Q2 2021 Primerica Inc Earnings Call
Welcome to the Primerica's second quarter earnings call a copy of our earnings press 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, Alice Rand, Glenn and Alison will deliver prepared remarks, and then we will 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 security.
The litigation Reform Act the company assures assumes no obligation to update these statements to reflect the information.
We refer you to our most recent form 10-K as modified by the subsequent form 10-Q, and the press release filed with our 8-K dated July 1.2021 for the list of risks and uncertainties that could cause actual results to materially differ from those expressed or implied we also referenced.
Certain non-GAAP measure we took the lead will provide 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 also 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 today second quarter results were very strong reflecting continued progress in both our term life and our investment and savings segments leveraging the fundamental strength of our business model. We are positioned to meet the middle markets increased demand for financial security, which has been revealed by the Covid pandemic.
Starting on slide 3 adjusted operating revenues of $654 million increased 25% compared to the second quarter of 2020, while diluted adjusted operating income per share of $3.25 rose 33%.
<unk> also increased to 27, 8% compared to 25, 6% of during the same quarter last year.
Turning to slide 4 we attracted nearly 90000, new recruits during the quarter year over year comparisons are difficult to evaluate because of the varying impact of the pandemic in each period and the tailored recruiting incentives we deployed each quarter looking.
Looking beyond this noise, we believe that we are using the right mix of messaging and incentives to continue to drive recruiting and to increase the appeal of our business proposition.
More than 10000 individuals obtain of new life insurance license during the quarter and we are encouraged by those results. We have seen some improvement in the licensing process over the last few months testing windows are now generally available in many states of called upland processing backlogs, although there remains some pockets where processing is still taking loan.
Where the mutual.
Licensing candidates today also have more flexibility to access pre licensing classes in both in person and remote options widely available.
We continue to see of higher success rate for candidates choosing to attend in person classes with there is some hesitancy about assembling in classrooms.
As Covid social distancing measures East, we noted a greater degree of distraction among our licensing candidates. After a prolonged period of lockdown. Some people were prioritizing social activities and travel over the pursuit of their like license.
Since the beginning of the year our message to the field has been focused on getting new recruits engaged in licensed we provide resources and coaching to assist new recruits from the most effective path of licensing. We also offer incentive credits and consistent messaging on the importance of new licenses and growth of the sales force.
We believe our prioritization and support will help overcome the recent obstacles to the licensing process over the next few months.
We ended the quarter with about 132000 life licensed representatives, including a total of 2400 individuals with either either COVID-19 temporary licenses or of license with an extended renewal date.
As time wears on we believe the majority of these licenses will largely age out excluding all 2400 of these licenses from our total sales force provides a more appropriate and conservative understanding of the underlying size of our sales force and the foundation for future growth.
The pandemic presented us with numerous unique challenges over the last year that we were able to navigate these obstacles by adapting quickly to a remote framework.
The work environment and by embracing web conferencing tools that will have a lasting benefits of our sales force. We remain committed to growing our sales force and expect to end the year at around 131 of <unk> Representatives. After all of the Covid temp licenses and extended renewals have expired compared to a normally.
<unk> count of 100.3700 at the end of 2020.
Turning to slide 5.
The consumer sentiment for the value of life insurance remains strong which is most evident in our persistency levels sales were also robust. However, we are finding the some individuals both clients and reps are also focused on resuming normal everyday activities, which competes with the urgency to obtain insurance coverage.
Nonetheless, we issued nearly 90000, new life insurance policies during the quarter a figure that is slightly below last year's second quarter record levels get outstanding by historical standards.
Productivity remains above our historical range at $2.3 policies per life licensed representative per month, and total face amount grew to $887 billion in force at quarter end.
Looking ahead as we see trends normalizing, we project full year over year life sales to decline approximately 5% versus last year's elevated levels.
Turning to slide 6 for a review of our investment and savings products segment results say.
The sales exceeded $3 billion for the first time in history with solid demand from both the U S and Canada clients and across all product lines, including mutual funds, the annuities and managed accounts.
Strong equity markets continued to contribute to investors' confidence and helped drive sales.
Net inflows at $1.2 billion during the quarter were twice the level in the prior year period and slightly above the $1.1 billion in the first quarter of 2021.
This level of sustained net inflows as a function of strong sales and investors' decisions to stay invested we.
We believe our redemption levels remain well below industry range.
We ended the quarter with client asset values of 92 billion.
A 34% increase year over year, combining strong equity markets and nearly $3.5 billion of net new inflows over the last 12 months.
Barring an unforeseen period of market uncertainty, which would have a negative impact on investor sentiment, we expect third quarter investment sales to grow in the 30% to 40% range versus last year's third quarter.
We're making steady progress in our U S mortgage distribution business and continue with our deliberate efforts to expand distribution.
We are now actively engaged to do business in 15 states with about 1000 license Representatives, we estimate the mortgage business will earn around $4 million in pre tax earnings during the second half of 2021 for a full year total of $7 million.
Because of the positive impact we believe the mortgage business brings to recruiting life of an ISP sales and client satisfaction with the kind of mortgage referral program in Canada.
While providing similar positive overall business dynamics. This referral program does not require a licensing of our representatives in Canada and provides much smaller economics for the company. We're seeing good response from our reps and clients to this offering which rounds out the full service client experience.
Our acquisition of the telephone closed on July 1 and we're excited about adding senior health offerings. The primary because financial solutions for middle income families.
In addition to <unk> existing distribution model, we're in the process of rolling out of pilot referral program, leveraging primarily strong relationships between our sales force and our clients I look forward to updating you on our progress in the coming quarters now I will turn it over to Alison. Thank you Glenn and good morning, everyone starting with.
That Karen life segment on slide 7.
Part of marks the first period per Covid impacted both the current and prior year periods.
Segment results were very strong and operating revenues of $384 million increased 17% and pre tax operating income of 117 million. The 23 per year every year.
As Brian discussed Cadillac sales were down slightly from last year, the highly elevated level.
Consumer sentiment for protection products continue to be favorable as reflected in record levels of policy retention.
Shifting from improved across all of the arrangement over the prior year paid interest already at historically elevated levels.
Given the contact lapsing in last year's second quarter of 15% lower than 2019 levels. While the current quarter lapses are an estimated 25% of power in 2019.
The current operating impact of sustained higher sales and policy retention over the last 5 quarters kind of 16% and adjusted direct premiums the year every year, adding $11 million to pre tax income of the baseline 2019 level the same.
The contribution in 2000 training with the spleen volume.
The higher percentage of <unk>.
Lower DAC amortization by $14 million, which was partly offset by $6 million and higher benefit the third for a net current depletion of $8 million to pre tax income for the quarter.
The net contribution in the prior year period was $4 million.
Current period claims remained elevated in comparison to our historical experience.
About $6 million in kind of the claim and an additional $1 million of claims that were not identify the COVID-19 I tried to of $9 million excess claims for the quarter.
This compares to the 10 million of excess claims in the prior year quarter, which was fully attributable to kind of the cash.
The $6 million of Covid claims was in line with the expectation that increased our experience from 10 million per 100000 population gas the $13 million per 100000 population of that.
The increase was caused by higher COVID-19 related debt in Canada, which has historically had lower reinsurance coverage and therefore, a higher average return the hanes pace now.
It is not unusual for us to experience normal claims volatility and the $3 million range in the quarter and at this point, we believe this to be the case.
That being said areas of lot of discussion in the news about the impact of delayed medical care in the behavioral health price at which.
Could have impacted we think claims activity. We continued in line of our experience of any emerging trend.
The level of vaccinations in the efficacy against strength of the virus are key to determining the ongoing level of COVID-19 related debt.
Looking at the third quarter, we estimate $6 million from Covid claims for the quarter based on an estimate of 57000 population gas, including 500 gas from Canada.
We expect lapses to begin normalizing later in 2020 'twenty 1 to keep from.
2020 line. However, we had yet the team loopnet in that direction and it remains difficult to predict the extent to which we will see a permanent improvement in persistency from pre COVID-19 levels.
Any SEC improvement in persistency with the favorable to margin, resulting in the benefit ratio being higher than the GAAP ratio being lower than pre COVID-19 levels.
With the improvement of in the 10% range margins would likely increase 80 to 100 basis points from where they were prior to the pandemic.
We'll share an expense ratio remained below at the pre Covid historical average during the quarter at 6.6% compared to 6.8% in the prior year period as higher adjusted direct premiums that the greater fixed cost absorption.
Turning to the ISP segment on slide 8 operating revenue at $238 million increased 45% and pre tax income of $71 million was 52%.
Year over year comparisons reflect continued strong sales, which Glenn discussed earlier and significant asset appreciation over the last year.
The 67% increase in sales based revenue was somewhat lower than the growth in revenue generating sales due to an increase in large dollar trained the kind of lower commission rate.
Any of the large dollar trades are coming from the current plan of all over the job turnover on the rise and a greater number of 80 of them deciding to retire.
Asset based revenues increased 39% largely in line with the higher average client asset value.
The sales and asset based commission expenses increased in line with the associated revenue.
Other operating expenses grew by 11% largely driven by fee based on client asset value.
Canadian segregated fund DAC amortization for the quarter that of normal run rate of 1.7 million higher than the prior year due to a significant market correction that occurred during the second quarter of 2020.
Moving next to our corporate and other distributed products segment on slide 9 in cash.
Operating loss increased by $5.2 million compared to the prior year, excluding $2.1 million in transaction related expenses incurred during the quarter as a result of the acquisition of the calico.
The year over year change result reflects around $3 million higher employee and technology related costs as well as $1.6 million of higher reserves on a block of discontinued business.
Of the low interest rate environment and improved persistency.
Allocated net investment income in the segment declined by $2 million largely driven by a higher allocation to the term life segment to support growth of net business along with lower overall yield on the invested asset portfolio.
Our growing mortgage business added a net $1.6 million of pre tax income during the quarter.
Sure.
Consolidated insurance and other operating expenses on slide 10 were in line with expectations out of $113 million during the second quarter by the.
The 13% or 13 million kind of the prior year.
The increase was largely driven by growth in our businesses.
Dissipate third quarter insurance and other operating expenses and our 3 existing segment will be approximately of $119 million of 12% higher than the prior year period.
Beginning next quarter, our disclosures will be expanded to include a force segment senior health, which will capture revenue of incentive associated with the distribution of Medicare related insurance policies by E Mail club, including earnings generated from sales force by primary go App.
Our intent is to continue to remove transaction related costs, which are specific to the purchase of E tail of club and that we view as onetime in nature from the operating results.
These costs include fees necessary to close the transaction and other 1 time costs that will assist us in integrating <unk> into our organization and the <unk>.
Adjustments to certain items recognized for purchase accounting.
Other integration related costs that are ongoing in nature will be shown at the operating expenses in the senior housing segment.
Turning to slide 11, the unrealized gain in our invested asset portfolio at the end of June was the 120 clean the land from $98 million at the end of March as rates declined and credit spreads tightened the.
The portfolio remains of high quality and well diverse the diversified across sectors and issue of it.
The any IC recently adopted new bond factors to be used in the calculation of RBC that go into effect for 2021 year annual reporting.
Modeling our June 30, RBC ratio using these new non factors, we estimate our ratio will be reduced by approximately 10% to 15 basis points.
We believe this change of small enough to not require significant changes to our invested asset portfolio.
With the news on factor the primary the life estimated risk based capital ratio.
Is about 410% at the end of the second quarter and we plan to remain above 400 per cent for the rest of the year as we continue to fund business growth and pay ordinary dividends to the holding company.
On slide 12, holding company liquidity at June <unk> of 666 million, reflecting the buildup in anticipation of the <unk> acquisition and includes the $125 million draw against our revolving credit facility.
Immediately following the closing on July 1 other things happening liquidity was approximately $169 million with that I will open the lineup for questions.
Thank you we will now begin the question and answer session.
You asked the question you May Press Star then 1 on your Touchtone phone.
And the speakerphone, please pick up the handset before pressing the keeps sort of.
Anytime of the question has been addressed and we would like to withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
And the first question will be from line Krueger with <unk>. Please go ahead.
Good morning, Ryan Thanks, Hey, good morning, all.
I'll start with <unk>.
The pellet quote.
Can you provide any guidance I guess the around how to think about the initial earnings impact.
The.
So quite of bit of seasonality of the business. So any any help there of adult could be great.
Yeah, Hi, Ryan we at this point aren't providing that information of our exactly correct. The third quarter is not a seasonally strong quarter per se their strongest quarter will the most likely to be the fourth quarter, while annual while the annual enrollment period is open.
We do plan to provide that information as we move into next quarter's earnings results.
Got it okay.
And then on persistency.
I'm sorry.
2.2.
<unk>, but.
You have any thoughts on the 1.
We saw persistency.
Good even better again, and where there any trends that happened throughout the quarter month by month and post quarter or was it.
Distantly that favorable throughout.
Yes, great.
Great question, it was consistently favorable throughout the quarter.
And to put it in context of last quarter and again, we have a lot of seasonality in our business and the persistency.
Persistency in the second quarter is usually elevated anyway.
But when you look at it on a year over year basis, both the FERC, Inc. Second quarter in comparison to we're using 2019 of the baseline on your pre Covid those periods, where our balance of this pad the same strength in about the 25% range improvement. So it's not that we've seen of further uptick versus what we saw the day last quarter, we get arent.
Seeing any deterioration in the range and I think it correlates very highly quite frankly with what we're seeing in sales and while the sales were down a bit from last quarter last year.
Were still exceptionally strong in comparison to where we were pre COVID-19.
You know obviously at the very end of the quarter and into the third quarter you had the rise of the Delta variance. So.
Internet itself, probably makes me feel like the normalization of persistency may be pushed off further than I had even anticipated a month ago.
Right now again, we're not seeing any kind of normalization of to me, it's very unlikely that it will get back to pre COVID-19 levels, or even where its kind of land post COVID-19.
By the end of the year and I think it will continue to be elevated for the remainder of the year.
Perhaps not quite as highly as it is right now on the.
Scale to a point that would be very favorable to our earnings.
And most likely to sales as well.
Great. Thanks, a lot.
And again, if you have a question. Please press Star then 1 the.
The next question comes from Mark Hughes from Truest. Please go ahead.
Good morning, Thank you good morning.
Indeed.
Glenn.
Talk about how the recruits have not been quite diligent in getting license.
Could you talk about.
Do you think that the fact is extending into the second half and do you think those kind of pull through rates theyre going to be below historic levels.
Yes, Mark we're seeing kind of the distraction of effect that I referenced in my prepared remarks that.
People have been limited in their activities for so long and then wound finally, they're able and of course a lot of this is being impacted as Alison just mentioned about the delta but.
As the Lockdowns in the it and people felt more comfortable about moving about we could see of distraction factor and I believe that is attributable to the <unk>.
Some of what you're describing in our pull through rate of licensing. It's probably also created a little bit of a disconnect from the strength of life sales and the strength of persistence. The they were traveling very close together through most of the pandemic and as Alison just referenced persistency has remained very strong sales of east some and I think the difference between that is the fact that we have.
We just got a lot of people out moving things that they haven't been able to do in a long time and so that creates the distraction effect on our recruit pull through right through licensing. It still continues to be hampered by some backlogs in states and not only the distraction factor, but as I stated the most effective way to.
Some of them through an exam is through a lot of licensing course, they just appear to be more effective in our analysis and online preparation and people arent real comfortable yet getting in classrooms with a lot of other people.
And so all of that added together is kind of created a drag on our pull through we estimate that is probably going to continue certainly in the third quarter. Although we've got the every resource available debt against trying to overcome that and create offsetting positives.
Probably going to continue through the third quarter, maybe even into the fourth quarter.
Understood how about the hug the recruiting look.
Early in the third quarter.
We're <unk>.
Very pleased as we said with the second quarter recruiting.
And again things are normalizing.
You will recall is all of this really began in the second quarter of last year.
We were very concerned about how a remote environment might impact our business has never existed in an environment like that before and so we kind of fruit of the kitchen sink at it.
From an incentive perspective, and then we found out that we actually thrived in the remote environment and it had its own set of positives. So we had some double positives there last year and we started pulling back on the incentives.
At the end of last year.
The re implemented some because of the tough comparisons early this year of now we are beginning to pull back on some of them now so I think youre going to see recruiting continue to normalize.
If you do look back at the pre Covid period.
The recruiting about 24000 people of months during 2018 and 19.
And all the way to 33000 of months last year in the last quarter backed up to about 30000. So it is normalizing, but it's still at very high levels, historically, and we expect that normalization to continue slowly throughout the year.
Understood.
On the E teller quote how much of the push are you making internally for the.
The existing sales reps to the 2.
The participate either refer I'm not sure how youre winning net.
Youre going to describe it but the.
2.
Upcoming Medicare.
Advantage season are there going to be fully engaged are you laying the groundwork for the.
Yes, we are starting as is our practice of primary who were very deliberate we've got to learn we got a teacher group of people how to do this business is the referral system. So it's simple which would be used the stage, but it's hard to anticipate how quickly they'll get around the learning curve and what kind of the unintended consequences and other distractions that might create 2 are <unk>.
I'm Mary businesses, the historical businesses. So we're moving pretty slowly we do have a group engaged already and have had some referrals passed from our sales force to E tail of quotes were kind of examining each 1 as it goes through the system to determine how we feel about the process. We've created so we will have some activity by.
This upcoming enrollment season, but we will be at full force by the fourth quarter. We'll just we'll just add probably know both of them in the water at that time, we've got a total in right now.
And so we are moving at a reasonable pace, but we're not going to sacrifice the momentum in our current businesses nor create a process that we don't feel great about has.
The long term positive impact to rush and make it in time for this upcoming season there'll be other seasons in future years.
It will be more important but we should we should be able to report our progress by the end of next quarter and by the end of the year on how we've come along because we are engaged in it we're just going to move deliberately rather the recklessly.
Okay.
And then the you talked about 30% to 40% increase in ISP sales similar mix of what you've got the.
This quarter has seen a pretty good pretty good balance of the annuities and mutual funds.
Likewise in Q3.
Yes, we arent, we arent seeing a big shift the end product.
During the explosive growth that we experienced it is across the board in both countries in the across all product line. So we're not anticipating any real difference it should stay pretty close to the say normal fluctuation maybe between products, but no real shift from 1 product to another is growing across the board.
Thank you very much thank.
Thank you Mark.
Ladies and gentlemen, this concludes our question and answer session and thus concludes today's call. Thank.
Thank you for joining Primerica, Inc. Q2 earnings results Conference call. You May now disconnect your lines per kit.
Yeah.
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Yes.
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