Q1 2021 Primerica Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Prime Miracle of quarter. One 2020 earnings results conference call and webcast. At this time all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone please.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star Zero I would now turn the conference over to your Speaker today, Nicole Russell head of Investor Relations. Thank you. Please go ahead.
Thank you operator, and good morning, everyone. Welcome to part of America's first quarter earnings call a copy of our earnings release, along with materials that are relevant to today's call are posted on the Investor Relations section of our website.
Joining our call today, our Chief Executive Officer, Glenn Williams, and our Chief Financial Officer, Alison Rand Glenn.
Glenn and Alison will deliver prepared remarks, and then well open the call up for your questions.
During our call some of our comments may contain forward looking statements in accordance with the Safe Harbor provisions of the Securities Litigation Reform Act. The company assumes no obligation to update these statements to reflect the information.
We refer you to our most recent form 10-K as modified by subsequent form 10-Q, and the press release filed on a form 8-K dated April 19, 2021 for a list of risks and uncertainties that could cause actual results to materially materially material at least differ from that.
It was expressed or imply.
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.
Thank you Nicole and thanks, everyone for joining us.
First quarter results reflect a very strong start to 2021.
Fundamental strength in our business model continues to build and we have benefited in part to consumers' response to the COVID-19 pandemic.
Year over year term large sales were up 16% investment and savings product sales were up 27% and recruiting is up 12%.
We're also seeing steady progress in mortgage sales and we received an enthusiastic response from our sales force employees and the other constituents to our newly announced intent to acquire until the close which will add of senior health solution to the products, we offer the middle income families.
The expand on these themes.
Moving on slide three adjusted operating revenues of $637 million increased 18% compared to the first quarter of 2020, while diluted adjusted operating income per share of $2 44 rose 19%.
<unk> also increased to 22, 2% compared to 21, 8% in last year's first quarter.
Turning next to slide four continuing its strong momentum recruiting with the double digits as nearly 95000 individuals joined primerica during the first quarter of 2021.
Our efforts to improve and communicate the appeal of our business opportunity of <unk>.
Reinforced by our recent success and heightened career of uncertainty caused by the pandemic.
We continue to see of record response from individuals seeking freedom and control in their work lives.
The licensing process continues to create a bottleneck for individuals trying to obtain the permanent life license during the first quarter of nearly 11000 individuals obtained the life license less than we would normally the anticipated given our success in recruiting.
The licensing process, we see emerging out of COVID-19 has both positive and negative repercussions.
Virtual and online licensing classes of added flexibility for our candidates who are prepared to take a state or provincial exam.
However of candidates who select the in person route historically have a greater success rate due to the focused instructor led learning.
Social distancing measures and the general hesitancy to of 10 group classes currently limit the availability and appeal of lot of classes. We expect this dynamic to improve over time.
On the positive side 41 states and provinces of Mt rolled out remote testing capabilities remote expands or more accessible and convenient the in person exams and have the similar pass rate.
Even with this advantage with fewer candidates completing in person classes in attempting the exam licensing remains below expectations.
We ended the quarter with about 132000 life licensed Representatives. This number includes approximately 2400 individuals with COVID-19 related temporary or extended licenses that we believe will eventually fall out of the account.
Turning to slide five we continue to see solid demand for term life insurance products and issued almost 83000, new policies during the first quarter of 16% increase compared to prior year sales year.
Year over year comparisons continue to benefit from the fundamental strengthening of our business as well as COVID-19 has positive impact on consumer sentiment.
Consequently, our productivity rate remains at the top of our historical range at two one policies per life insurance licensed rep per month compared to one eight in the prior year period.
Our investment and savings products segment continues to set new sales and AUM Records.
Turning to slide six first quarter sales rose, 27% to $2 9 billion.
Sales of mutual funds and managed accounts were up 43% and 34% year over year, respectively. While sales of variable annuities worth up for the first time after three consecutive quarters of year over year declines.
We are of much of our ongoing success of the efforts of our sales force and the breadth of products. We offer our clients. Our success is amplified by technology support which has improved client interactions and enhanced communication and connectivity.
The strength of the financial markets, along with emerging optimism has also help motivate clients to invest for the future as evidenced by net client inflows, surpassing the $1 billion Mark for the first time in our history.
We continue to see progress in our mortgage distribution business and remain deliberate in our efforts to expand in the more states.
The appeal of this opportunity is also leading eligible reps in both new and existing states toward obtaining the appropriate licenses to expand their business into this new area.
We believe this program will contribute about <unk> 8 million to 2021 pretax earnings then grow by 5 million to $7 million per year thereafter.
Assisting clients with mortgages in managing their debt load also has a positive impact of life sales ISP production and recruiting.
As we ended the second quarter and the COVID-19 impact continues to moderate we recognize that year over year recruiting and life production comparisons will be difficult to evaluate.
Comparability will be further distorted by significant recruiting and production incentives we used in 2020 to preserve momentum as the pandemic worsened.
In addition states adopted temporary licensing measures to manage through COVID-19 related shutdowns and these measures are starting to sunset.
As we look ahead, we see continued momentum in recruiting compared to pre COVID-19 levels and expect licensing to continue improving of states and provinces process has returned to normal and social distance measures fees.
However, it will take another quarter or two until we have a better view of the growth rate of our sales force.
As we shared last quarter, we expect year over year comparisons for life sales to be slightly negative in the second quarter and full year sales are projected to decline by approximately 5% compared to the elevated levels in 2020. However.
However, 2021 sales are projected to be approximately 10% higher than pre pandemic levels.
Preliminary sales of investment products were very strong in April we expect second quarter growth to meet or exceed the first quarters year over year growth rate of 27%.
We believe momentum for investments product sales will continue barring a resurgence of market uncertainty.
Now I'll turn it over to Allison.
Thank you Glenn and good morning, everyone, starting with our term life segment on slide seven operating revenue of $382 million increased 17% year over year and pre tax operating income of $88 million up 6%.
COVID-19 continues to impact results the strong demand for protection products driving sales growth and policy persistency.
A significant level of death claims this quarter more than offset the benefit.
The term life margin declined to 17, 4% in the quarter of 19% in the prior year period.
COVID-19 did not have a significant impact on kind of like results in the first quarter of 2020.
As Glenn noted earlier.
Growth continues at double digit pace.
Counting of sales growth and strong policy retention over the last year.
Adjusted direct premiums of <unk>.
16% year over year and added $9 million to pre tax income during the quarter.
Looking more closely of course.
The continued to see strong policy retention aggregate lapse rates of about 20% lower year over year.
The first duration for 56, the lower year over year increase in other generation.
The Asian, partially due to the strong first duration persistency of you are already experiencing in the first quarter of 2020 prior to the onset of COVID-19.
Other policy durations continued at the very strong.
You can see although not at the unprecedented levels seen in the second half of 2020.
We believe persistency will continue to normalize to more sustainable levels. Throughout 2020. However, it is difficult to predict the pace at which the normalization will occur aware of retention level will ultimately settle.
For the first quarter higher persistency resulted in $12 million, lower DAC amortization and $7 million of higher benefit reserve increases for a net contribution of $5 million to pre tax income.
Turning next to the incremental claims attributable to COVID-19 related GAAP recognized approximately $21 million in excess claims net of reinsurance during the first quarter, which is in line with our projections and consistent with previous quarter of experiences $1 million for every 10000 population yet.
Train for much higher at the start of the period with half of the deaths occurring in January then declining in February and again in March.
Buying the net impact of COVID-19 on sales persistency of claims, resulting in a $7 million reduction to pre tax income during the first quarter.
Moving to term lines of expenses and sharing the commissions increased year over year due to higher non deferred commissions related to enhanced scale of incentives to offset the absence of our biannual convention that was postponed to next year.
Conversely, the insurance expense ratio remains.
The lowest historical average during the quarter of 7% compared to eight 5% in last year's first quarter.
Expenses remained unchanged year over year due to various COVID-19 related restrictions the impact in person meetings and licensing costs.
Debt higher cost of normal growth in the business.
Looking forward as more people are vaccinated in the exit rate of decline, we expect sales levels to moderate as Glenn described earlier.
Adjusted direct premiums are expected to grow around 13% on a full year basis with growth rates tapering as the year progressing.
Persistency will continue to normalize as previously discussed.
Best estimate of that persistency levels will continue to come down over the next two quarters.
<unk> pre COVID-19 levels by year end.
This would put the DAC ratio between 14, and 15% for 2021 of the typical seasonality from quarter to quarter.
We estimate second quarter COVID-19 related claims at approximately $6 million based on a projection of 60000 popular day population debt in the U S and Canada.
Assuming COVID-19 related deaths continue to decline, we expect the benefits and claims ratio to revert to the test.
The Oracle range between $58, 59% later in the year.
On a full year basis, we expect the benefit ratio to be between 60 and 61% for 'twenty one 2021.
Can you extend the COVID-19 threat neutralize at the pace, we anticipate we expect full year term life margin in the mid 19% range for 2021.
Turning to the ISP segment on slide eight operating revenues of $223 million increased 21% and pre tax income of $63 million was 33%.
Sales based revenue grew 21% while revenue generating sales of 26 per day.
Very strong sales of mutual funds drove the year over year increase however revenue with lagged sales due to the lower average sales based commission rate earned on mutual funds relative to our other investment products as well as a higher proportion of large dollar trade, which also have a lower commission free.
<unk> expenses increased in correlation with the associated revenue.
Asset based revenue increased 24% in line with the increase in average client asset value.
Asset based commission expense grew at a slightly higher pace and revenue as a result of Canadian segregated funds.
Less favorable fund performance during the period compared to our other investment products.
Expenses for Canadian segregated funds are captured as insurance commissions and DAC amortization, rather than asset based commission.
Canadian segregated fund DAC amortization was lower by approximately $1 million year over year of last year's first quarter reflected the periods of negative market performance, which had a much larger impact than the hot and the slightly unfavorable market performance experienced this quarter.
Moving next to our corporate and other distributed products segment on slide nine.
Operating loss increased by $4 6 million over last year's first quarter.
On the revenue side mortgage loan commissions increased $4 7 million following the program rollout over the past few quarters.
Net investment income in the segment was lower by $3 million due to lower portfolio yield combined with more net investment income being allocated to the term life segment to support the growth in that business.
Benefits and expenses were about $7 million higher year over year.
Related commissions and operating expenses were approximately $8 5 million higher.
Another $5 million, largely due to technology spend and higher employee related costs.
On ancillary product sales.
Partly offsetting these increases increased expenses with a $1 $6 million loss associated with reinsurance allowance on a discontinued line of business reconciled recognized in the prior year period.
Consolidated insurance and other operating expenses on slide 10 were $122 million during the first quarter by the 6% of $7 million year over year.
Growth in the business technology spending and employee related costs increased expenses by about $10 million year over year.
The COVID-19 related restrictions on interest and expenses, such as licensing and education meetings and travel and entertainment costs resulted in expense as being about $5 million of lower.
For the second quarter, both the current year and the prior year periods of expenses reflect these restrictions.
These costs to increase as travel restrictions lift during the year.
Second quarter insurance and other operating expenses are expected to be $113 million of 13% higher than the prior year period, which is excluding any costs associated with the acquisition of T cell clones.
Turning to slide 11, our invested asset portfolio remains well diversified across industries and issuers.
The unrealized gain at the end of March with $98 million compared to $153 million at the end of December 2020, reflecting the increase in market rates during the quarter.
On a consolidated basis net investment income was about $1 million lower $1 million lower year over year.
On slide 12 invested assets in cash at the holding company of $369 million has been building to fund the <unk> acquisition.
We expect to close July 1st.
Immediately after closing, we expect holding company invested assets and cash to be around $170 million and growing to a more normal level above $200 million over the next few quarters.
As we previously announced we do not plan to repurchase any shares in 2021.
We are confident our strong capital generation will allow us to resume repurchases in 2022 and continue to fund our business growth and E calix loads cash needs.
We expect we expect <unk> cash flow to remain negative through 2026 and be in the negative $40 to $45 million range annually for the next few years.
Primerica life estimated risk based capital ratio was 400% at the end of the first quarter and we plan to remain around this level for the rest of the.
A year as we continue to fund business growth to pay ordinary dividends to the holding company.
Of that operator to open the lineup for questions.
At this time, if you'd like to ask a question. Please press Star then the number one on your telephone keypad.
Again, the Star then the number one to ask a question.
Your first question comes from the line of Jeff Schmitt with William Blair.
Hi, good morning, good morning.
Last quarter, you had mentioned.
The thought 4200 individuals with either temporary or extended licenses would you pursue of permanent place.
And that dropped the 2400 this quarter did those of all drop off in the quarter in the back of differential.
Or is there a change of that.
Estimate that at all.
No thats it.
As part of the process that we started its own the slow kind of of the glide path that we talked about last quarter. It is dependent of when they drop out based on how quickly states react whether theyre continuing there's a small number of states are continuing to issue a very small number of temporary new licenses.
Almost negligible, but there were a number of states that have used have an open and on the deadline of the extended renewals and that's the vast majority of kind of what is.
As hanging out there of the longest but the idea is happening episodes that we anticipated. This is just more of that process. We described last quarter.
Okay. Okay. It is kind of moving in line with your expectations.
Yes.
And then looking at the ISP margin as it continues to be really good.
Eight 4% I think is the highest first quarter result.
In years.
Could you speak to your outlook there I mean is that just leveraging technology higher.
Asset base.
I noticed that the other operating expenses have held flat for.
While they were flat in 2020, there again flat in the.
The first quarter.
Could you maybe speak to your to your outlook there.
Our investments being held off from that other operating expenses that's true.
The net of what me.
Maybe driving that.
Yes, I think we have seen some operating expense change a little differently in the ISP segment as well.
It's driven by our investments in our technology improvements.
The other other costs that we experienced in maturing debt business and Golar any of those as you point out of exploring the very healthy rate.
And so we are seeing a little bit of that concentrated there.
One thing to think about it.
Its normalized out for this year, but over the last several years I've mentioned that we renegotiated several of our contract with our business partners people will help us of record keeping and the like.
All of which resulted in lower operating expense of which we saw a pretty significant reduction over the last several years. We've also.
Hit obviously certain breakpoints with the size of our assets under management, which has also reduced some of the cost to operate so that could be what you are saying I wouldn't say from the standpoint of our philosophy towards making investments in that business that anything has changed.
Okay. Okay.
That's helpful. Thank you for the answers.
Right.
Again, if you wish to ask a question. Please press Star then the number one on your telephone keypad.
Your next question comes from the line of Mark Hughes with tourists.
Good morning, Mark.
Good morning, Glenn.
Good morning, all.
Glenn.
Came in a little bit late but did you give any color on the.
Early thoughts about Q2 term life sale.
Yes, we did we talked about the fact that as we discussed in the previous quarters discussion that we do expect to see second quarter and full year sales are going to start the declines.
And so we think the full year is probably at a 5% of lower than the elevated levels of 2020.
So we did that.
We start to see some evidence of that by the end of the second quarter and then it will kind of continue through the last half of the year, but an interesting thing that you also content onto the FCC units.
The language was that do you feel like where we're going to land is above where we were pre COVID-19. So about 10.
10% above pre COVID-19 levels.
Yes.
Did I hear you properly you said the kind of the decline maybe starting at the end of the second quarter.
Yes, exactly we foresee it in the second quarter reported is what we're anticipating now.
Start to the evidence itself and then by the end of the year you'd be at about a five percentage lower than last year's elevated COVID-19 levels.
Yes, yes.
How about the Allison did you give any color on the operating expenses for the full year I think you said $113 million.
The anticipated into two.
Yes.
I guess, the TQ acquisition of side, how do we think about expenses for the full year.
Yeah, I gave some estimates last quarter those numbers have not changed we came in just slightly below expectation in the first quarter, but absolutely believe it can be timing.
All of the full year color that I provided last quarter.
Mains unchanged.
And with regards to <unk> again.
Some costs will be operated out of that are associated with the deal itself, but we haven't layered in anything either on the revenue or expense side with regard to that transaction at this time.
Okay.
And then.
Are you gearing up for the.
The sales force are you prepping them for the <unk> quote.
When we think about this year given the July close I know fourth quarters obviously.
Strong period for that business.
How engaged is your sales force going to be.
This year.
Based on whatever groundwork you might be doing now.
Alright, but we're certainly aware mark of the uniqueness of the enrollment period that happens at the at the end of the year.
Our game plan is to get our pilot out operating around the time of the transaction closing.
The distribution agreement operating separately from the rest of the transaction and that's deliberate.
And assuming that we have good success with our process can be as simple as we'd like for it to be we do want to be in a position, where we can take advantage of the annual enrollment period, but we are being realistic about how much of it there's not much time to get ready.
And we want to make sure of that anything we do in of new business lines doesn't negatively impact the success that we're having in our current business lines. So we're going to try to moderate debt expectation just a little bit based on those two consists of considerations, but we are trying to get to a certain point, where we can assess.
How successful we might be doing an annual enrollment period, and then as we look forward into future years. When we have some maturity in the business will be better at projecting once we have that first year's experience. So we're aware of it and preparing for it but we're also realistic in our expectations of how much we can get done with the with the that we have.
Understood. Thank you.
Gladhill.
At this time there are no further questions.
That does conclude today's conference you may disconnect at this time, thank you for participating.