Q3 2018 Earnings Call
At this time I would like to welcome everyone to the Primerica third quarter 2018, earning results conference call.
All lines have been placed on mute to prevent any background noise and after the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad and if you would like to withdraw your question press. The pound key. Thank you I will now turn the call over to Katherine.
Keizer Executive Vice President of Investor Relations you May begin your conference.
Thank you Krista good morning, everyone. Welcome to primary <unk> third quarter earnings call a copy of our earnings release financial supplement presentation and webcast of today's call are available on our website at investors Primerica Dot Com, Glenn Williams, our Chief Executive Officer, and Alison Rand, Our Chief Financial Officer will deliver prepared remarks, then we'll open it up for.
We reference certain non-GAAP financial measures in our press release and on this call. These non-GAAP measures have limitations and reconciliations between GAAP and non-GAAP financial measures are attached to our press release.
We will also make forward looking statements in accordance with the Safe Harbor provisions of the Securities Litigation Reform Act. The company will not revise or update these statements to reflect new information subsequent events or changes in strategy risks and uncertainties that could cause actual events to differ material from those expressed or implied are discussed in the companys.
2017 annual report on Form 10-K as updated by our quarterly reports on Form 10-Q , now I'll open the call to Glenn.
Thanks, Kathryn and good morning, again, we're pleased to report another strong quarter of returns of Prime miracles.
We continue to execute our strategy to drive growth and enhanced performance by expanding distribution and prudently deploying capital on page three of our presentation you can see our adjusted net operating income grew 27%.
We also achieved a 32% increase in adjusted operating EPS and a 200 basis point increase in adjusted operating our Hawaii compared with the third quarter of 2017.
The solid foundation, we built over the last few years is focused on growing our sales force and meeting the expanding needs of middle income clients.
At the same time, we've been working on incremental enhancements across the business to <unk>.
These positive financial returns, including an increased focus on the investments and savings business.
The middle income markets need for retirement and savings products is greater than ever and the strength of the economy has created more discretionary income more.
More of our representatives are embracing this opportunity.
Size of our mutual fund licensed sales force has grown 4% year over year to over 25000 representatives to.
The success of our lifetime investment platform has also generated excitement among our registered investment advisers as well as interest from mutual fund licensed representatives to obtain a series 65 license.
Our number of investment advisor Representatives has increased to over 3500 up 6% from the end of the third quarter of 2017.
We are working to enhance our clients' experience as well as expand distribution capabilities, where our representatives by.
By year end, we plan to launch an investment and savings products sales tool called EZ key.
This will allow our representatives to seamlessly move from a mobile life insurance application to pre filled information in a mobile ISP application. This will streamline the investment decision.
<unk> will help guide the clients through the investment decision process and ultimately provide investment alternatives based on the client's individual situation we.
We expect that the tool will provide our representatives more confidence in executing investment transactions and encourage more representatives to consider obtaining a mutual fund license.
This new digital capability should also create efficiencies and drive long term productivity and our high touch distribution model has additional features are added to aid our top ISP producers.
In addition to strategic initiatives to drive organic growth, we remain committed to increasing stockholder value by actively deploying capital.
Our strong diverse earnings streams continue to generate significant distributable free cash flow, enabling us to deliver strong returns, which are among the best in the industry.
We continued optimizing our balance sheet by repurchasing $33 $5 million of shares in the third quarter for a total of $167 3 million of common stock repurchased year to date through September 32018.
We plan to repurchase about $200 million for the full year 2018.
Our confidence in our business and future prospects should provide us with the ability to deploy at or above $200 million of capital in 2019. In addition to stockholder dividends.
Shifting to distribution results on page four the size of our life insurance licensed sales force increased 5% year over year to almost 100 3700 representatives at the end of the third quarter.
As you may recall in the third quarter of last year, we incentivized our representatives in hurricane impacted areas to remain engaged in the business by waiving the independent business application fee of new recruits in FEMA designated disaster areas.
Those efforts generated around 17000 fee waived recruits in the prior year period, which did not recur in the third quarter of 2018, largely resulting in the recruitment of new representatives declining on a year over year basis.
The number of representatives, obtaining a life insurance license declined from the third quarter a year ago following recruiting levels in recent periods.
In 2019, we expect SaaS to Salesforce to grow in the mid single digit range and anticipate both the new licensing and non renewal ratios to remain consistent with 2018 on a full year basis.
While the size of our life insurance license sales force continues to grow you can see on page five our term life productivity has pulled back from the breakout levels, we experienced in the past three years in.
In the third quarter productivity within the historical range at <unk> nine policies issued per life licensed representative per month.
As a result term life issued policies remain near the high levels achieved over the past few years, although although they declined on a year over year basis.
Term life estimated annualized issued premiums grew versus the prior year period as we continue to use initiatives to meet our clients' changing needs. After our initial interaction with them.
We offer clients the ability to add an increasing benefit rider to their policies, which automatically increases their total amount of coverage by five or 10% annually.
Today, most of our new clients, except this rider, which has an additional premium as benefits grow throughout the life of the policy.
In April we launched a new process offering an automatic increase in the amount of life insurance coverage a client can receive.
For the same amount of premium quoted at the time of the sale if client qualifies for a better underwriting class. They can increase their coverage rather than receiving a premium refund. This new systematic offering has resulted in additional issued premiums year to date.
We're constantly monitoring the momentum in all facets of our business from distribution growth to life insurance to our investment business.
We look for trends and momentum and adjust messaging and incentive programs frequently to help recalibrate where necessary.
One of the great strengths of our business model as our complementary term life and investment and savings products segment and the ability to deliver solid returns even as momentum shifts between the business segments.
Shifts can occur for many reasons, including new product introductions market performance economic and environmental factors to name a few.
Right now we are seeing term life sales stabilize as our sales force leaders refocused after the record growth of the past few years.
While we are in the process of executing levers to drive growth. We estimate 2018 term life issued policies will be down around three 5% compared with 2017 on a full year basis.
We expect to issue policies to increase by about 3% year over year in 2019.
At the same time, our investment business has gained momentum as a result of a more favorable market and regulatory environment as well as recent product enhancements.
Our strong investment and savings products segment performance in the quarter was driven by both sales and client asset growth.
Total ISP sales increased 23% versus the year ago period.
Variable annuity sales increased 63% from the prior year quarter, reflecting recent product enhancements by our product partners that offer more attractive client benefits the.
The continued success of the lifetime investment platform resulted in 52% growth in managed accounts sales year over year.
Positive market performance also drove 10% growth in ISP average client assets to a record $63 4 billion in the third quarter.
Market volatility in the fourth quarter is pressuring average client asset values, but we're not seeing a negative impact on sales.
Since the majority of our clients investments are in retirement accounts, we educate them on dollar cost averaging in the value of a long term investment strategy that focuses on time in the market rather than timing the market.
So when there is short term volatility in the market. Our sales are slightly more insulated in our redemption rates are generally better than firms that work with clients with higher assets.
We excel at providing financial education and products to middle income families and our commitment to them is unwavering we can.
Continue to focus on expanding distribution and enhancing productivity to better serve their increasing needs. We have a proven track record of success and continue to execute our strategy to deliver growth and long term value for all of our stakeholders.
I will now walk you through our financial results.
Glenn and good morning, everyone. My comments today will cover the earnings results for our core business segments, and then conclude with a companywide with you and insurance and other operating expenses and income taxes.
Starting on slide six term life continued to achieve strong financial results with 12% growth in both revenues and income before income taxes in the prior year quarter.
Jessica direct premiums increased 13% in the third quarter and the business continues to perform well generating a pretax margin of 19, 6%.
On a full year basis, we expect adjusted direct premiums by around 13, 8% in 2018 and term life margins to be around 18, 8%.
In the third quarter benefits and claims were favorable to historical trend by approximately $10 million, which we attribute to normal claims volatility.
Benefits and claims ratio at 57, 8% was consistent with the prior year period, which reflected a similar level of favorable claims experience.
We expect the benefits and claims ratio to be around 58, 2% for the full year 2018.
The DAC amortization ratio was 15, 8% this quarter also consistent with the prior year period.
Persistency in the quarter was generally in line with 2017 level and we expect <unk> to remain at this level adjusted for typical seasonality in the fourth quarter.
The DAC amortization ratio also reflects a small increase related to insurance commissions.
<unk> from a change made to our 2018 fourth equity program at modestly shifted commission expense from deferred non deferred expense.
And a full year basis, we expect the DAC amortization ratio to be around 16% for 2018.
The net insurance expense ratio was generally consistent year over year and reflects about $1 million of incremental spending on business initiatives in the quarter.
For the full year, we expect the term life net insurance expense ratio to be around 8%.
As we look towards 2019, we anticipate that adjusted direct premiums will grow by around 11%.
This is lower than the growth we've seen in adjusted direct premiums in the last few years, we should continue to compare favorably to others in the industry.
As we discussed in the past the main drivers of adjusted direct premium growth have been the IPO coinsurance transactions, including the retention of policies that continue beyond their initial policy term starting in 2017 as well as the level of sales policies issued over recent years with.
So lesser degree exchange rates have also impacted results.
The top chart on slide seven shows how these main driver have contributed to the growth in adjusted direct premiums and the composition of the 11% growth estimate for 2019.
The IPO coinsurance transactions continue to positively impact.
Although the benefit has been diminishing as expected due to growth in the post IPO block coupled with the runoff of the pre IPO block.
The bottom chart on slide seven illustrates this dynamic.
The retention of policies that continue beyond their initial policy term provided additional growth in 2017 and 18. It is now reaching steady state with future incremental growth considered modest.
As these two drivers normalize the level of life insurance policies issued will become an increasingly meaningful driver of adjusted direct premium growth.
The step up in life insurance policies issued in 2015, 16, and 17 has provided ongoing value as earnings emerge over the life of the policy.
Earlier in the call Glenn discussed that we are targeting growth in issued policies around 3% for 2019.
While this will only have a small impact on 2019 results. It will help sustain our overall growth in adjusted direct premiums into the future.
From a profitability perspective in 2019, we expect the DAC amortization and benefits and claims ratio.
Consistent with the levels reported in 2018 at around 16% and 58, 5% respectively.
We expect a modest increase in the insurance expense ratio at Nee and continue to invest in platforms and technologies to build the business.
The impact on overall segment margins to be relatively minor.
Moving to our investment savings product segment on slide eight we continue to achieve very strong results.
<unk> revenues and income before income taxes grew 18% and 15% respectively over the prior year period.
Total product sales increased 23%, primarily reflecting a significant increase in managed account and variable annuity sales previously discussed.
Sales based revenues net of commissions increased 22% in line with revenue generating product sales.
Net inflows and year over year market performance led to a 9% increase in asset based revenues net of commissions in the third quarter.
The revisions made to our record keeping platform contracts last year resulted in an account based revenues and other operating expenses, both increasing year over year, but a positive impact on pretax income of about $1 million this quarter.
Also impacting on our account based earnings has been the reduction over the past few quarters and the number of accounts for which we earn recordkeeping fees as our clients have moved from the life to our lifetime investment platform from our fleet and our managed account portfolios.
We expect to see this trend stabilize in 2019 at the full transition to the lifetime platform is completed.
Now I'll move to a discussion of the company's insurance and other operating expenses.
On slide nine you can see our third quarter expenses of $96 6 million or $13 5 million higher than the third quarter of last year.
The changes to our ISP record keeping contract increased expenses by $5 7 million and as I already mentioned this was more than offset by incremental revenues.
We also had $5 8 million of additional expenses to support growth in the business looking.
Looking ahead to the fourth quarter of 2018, we expect expenses to be about $98 million.
As described as described in previous earnings calls, we are making incremental investments in digital development and other technology initiatives.
During 2018, we laid the groundwork for a multiyear initiative to modernize enhance system data gathering and processes to enable continuous delivery of innovation.
Year to date, we have incurred around $4 million of cost to support these initiatives with 2 million incurred in the third quarter.
Anticipate spending around $7 million on a full year basis, which is less than our original estimate of $10 million largely due to timing.
We are finalizing our plans for 2019 initiatives can be reviewed with our board. Later this month, we plan to provide a fuller picture of a <unk> of our 2019 expense expectation on next quarter's earnings call.
In the third quarter of 2018, the effective income tax rate was 23, 6% and the operating effective income tax rate was 24, 5%.
The rates differ due to an adjustment made during the quarter of $1 million related to the transition impact of tax reform that has been excluded from the operating effective income tax rate.
The full year 2018 operating effective income tax rate is expected to be 23, 6%.
As I wrap up let me say that we remain committed to maintaining a strong balance sheet and capital position.
On page 10, you can see Primerica life insurance company's statutory risk based capital ratio was estimated to be around 450% with holding company liquidity at about $100 million at the end of the third quarter.
Continue to take out ordinary dividends from Primerica life to the extent available with the goal of maintaining our near term RBC ratio in the low to mid 400 range now, let's open it up for questions.
At this time, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.
Your first question comes from the line of Mark Hughes from Suntrust. Please go ahead. Your line is open.
Good morning, Thank you good morning.
Good morning.
The variable annuity sales are quite strong in the quarter. When you have a product launch like that or.
A big Spike in sales is that something that usually you might see a follow through impact in subsequent quarters is there kind of a catch up effect that people get excited and so.
It may just be a one or two quarter phenomenon, how do we think about that.
I think that rate of growth is something that happens around the perfect conditions I don't think its something.
Have a contraction in following quarters to kind of make up for it.
Because we do see our product partners are doing a great job we represent the major players in the industry and they are doing a good job of improving their products.
To meet clients' needs in a better more efficient way more attractive way and so you are right Mark that does create excitement at the point that those new product features are rolled out we really don't have a lot of brand new products, but there are new features and improvements to the to the chassis of the products, we already have and that does add to the momentum it adds fuel to the fire if you will.
And then you would expect things to normalize down the road somewhere.
Expect kantar.
Continued strong performance, but you will see spikes in it as new products are rolled out around the excitement. So I'd say, it's not exactly as you described it but directionally you're correct.
The anticipation of 3% growth in.
Life policies issued in 2019 is that just sort of a reversion or stabilization in productivity.
Yes, <unk> got a number of factors.
That are happening to our business at all times and so.
As we look forward into the future and we tried to take everything that's going on in consideration the pros and cons of our business.
We try to look and see where we think that would be in a year from now or within a year from now and.
That's our best shot at where we think we will be I do think there is some normalization.
From the extraordinary growth rates of the past at the same time, we're always working to take advantage of every opportunity that presents itself.
So, it's where we see things from where we stand right now looking into the future.
And then the final question on.
The term life business, Alison you've given us a number of metrics for 2019, I think you said that.
Net insurance expenses might be up a little bit, perhaps but not a big impact would we look for the.
The margin.
I guess.
Just the direct margin I think.
Relatively steady year over year in the term life business.
Yes, and the reason I caveat is the the expenses is we're obviously meeting with our border Board excuse me later this month to go through our anticipated budget for 2019. So once we see where those final decisions land a lot of it really depends also on how we allocate between the segments. So we usually like to talk.
<unk> operating.
Operating expenses less on a segment basis more on a holistic basis.
I'm not exactly sure how the split will end up between the segments. So we really wanted to focus you on what I would consider the core drivers of how that block of business is doing which of course, our DAC and benefits and claims.
That being said, we will obviously have to allocate some of what we anticipate towards term life as its a large component of our business and that may bring the margin down a little bit.
But I'd say the two critical drivers to sort of fundamental components of that that segment are remaining extremely stable, we believe with 2018.
Thank you.
Your next question comes from the line of Ryan Krueger from <unk>. Please go ahead. Your line is open.
Good morning.
Good morning.
Another question on term life.
Policies issued I guess, if we take your 2018 guidance.
I think down three 5% it implies a fairly meaning.
Meaningful decline in the fourth quarter I guess is that just kind of normalizing towards the lower end of the productivity.
Our per rep in the fourth quarter relative to a good year ago quarter.
Yes.
Exactly what it is Ryan.
As we stated in the prepared remarks, the strength of our business is the complementary nature of our product lines.
So we are supporting our field leadership as they do three very important things they build distribution they sell life insurance and they also sell investments and of course, we work to create success in all three of those over the long term, but they don't always move in the same direction at the same pace and so you see right now a lot of natural momentum in our ISP business and of course.
We are leveraging that opportunity because it's presented itself.
And the momentum cycles are different in the other areas of life and distribution tend to move more in tandem the same direction at the same time to a certain extent in the ISP business is a little bit different cycle.
So those are the things that we're managing at all times Youll see spurts of growth that will then normalize.
Sometimes youll see a little lag that will later normalized but.
The three interact with each other and you do it kind of with our field leadership to our bandwidth limitation at some point.
Their attention is focused on what's working well right now and it creates a little bit of a headwind onboard the metro where there is not as much natural momentum, but then over the long term that tends to all correct itself. So we're just seeing some of that given take dynamic that we're accustomed to in our model.
Thanks, and then on an ISP is.
Is it mostly been just higher productivity of the existing licensed.
<unk> are you also seeing some traction in terms of getting more of the field force license to sell investment products.
It is both I mean, as we reported in the prepared remarks.
We had a 4% increase in our sales force size on the investment side. The ISP the mutual fund series six side and so.
That's been lagging behind some of the strong numbers on the life side. It has actually been in to catch up and normalize as we anticipated. It would so when the business is working well in this case the ISP business.
It not only provides great momentum for the people who are involved in that business. It becomes more attractive to the people that are not yet involved in that business and so we've been working hard to lay that foundation to make it more attractive to produce the results and then that makes it a very fertile ground to get more people to get licensed and engaged in the business. So we're actually.
Seeing both.
Got it thanks, Dan.
Yeah.
Your next question comes from the line of Dan Bergman from Citi. Please go ahead. Your line is open.
Hi, Thanks, Good morning, good morning Blake.
The non renewal rate for the sales force increased in the third quarter somewhat elevated rate versus where it had been in recent quarters. So I just wanted to get a sense. If you could provide a little more color on the dynamics in the quarter.
And.
Whether you expect this is anomaly or part of a trend.
Yeah, Hey, Ken on that outlook would be helpful.
Absolutely.
Our licensing pipeline when you look at anything on a quarter basis, you get a lot of noise in there based on when the quarter ended how many weekends, where in the quarter when various states or provinces that are large had renewals in certain quarters and others also weather states and provinces are caught up in their workload.
So anything that we're seeing right now we would expect as we've said both our pull through rates from recruit to licenses and our termination rates.
Over the full year period to stay in their traditional ranges and so I think you've got a little bit of an anomaly there on terminations in the third quarter. You also had some timing on the front end of our business on new licenses, where the second quarter was particularly strong.
And took some out of the third quarter, but if you look at us year to date on any of those.
Metrics I think we're very much in line with our expectations and with the past.
Got it very helpful. Thanks, and then maybe just the guidance for it I believe you said, 11% adjusted direct premium growth in 2018.
It was down a decent amount from the 2019 level. So I just wanted to see if you could provide any more color.
Around what that glide path might look like post 2019, just in terms of how quickly we should be thinking about that moderating maybe closer to the pace of the sales growth.
Sure.
And I do think the chart that we added in the presentation is useful.
I would definitely use that as a point of reference as shown on page seven I believe so we do see it coming down and if it has more to do quite frankly, if you look at what's happening from less from the sales side and more from the maturation of the IPO transactions as well as.
The stabilization of the sort of end of term block. So on the IPO piece, we've been following a fairly consistent trend.
It's falling off a little bit more we see in 2019, but that's not really much of anything and I do think I do think you can sort of try to trend what you think's going to happen that that will continue to gradually come off over the next couple of years.
It really really what happens is is the reason you get some spikes in the fall off is when you get big blocks of business running into their end of term.
That is what really will change with how fast it does or does not run off.
Did really have that added benefit that started in 2017 from the <unk> block that we were retaining.
And and that's sort of the offset if you will for the runoff in the IPO transaction and you can see where both of those are.
And and then really you have the sales piece and so I think what becomes completely meaningful or really meaningful is what we can do with sales as we move forward.
I don't expect it to drop another.
Three points in 'twenty 'twenty.
But I will say that one of the big things will be is can we maintain our level of sales. So.
I think youre going to see the first two items on that chart continue to run off at a pretty relatively slow pace, but Adam you know at a pace that does have a have pressure on the overall number.
And then growth in sales to be what can really drive a meaningful change.
Got it that's very helpful. Thank you.
Your next question comes from the line of Mark Hughes from Suntrust. Please go ahead. Your line is open.
I'm curious if you have any early read on.
Maybe asset.
Or are sales based revenue when you look at the market volatility here.
Early in the fourth quarter really different from kind of the operating environment <unk> been.
Facing the last.
A couple of years few years.
How do you think that kind of volatility influences your your sales.
Yes, Martin historically, what we've seen if the volatility is relatively brief and not too dramatic.
We do have a bit of an insulation from it in our business model. It seems that our clients aren't plugged in a minute by minute to exactly what's happening in the market and so a lot of times, we'll kind of skip across a little rough water if its relatively brief and not to major and in so far as I've said in my comments on our sales that's kind of what we've seen so far.
We haven't seen the volatility really have a noticeable impact in the sales momentum we're experiencing on the other hand, obviously as the market drops it does impact our <unk> and so the speed and amount with which it recovers will be important on that front, but.
I think we do our model in our marketplace and our clients just don't react quite as quickly or as radically as maybe the more traditional wall street firms might see.
And then on the managed accounts had a very good growth again in the.
Third quarter.