Q1 2018 Earnings Call
At this time I would like to welcome everyone to the Primerica, Inc. Q1, 2018 earnings results Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll 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, if he would like to.
Withdraw your question press the pound key thank you I now turn the call over to Kathryn Kieser Executive Vice President of Investor Relations you May begin your conference.
Casey and good morning, everyone welcome to Prime Miracles fourth quarter earnings call a copy of our earnings release financial supplement presentation and a webcast of today's call are available on our website at investors Primerica.
American Dotcom, Glenn Williams, our Chief Executive Officer, and Alison Rand, Our Chief Financial Officer will deliver prepared remarks, then we'll open it up for questions. We referenced 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 during the call we will 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 company's future.
<unk> thousand 17 annual report on form.
N K and may be updated by our quarterly reports on Form 10-Q, now I'll turn the call over to Glenn.
Thanks, Catherine good morning, everyone.
Today, I'll share performance highlights and accomplishments that position us for continued growth and Alison will cover our financial results.
Our focus as a company and our messaging to our sales force leaders is to continue to build on the strong growth we've achieved over the past few years the.
The need in the middle income market for what we do is greater than ever.
We are executing business enhancements and launching initiatives focused on distribution growth to broaden our reach and to help create more financially independent families on main street.
We successfully expanded our distribution capability and the communities we serve by increasing the size of our life insurance license sales force, 8% year over year to over 127000 Representatives.
Beginning on slide three you can see in the first quarter of 2017, we continued delivering solid earnings growth across the business and returning significant capital to shareholders. Our adjusted operating revenues increased 14% to $462 9 million and adjusted operating income before income taxes.
<unk>, 15% to $85 $9 million year over year.
Adjusted operating income increased 27% to $66 $2 million from the prior year period, driven by increases of 22% and 8% in the term life and ISP segments, respectively, and the benefit of tax reform.
We achieved 32% growth in adjusted operating EPS, and our Aro AE expanded to 19.0%, we expect annualized ROA to increase to about 21, 5% for the full year 2018.
Our diversified business generate solid earnings and returns a significant amount of capital to our stakeholders in the first quarter, we repurchased approximately $46 million or 468000 shares of prime Erika as common stock we plan to repurchase a total of about $200 million of shares during two.
2018 in addition to paying stockholder dividends and we plan to deploy capital at or above this level in the future.
We're also investing in our business to generate organic growth as we discussed last quarter, we expect to incur about $11 million of additional costs on digital initiatives in 2018.
We intend to spend approximately $10 million of the previously discussed 7 million to $10 million of tax reform benefit on investments to accelerate planned initiatives and to give back to our key constituents in 2018.
While this incremental spending for these purposes was nominal in the first quarter, we do expect to incur a total of approximately $21 million throughout 2018.
In addition to solid financial performance, we surpassed the very strong distribution results achieved in the first quarter last year on page four you can see our life licensed sales force grew 8% from the prior year period.
Recruiting of new Representatives increased 7% and new life insurance licenses were 8% higher indicative of continued recruiting growth in licensing focus.
On a sequential quarter basis recruiting increased 18% following the typically slower holiday season <unk>.
New life insurance licenses slightly declined from the prior quarter, reflecting seasonally lower recruiting levels in the fourth quarter.
We expect the size of the sales force to continue to increase in the second quarter of 2018.
On page five you can see term life insurance policies issued were consistent with strong results a year ago.
Productivity of <unk> 109 policies issued per life licensed representative per month in the quarter was slightly below the prior year period, although consistent with historical first quarter trends.
On a sequential quarter basis term life insurance policies issued declined from the fourth quarter, a lower number of new life insurance applications is typically submitted during the slower holiday season, which leads to fewer issued policies in the months following.
We're very pleased with our record term life growth over the past three years, we recognize that this growth compounds. The aggregate level of policies. We've issued makes it challenging to sustain the elevated level of policy growth.
We are continuing to grow the size of our sales force and we're constantly working to maximize productivity through business innovations technology and strategic use of incentives.
On a longer term basis, we anticipate seeing healthy growth in our term life issued policies. That's generally in line with the growth in the size of our sales force.
For the remainder of 2018, we expect term life issued policies to grow between 5% and 8% with some quarterly fluctuations in productivity.
Over the past several years, we positioned ourselves to take advantage of shifts in consumer interest and product demand as they emerge.
And our investment and savings products business, we have significantly enhanced the licensing process product offerings and client experience in order to drive growth.
These initiatives include providing more licensing preparation and assistance a streamlined application process and the digital delivery of marketing materials prospectuses and other documents.
A large portion of our sales growth in the past two quarters can be attributed to the successful launch of our lifetime investment platform, which expanded our ability to meet the needs of our clients with more assets.
These enhancements coupled with other factors have driven growth in product sales with larger average initial investments.
In the first quarter, we achieved an all time record level of investment and savings products sales of $1 8 billion.
Up 12% year over year, reflecting strong managed account sales retail mutual fund sales increased 8% influenced by strong Canadian sales.
Our variable annuity sales improved increasing 10% compared with the first quarter a year ago, while segregated funds declined reflecting lower demand for investment product guarantees in Canada.
ISP net flows were positive $212 million and average client asset values increased 15% year over year to $61 7 billion.
Managed accounts were our fastest growing asset class, increasing 40% from the first quarter of 2017.
While managed accounts do not generate sales based revenues they produce higher levels of recurring asset based revenues, which will benefit the business longer term.
As we head into May we're using the proven levers to drive growth and we are working on high impact initiatives involving digitization to improve client experience and facilitate representative success.
Our business fundamentals are strong and we are well positioned to continue to achieve solid distribution growth and operational results for our stakeholders I feel good about our opportunities for the future now I'll turn it over to Alison.
Thank you Glenn and good morning, everyone.
My comments today will cover the earnings results for each of our business segments, and then conclude with a company wide review at insurance and other operating expenses and income taxes.
Starting on slide six in the first quarter, our term life segment revenues and adjusted direct premiums.
Increased 15, 5% outpacing growth in benefits and expenses and delivering a 22% increase in income before income taxes year over year.
Solid growth in adjusted direct premiums was driven by strong sales levels in the past in here.
Manav business subject to the IPO, Colin Shannon and policies that continue beyond the end of the initial level premium period, which are no longer ceded to the IPO reinsurers.
As we discussed in the past the coinsurance transactions entered into at the time of the IPO have given us a long runway for double digit growth in adjusted direct premiums are.
The tremendous growth in issued policies over the last few years strengthening of the U S. Dollar in 2017 and the additional end of term premiums we began retaining last year led to adjusted direct premiums increasing 15, 4% in 2017.
At the post IPO block of business with ground the benefit of the IPO Coinsurance continues to diminish given this combined with the stable exchange.
Exchange rate and our 2018 expectation for issued policies, we anticipate the growth rate in adjusted direct premiums to be between 14, five and 15% in 2018 on a full year basis.
In the first quarter, the DAC amortization ratio, which also includes non deferred insurance commissions was 16, 6% versus 16, 8% in the prior year period.
Persistency in the quarter was generally in line with 2017 levels and we expect <unk> to remain at this level adjusted for typical seasonality throughout 2018.
During the quarter, we experienced heightened lapses in certain regions affected by last year's natural disasters, although the impact was not as significant as the lapses in the prior year period associated with a specific block of Louisiana policy.
The DAC amortization ratio also reflects a 20 basis point increase in insurance commissions.
Recent changes made beginning in 2018 to our sales force equity program that modestly shifted commission expense from deferred to non deferred expense.
While this shift changes the timing of expense recognition it does not impact the overall economics of the program.
We expect the quarterly GAAP amortization ratio to be similar to the 2017 ratios for the remainder of the year with a full year ratio of approximately 16%.
Incurred claims were consistent with the prior year experience with the benefits and claims ratio at 59, 5% for the quarter.
Now lets periods reflected seasonally higher claims often reported by the industry in the first quarter.
We consider this to be normal business volatility.
Full year basis, we expect the 2018 benefits and claims ratio to be.
Year round 58, 5% consistent with the prior year.
While always seasonally high due to annual employee equity award and Merit increases in the first quarter.
Net insurance expense ratio declined 50 basis points year over year to 8%.
Merrily due to about $1 million of lower premium taxes and fees from changing <unk> date of garden style in December of 2017.
For the full year, we expect the term life net insurance expense ratio to be slightly higher than 2017, reflecting the investments in digital technology and other key constituent initiatives.
Good to be incurred in 2018.
The termite Morgan.
Is that good to be around 18, 5% for the full year 2018.
Moving now to our investment and savings products segment on slide seven Youll see that our ISP revenues and income before income taxes increased 15% and 18% respectively compared with the first quarter a year ago.
Revenues grew faster than income due to revisions made to our record keeping platform contract in December .
While these changes are expected to benefit pre tax account based income by about $3 million on a full year basis in 2018.
The additional account base expenses fully offset the $7 4 million in additional account based revenues in this quarter.
Note that for purposes of calculating account based net revenue per account in our financial supplement some expenses not formally included in the calculation have been added on a historical basis to reflect the expanded scope of our transfer agency record keeping services.
Year over year sales based revenue increased 7% in line with growth in revenue generating product sales.
Total product sales grew 12% over the prior year period, reflecting strong growth in managed accounts sales from the adoption of our new lifetime investment platform.
Launch in the second quarter of last year.
As we've mentioned in the past, although managed account sales did not generate sales based revenue. They do provide ongoing account base revenues earnings above what we receive for other U S product.
Asset based revenues increased 16% year over year, reflecting 15% higher average client asset values overall, including 40% growth in managed account assets.
Canadian segregated fund DAC amortization was $1 7 million higher versus the first quarter last year, primarily reflecting negative Canadian.
Market performance in the current year.
As well as strong market performance in the prior year or in contrast to strong market performance in the prior year.
On slide eight you can see the corporate and other distributed products segment. Adjusted operating revenues were $30 5 million and adjusted operating losses before income taxes were $13 7 million in the first quarter of 2018.
Net unrealized gains decreased to $17 9 million at quarter end from $60 3 million at December 31, 2017.
The impact of higher interest rates on prices of fixed income securities and our invested asset portfolio as well as the adoption of new accounting standards update which reclassified unrealized gains on equity Securities Securities into retained earnings at the beginning of 2018.
While rising interest rates will continue to pressure fixed income prices over time, our investment income will benefit from the ability to reinvest our portfolio at higher yields, albeit at a gradual pace.
Now I'll move to a discussion of the company's insurance and other operating expenses.
On slide nine you can see our first quarter expenses of $104 3 million or $14 million higher than the first quarter of last year about half of which was due to the investment and savings products account based expense changes previously discussed.
The remaining variance primarily reflects $1 5 million of other growth related expenses as well as about $5 million of annual Merit employee Merit increases equity award ongoing technology spend and other expenses to support the business.
The incremental spend we announced in February was nominal in the first quarter as we continued to refine the strategies and lay the groundwork for the investments.
As Glenn mentioned, we still expect to incur $21 million on digital development and key constituent initiatives throughout the remainder of 2020 18.
Looking ahead to the second quarter of 2018, we expect expenses to be about $99 million largely reflecting the typical sequential decline in our annual employee related expenses.
Of the $21 million total initiative spend for 2018, we plan to spend about $4 million on key constituent initiatives and about $2 million on digital development in the second quarter.
Moving now to income taxes in the first quarter of 2018, the operating <unk>.
Operating effective income tax rate was 22, 9%.
For 2018 full year operating effective income tax rate is expected to be around 23, 5% for the second quarter tax rate about 100 basis points higher at historically seen.
The annual rate is higher than previously estimated due to the global intangible low taxed income component often referred to as guilty of tax reform.
Barring any changes this provision is expected to add approximately $1 million of cash tax expense per quarter.
As I wrap up let me say that we remain committed to maintaining a strong balance sheet and capital position.
Holding company cash and invested assets were $107 million as of March 31, 2018, and primary <unk> estimated statutory risk based capital ratio was approximately 480% providing ample opportunity to fund capital deployment throughout the year now I'd like to open the call up for questions.
Thank you as a reminder, if you'd like to ask a question at this time. Please press star followed by the number one on your telephone keypad. Once again that Star then one if you'd like to ask a question.
Your first question comes from Sean Dargan with Wells Fargo Securities. Please go ahead. Your line is open.
Okay.
Good morning.
Good morning.
I realize that the first quarter is seasonally.
But the production.
Ratio is lower than it's been in recent years.
Just wondering if there's anything behind that.
Yes, Sean.
As we've said in the past we've enjoyed productivity at the very upper end of our historical range for quite some time and what we've seen is it edge back into the middle of the range very consistent with other first quarters.
See this is just normal fluctuation in productivity.
That happens over time as incentives come and go when we transition from one incentive program to the next.
Also as you've noticed.
You had quite a gain in momentum on the ISP side of our business and often are two major products that compete with each other for attention and so youll see us one advances the other tends to contract just a little bit. So we believe what we're seeing is just the normal change in productivity. We have a lot of programs a lot of efforts in place to make sure that we.
Do everything possible to keep productivity as high as possible, but it's just normal trending as far as we see it.
Okay, great. Thanks, and then if I can ask question about where we stand with fiduciary duty. We had I believe it was the fifth circuit vacate.
The.
Dol rule and then we had the FCC.
On something.
Wondering if you can give us an update on where you feel you stand in terms of your your payout structure in your compliance and.
And whether this is going to be a.
Benefit relative to.
Where you were a quarter ago.
Yeah, well I think you've got it Raj on the the SEC has stepped in as the Dol rule was dealt with by the fifth circuit.
We see a stepped up and as we've often said we believe there are the appropriate regulator to be dealing with fiduciary standard. So we're appreciative that they've acted under their authority and are taking a thoughtful approach to their recent rule proposal.
They've requested substantial input from the industry as a normal part of this process and Thats, where we are in the process right now and so of course, we are participating in that along with other industry.
History participants in groups. So in a way the process is started again and it's not just begun but it's in process. We are in that comment period, and so knowing exactly where it comes out.
It's always hard to predict that the early.
At this early point.
That said, we do believe this is the appropriate direction.
And we are anticipating continuing to be able to do businesses. We've done in the past and continue to grow our business. So we don't see any any new or unexpected hurdles. It's a process we deal with as we go.
I'll comment on the proposal I'm sure there will be future versions of the rule that will be adjusted and then we'll see where this comes out.
Alright, great. Thank you.
Your next question comes from Dan Bergman with Citi. Please go ahead. Your line is open good morning, Dan.
Good morning, Thanks for taking the question.
Firstly I just wanted to see if you could provide some more color on how the term life claims and persistency per firm performed in the quarter relative to your expectations. It sounded like it was roughly consistent year over year, but I had thought that the first quarter 17 experience might have been a little bit unfavorable for those two items I just wanted to see if you could separate out kind of the typical seasonal impact and then any.
Variation above and beyond that if there was one and to the extent that there was a difference versus expected and any quantification would be helpful. Thanks sure sure.
So first on claims we do think this is definitely seasonal experience.
We had to start if you look back over the last eight or nine years, I'd say six or seven of them. The first quarter Hasnt been elevated. So this is not atypical.
From what we've seen and in fact, it was elevated last year as well.
This year I would say the claims were about $3 million or so elevated vis vis whether it be a historical norm on an average quarter basis.
Which was actually slightly better than it was last year, but relatively in line. We did see sort of that experience last year, maybe a little closer to the $4 million range. So.
So again, we don't look at that sorry, I have a cold.
We don't look at that as having any ongoing issues and in fact believe like I said that it's pretty consistent with what we've seen in the first quarter.
In the past with regard to persistency, there's are a couple of things going on here.
Generally believe that our persistency levels are pretty much stabilized at where they are right now.
We've been doing a lot of work on this just to make sure we're comfortable with it and in fact some of the things that we've seen.
Have to do a little bit with the disasters natural disasters that unfortunately, the country was faced with last year and quite frankly to here before.
We specifically saw last year, a block of policies that we had been asked to not lapped and lapped in Louisiana in the.
The first quarter of 2017 this year, we've been actually accruing if you will for that expecting expected lapses, even when states have asked us to restrict lapses that being said when we look at our first quarter experience. We are seeing a bit of an ongoing lag and a couple of regions that really well.
Impacted Puerto Rico, Louisiana being two of them.
And so there is some of that which we hope will taper out throughout the rest of the year.
The other thing to mention.
And it is the.
Shortcut this and say, it's the DAC ratio.
But I will remind you that the DAC amortization ratio actually includes the line item of insurance commissions and because of this one program that we changed.
With our sales force compensation program, we can no longer defer the expand.
So youre actually seeing it hit.
You hit it now rather than being deferred and amortized.
That being said it doesn't change the overall economics of the program the amount of compensation total outlay is the same but we do think that that's impacting the ratio by about 20 basis points.
Year over year.
And so if you ultimately look at it I think what we've said is that on a full year basis, we expect the ratio to be around 16, which is really very consistent with what it was in 2017.
Got it Thats very helpful. Thank you.
And then if I could just moving to the tax rate guidance. Tom I was hoping you could provide a little more color on.
The guilty provision and how that impacts primary.
And then just given that I think the revised 23, 5% guidance provided with specifically for 2018 should we think about the tax rate impact from that guilty provision is kind of steady in longer term or is there a chance that that impact of pressure moderates as we get beyond 2018.
Yeah.
I, just loved that acronym in and of itself.
Well, well said, but for those who don't know what guilty is a global intangible low taxed income provision and really what it's meant to do is be a penalty.
For companies that have a lot of offshore earnings in low tax jurisdictions.
We of course have only offshore earnings in Canada, which now is actually a higher tax jurisdiction than the U S. So theoretically and when we first did our analysis that we didn't feel that this would even apply to us.
Given the rapid nature in which the legislation was written.
And you probably heard this from other companies there are a lot of things that need to probably have language cleanup done.
This is one where the language was and where it in our view accidentally forced us to not be able to take full credit for our foreign tax credit.
There has been some discussion by folks that the IRS and others that they will look at how this provision has been written so we are fairly optimistic that a rewrite will occur that would allow us to actually reverse the vast majority of this tax.
But at this point given theres been no formal change we felt it appropriate to go ahead and adjust the rate in accruing. So before I talk about really next year, we are still hopeful that theres. Some modification this year that curtail some of the impact.
Great. Thank you.
As a reminder, if you would like to ask a question. Please press star followed by the number one on your telephone keypad. Your next question comes from Mark Hughes with Suntrust. Please go ahead. Your line is open.
Morning, Mark.
Good morning.
The annuity sales rebounded this quarter was there anything in particular behind that why do you think they are.
Got it got better here.
So there's nothing specific I would point to Mark I would say that I think that this the.
Clearly the parting of the clouds from a regulatory perspective is probably led some to be a little more confident in the future direction of the product and therefore consider recommending it again during the period of great uncertainty about variable annuities I think a lot of people said, we're just going to put those on the shelf and not talk about them until we see what the future holds.
And now I do think there is a little bit of clarity thats arrived and a little more confidence and so that's what I would attribute it to its no special program or anything unusual that would create a spike in sales is just a little returns confidence would be.
Opinion.
The.
Outlook for 5% to 8% growth in the.
Policies I think you express doesn't policies for the balance of the year maybe premium.
What what gives you confidence that that is going to kind of reaccelerate, yes.
Yes, that's policies issued.
It's easier for us to transact for us to track transactions, because sometimes size of transactions fluctuate and so it is a good kind of fundamental stat for us to track and as you know our business is driven our insurance business production is driven by two major factors, the SaaS or our sales force and productivity.
We feel very good about the Hilton the growth and the size of the sales force and so thats a fundamental factor thats in place growing at 7% to 8% kind of range. According to which metric you look at and.
And so we think that gives us an advantage if we can.
Can.
If we're successful and working on our productivity because the sales force has grown then that's the other half of the equation and that gives us kind of a leg up on the process. Since the sales force is larger so if we can.
Effective in our incentives between now and our convention next year and through our Convention next year. Then we think we've got an opportunity to get that growth rate back up closer to the sales force us.
True.
And then.
One more question.
The sales force growth and sales force growth I think you suggested you anticipate will continue to increase.
I think last quarter, you had suggested it would increase kind of high single digit pace.
Is that where you're making a distinction with your outlook this quarter.
Or is that just.
It just happened to lead out.
Specific detail.
No I think I think we're saying very much the same thing.
We all know as you look at various quarters in the past in the future you got.
Some quarters are more difficult comparable than others, and so I think youll get some fluctuation by quarter, but.
There was not an intent on my part to create any difference there in the way we describe it.
And if I could just sneak in one more.
The asset based revenue as a percentage of average assets if I understand it properly as you sell more of a managed account that should help support that number or move it upwards I think this year down.
Just a little bit.
Year over year.
One point.
<unk>.
Stabilizes or the shift to managed accounts.