings.
Earnings.
Total share repurchases in 2020 were slightly below our target we accelerated our buyback activity early in the year when markets were severely disrupted by the onset of COVID-19, which increased the impact on the number of shares outstanding and we chose not to resume buybacks.
The strength and stability of our business gives us confidence to continue capital deployment.
Earlier this month of the board of directors authorized the repurchase of up to $300 million in common stock through June 2022.
Additionally, the board raised the first quarter dividend by 18% to <unk> 47 per share.
Turning next to slide for for a closer review of our distribution results.
We added 80 599, new recruits and 12119, new life license representatives during the fourth quarter.
This represents a 33% increase of new recruits in the 9% increase in the number of permanent or temporary licenses year over year.
Temporary licensing and extended renewal measures during the Covid crisis continue to impact licensing and the size of the sales force.
We ended 2020 with 134907 lives life licensed insurance rips included in the year end count were approximately 3600, COVID-19 temporary licenses and approximately 2500 licenses with extended renewal dates.
While it is very difficult to predict how many individuals with temporary of licenses will take the steps necessary to obtain a permanent license for how many licenses with extended renewal dates will be renewed early indications suggest that approximately 4200 licenses included in the yearend total could eventually be eliminated.
Turning to slide five as I noted earlier, we continued to see strong demand for term life insurance products. During the fourth quarter. We issued 87 307, new policies for 22% increase compared to the same period in 2019 of.
Our productivity rate at two one policies per life insurance license Rep per months compares to the 0.18 in the prior year period.
Highlights from our investment and savings product sales segment are presented on slide six.
Sales of $2 1 billion during the quarter increased 4% year over year sales of mutual funds and managed accounts continued to show solid year over year growth, while demand for variable annuities remains subdued for.
Fourth quarter net client inflows were robust were robust at 600 of whole year quarterly comparisons significantly outpaced the prior year period due to a combination of higher sales and lower redemptions.
Despite continued challenges posed by the pandemic 2021 is off to a strong start we kicked off of the year with the virtual version of our traditional senior leadership meeting.
This event brings our most senior sales force leadership together over two days to share our vision for the new year as well as improvements to our business and incentives to create excitement.
This event was followed by five virtual regional Vice President meetings, covering the U S and Canada.
These events allow us to engage with the most influential leaders on our sales force and set the tone early in the year to generate excitement and sustained momentum.
Response to the virtual format was extremely positive and our messages were successful in casting of powerful vision for 2021 and beyond.
As we look further into 2021, the current level of uncertainty related to the Covid pandemic and the social distancing requirements that might still be in place. This summer. We've made the decision to reschedule the biennial primary the convention to the summer of 2022.
This event attracts approximately 50000 attendees and always generates a lot of excitement rescheduling. The convention was the appropriate decision under the current circumstances to ensure that we experienced the maximum positive impact and that no one misses the opportunity to be recognized for their sales achievements to your powerful messages from field leaders and to network with our business <unk>.
<unk> and peers and.
In lieu of the live event. This year, we are planning a series of virtual meetings and incentives to help sustain momentum.
January of 'twenty 'twenty, one is preliminary production results for positive even compared to our strong pre COVID-19 results from 2020.
In January we saw growth across our business and recruiting life sales on investment sales licensing continues to be challenged due to the lack of classroom training opportunities and exam backlogs.
The key question for 2021 will be whether we see sustained client sentiment in favor of our products and opportunity.
Our view is that the disruption in 2020, clearly reveal client needs in these areas and a record number of clients took action.
These needs.
Have existed for many years and will continue to exist in 2021 and beyond.
However, it remains unknown, how they will be prioritized by potential clients in the future.
We're going to face of noise the comparisons as we approach the one year anniversary of various measures that were put in place to help us navigate the business challenges caused by the pandemic.
And the term life segment licensing and the size of the sales for should begin to normalize as the licensing process stabilizes. However, the noise from temporary measures instituted in 2020 will make year over year change is difficult to evaluate.
We also anticipate sales volume to moderate from record 2020 levels due to the pandemic decelerating impact during 2021 production may be lower compared to the prior year period, starting in the second quarter at the same time, there are too many variables for us to accurately forecast 2021 sales, but we expect that they may normalize the low 2020.
The levels.
In the ISP segment, we're assuming a relatively normal year as our clients continue to invest for the future. Despite the pandemic January preliminary results for showing year over year growth as momentum continues while it is still very early we believe first quarter sales will be at or slightly above first quarter of 2020 levels.
We believe we will also see some long term positives coming out of the pandemic such as remote testing, which provides an alternative path of licensing and more usage of way of comp web conferencing tools, which can improve efficiency with that I'll turn it over to Alex.
Thank you Glenn and good morning, everyone.
Starting on slide seven with our term life segment operating revenues of $369 million increased 16% year over year operating income of 89, 9% to 9%.
The term life operating margin, which is typically lower in the fourth quarter due to seasonal per se.
Persistency trends.
With 18, 2% down from 19, 8% in the prior year period.
Kind of a continued to have an impact on the quarter's results as did our annual actuarial assumption setting for 2020 business.
Starting with Covid and the fourth quarter saw a significant rise in Covid related death claims combined with continued demand for life insurance in the form of both net sales and strong policy persistency.
The number of.
Policies issued increased 22% year over year with the company, reaching a record level of face amount issued in 2020.
Higher sales along with favorable persistency throughout the year Group Inc.
Growth rate and adjusted direct premiums up to 15%.
So every year added about $7 million to pre tax income in the quarter.
Persistency remained strong across all policy durations of fourth quarter last week, nearly 30% lower EMEA.
Yes.
I am Christine C resulted in $23 million, lower DAC amortization and $13 million higher benefit reserve increases being recognized for a net contribution of 10 million to pre tax income in the fourth quarter.
We continue to attribute the strong persistency as well as elevated sales volume the fears driven by the pandemic and expect levels to normalize as the risks associated with Covid subside.
Looking at claims we recorded an estimated $14 million of Covid related death benefit net of reinsurance during the quarter highest level of since the onset of the debt pandemic.
Previously estimated $9 million for the quarter based on 85000 expected debt in the U S and Canada.
Robert with the Spike in Covid related deaths in December actual reported deaths in the population or 140000.
Our level of incurred losses in relation to total reported population GAAP remained consistent with third quarter experience.
When combining the net impact of Covid on sales persistency on claims we recognized an increase in pre tax income of around $3 million for the quarter.
Moving on to the actuarial assumption setting as we typically do in the fourth quarter, we locked in our GAAP actuarial assumptions for 2020 business. This period.
The most significant impact came from a deepening the ultimate valuation range from five 3% of 4%.
To reflect the sustained low interest rate environment.
Lowering the valuation range pushes GAAP earnings out to later years, but it does not change the overall cash flow associated with the business.
This change along with the secondary impact of reflecting lower first duration lapses.
The opening in a full year increase in benefit reserves of $5 5 million and a minor impact on GAAP amortization being recognized in the quarter.
The wrap up fourth quarter term life results, we saw year over year increases in both insurance commissions and insurance expenses.
Insurance commissions increased with sales volume as well as special licensing incentives to keep new recruits engaged and working towards permanent licensing.
Largely funded the special initiatives. The dollars that were originally earmarked for incentive trips, which are typically recorded as insurance expenses.
The increase in insurance expenses for the quarter, largely driven by growth in the business and technology initiatives.
As we look to 2021, given the tailwind created by strong sales and persistency in 2020, we expect adjusted direct premiums to continue to grow in the 12% to 13% range on a full year basis.
The higher growth rates earlier in the year that paper at the year on Paul.
Uncertainties surrounding the Covid pandemic make it particularly difficult to project our results.
Of all time, we believe COVID-19 related debt and likewise the sales on policy persistency.
Main high for the first half of 2021.
We currently estimate first quarter 2021 claim at approximately $21 million, which is based on a projection of 210000 deaths in the U S and Canada.
As more people become vaccinated the level of Covid debt should decline significantly and our benefits and claims ratio of reverting to between 58%, 59% in the latter part of the year.
We continue to believe the unusually strong level of persistency experienced in 2020 is not sustainable long term the pay.
And extent to which persistency normalizes, we'll likely be correlated to how quickly COVID-19 sphere chip side combined with the health of the economy in 2021.
Turning now with one of investment and savings products segment on slide eight operating revenues of $193 million increased 6% and pre tax income of $57 million was 7%.
Those base revenues were largely unchanged year over year, although revenue generating sales increased 5%.
Looking at the competition of product sales of note that much of that mutual funds, which are of lower sales based commission rate.
17%, while annuity sales declined 15%.
Asset based revenues were up 11% in line with the increase in average client asset value.
Senses for both sales and asset based commission moving correlation with their respective revenue.
Canadian segregated fund DAC amortization continued to be low due to favorable market performance and redemption level.
And our corporate and other distributed product segment on slide nine our operating loss grew by $4 3 million.
Consolidated net investment income was flat year over year as both in the size of the portfolio of largely offset the impact of lower interest rates.
On the segment basis NII reported in the corporate and other segment was down $2 2 million as we continued to allocate a larger portion of NII for the term life segment in support of the growing block of business.
Benefits and claims were $2 1 million higher year over year, largely due to a reserve adjustment on a closed block of business reflect the sustained low interest rate environment.
Both the current and prior year periods, there were charges in the $2 million range associated with reinsurance on closed block that largely offset each other.
The mortgage distribution distribution business added $3 7 million of revenue and about 1 million to pre tax income during the quarter.
To help track the performance of this business. We've added closed U S mortgage volume and commission revenue received on mortgage loans to our financial supplement.
On slide 10, consolidated insurance and other operating expenses were $113 million during the fourth quarter, increasing 6% year over year and in line with our prior guidance.
Approximately a third of the increase was due to continued investments in various technology initiatives of the remainder was comprised of expenses that support the growth in our business and higher employee related costs.
Looking ahead to 2021, we anticipate insurance and other operating expenses will increase between 40% and $45 million for 9% to 10% year over year.
We expect about 40% of the increase the hit the term life segment with the remaining increase.
Split fairly evenly between ISP in corporate and other.
About a third of $15 million of the total increase is tied directly to revenue sources, such as premium taxes, ISP asset based fees and record keeping fees.
Salaries and benefit related expenses are expected to be about 10 million higher year over year. This inc.
The <unk> larger than normal due to unusually low licensing instructors salaries during 2020 as fewer pre licensing classes are held as a result of COVID-19.
We also experienced lower travel related expenses during 2020, and while we expect COVID-19 related travel restrictions remain in place for the first half of the year. We do expect normalization later in 2021, adding about 2 million in expenses.
We will continue to invest in priority is to grow the business and provide tools for our agents and employees.
Continued investment in technology will add approximately $5 million to our operating expense base.
Strategic enhancements to our business platforms, including adding states of our mortgage distribution business introducing life wholesalers to support the sales for evaluating the deferred sales charge alternatives in Canada, and expanding our lifetime investment platform at about $12 million in related expenses.
As Glenn mentioned, we are rescheduling, our biannual convention to December of 2022, and we will conduct virtual meetings and special incentives in 2021 to help sustain momentum.
When comparing this to the field meeting and incentives we conducted in 2012 on you expect about a $4 million Uva year over year reduction in meeting related insurance and other operating expenses in 2021.
Turning to slide 11, our invested asset portfolio remains well diversified across industries and issuers.
The company has invested asset portfolio has performed well during 2020 with only modest impairment.
At year end, the net unrealized gain by the $153 million and the average credit rating with a.
Finally on slide 12 liquidity at the holding company remains very strong with invested assets in cash of $350 million at yearend and primary for life statutory risk based capital ratio est.
The estimated to be around 400%.
The ratio fell from the prior quarter level of economic reserves on one of our captive entities were higher than expected due to higher persistency.
Comfortable with RBC at this level and expect it to increase somewhat in 2021 with that operator I open the lineup for questions.
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The first question is from Mark Hughes of true. Please go ahead.
One of our thank you very much good morning.
Alison you had in the past given some indication on the operating margin within the term life business.
Maybe just to add a lot of moving parts on a lot of uncertainty.
Wonder whether directionally, if you could talk about the expectations, maybe what do you think about Q1.
<unk> described the 21 million on incremental mortality.
Presumably there's some offsets around back sort.
Sort of curious how that shakes out for Q1, and then thoughts perhaps for the full year.
Sure Mark and you are correct I do normally give that and as I said in my prepared remarks, the sierras unusually difficult to predict.
What's going to happen, especially as the year unfolds early on so we're focused very much on trying to keep you very current in our guidance based on what we kind of feel very more comfortable.
Knowing.
On the $21 million that I quoted for life claims what would likely come along with that and quite frankly, what we have seen in January is that we continue to see strong results on both sales and persistency on net persistency components important because it's the one that will obviously drive the the impact on GAAP.
And to a lesser degree the.
Reserve. So if you look at what happened this particular quarter net net.
Ended up at about a 3 million positive on it.
I hate to say positive due to COVID-19, but the net result of our impact of code all of the Covid items was about $3 million increase to the bottom line of pre tax income excuse me. So I can't say for sure whether the persistency offset will be complete to that $21 million, but we and we do expect it to provide a law.
Lot of.
Positives in the form of DAC amortization and growth in adjusted direct premiums. So I do think there are definitely offset at this point I cannot really predict what will happen for the remainder of the quarter and certainly not for the rest of the year.
And.
I do I do with me with different but as we've learned throughout COVID-19 the.
The expected is completely unexpected and vice versa. So at this point that's about as much information as I can provide.
Okay.
When we think about persistency in the latter part of the year yeah.
The persistency say normalizes.
That's not necessarily a bad guy it's the ebbs.
For the good guy as debt.
Is that the right way to think about it.
Really depends on whether you're thinking about things in pure economic terms or in terms of comparison to just the prior year. So in say the third quarter of 2020, we had exceptionally strong.
Persistency and so the impact on DAC in that period was noticeable so while we might revert to a more historical level.
It would look potentially negative on a year over year basis, but I would categorize it as still being very positive.
Kind of reverting to normal and in fact, we're learning to something that's even a little stronger than normal.
Given now the real awareness.
<unk> if you will.
Towards the population towards owning life insurance and protecting their families I think of the things that we're striving to achieve so again, even though it might look financially like of negative year over year, just the way the gapping of ARX.
Reverting to our historical levels, especially the ones that we are starting to see I would say really just prior to the onset of Covid in my opinion would be positive.
Right. So you a day.
The mortality.
On the benefits expense would normalize the DAC normalizes, maybe net net this quarter as the $3 billion impact maybe net net those are a little bit of a headwind.
If it plays out that way later in the year.
Okay.
Definitely with regard to year over year.
Yes, yes.
On the on the other hand, you've still got the tail.
Sales from the strong sales growth.
Doug in your topline in the.
Absolutely and then the accurately because so much of that activity a little baked in based on what happened in 2020. That's why we were a little more comfortable giving you of forward projection on growth in adjusted direct premiums.
And it just gets obviously a lot more difficult as we think about the Covid related claims and then the impact on persistency associated with the pandemic.
Hey, tomorrow, but I'll re queue. Thank you. Thank you.
Again, if you have a question. Please press Star then one the next question is from Jeff Schmitt of William Blair. Please go ahead, good morning, gentlemen, Hi, Hi, good morning.
Just a question on the benefit ratio.
You had mentioned maybe that goes back to that 50% to 59% maybe in the second half of of this year.
I think you had mentioned on the prior call kind of like these.
Sort of benefit payments this year, maybe as high as like 90% or sort of pulled forward.
From the basically what would've happened over the next five years.
So as we look out to.
2022, 2023 could debt can see hopefully move below the historical range.
Wow, Okay, so and I forgot it already 2021, when you said 2000 2023 for home and I thought that was really far in the future 2020 I realize on.
All of Us I apologize.
So we have been seeing somewhat of a decreasing trend.
There's a lot of nuances about it.
So I think the simpler way to put it is we could see the trend be closer to the 58% versus the 59%.
Given COVID-19 and not knowing when it's going to and then what the ongoing potential impacts might be it's just hard to predict but.
There has been just one other thing not that we would see a whole lot of the because of our reinsurance, but there have been some changes in the population with regard to mortality improvement.
It has slowed down for a period of time I believe it is back of developing again, but a lot depends on sort of what the mortality improvement trends are in the in the population itself.
Got it okay that makes sense.
And then just turn of the ISP segment, obviously held up really well this year net flows were.
Well above historical levels are you seeing any shift in some of the agents may be wanting to sell investment products for me is that something youre kind of marketing more youre seeing mark interest there given all of that Stan.
Yes, Jeff you see our rips attention.
They are attracted to what's working at any one moment.
As normal human behavior, and clearly we've got some real strength in that line of business right now which is positive for us because we believe the one of the beauties of our business model is having those two complementary main lines of business allows our company on our sales force to flex and find the area that has the momentum that they can.
Take advantage of at the moment, so there's definitely a halo effect from the positive things happening on our investment business, but at the same time.
We're actually seeing the same thing happened because of the client awareness on the life insurance side. So we're having we're having those that may have majored in investments take a look at life insurance. Those it may of majored in life insurance take a look at investments, which is of a really positive dynamic the have going on and as I alluded to in my remarks.
What we believe happened in 2020 is not that of need that had never existed before was created we believe that the circumstances of 2020 revealed the need that had always been there and we will continue to be there and made people more sensitive to their needs both for protection for investing for the future.
Get out of debt, our mortgage business that Alison referenced and also obviously our opportunity. It made all of those are higher priority and so thats really the message that we're giving right now is to make sure that debt. The fact that the health crisis. We pray is hopefully winding down the financial prices remain.
And in the middle market and we've got to be the reminder of that financial prices because it was already there and its still there and so it's really half of it's a positive.
In all areas of our business right now, Jeff, it's really a pretty unusual situation doesn't usually happen exactly like this.
Yes.
Right right Okay.
Thank you for the answers.
One of the Hill.
This concludes the question and answer session as well as the conference. Thank you for attending today's presentation. You may now disconnect.