Q3 2017 Earnings Call
Operator today at this time I would like to welcome everyone to the Primerica third quarter earnings results webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session.
I'd like to ask a question. During this time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question. Please press the pound key. Thank you I will now turn the call over to Kathryn Kieser Executive Vice President of Investor Relations you.
You May begin your conference. Thank you Megan and good morning, everyone. Welcome to primary because 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 Dot Primerica 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 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 provision of the Securities Litigation Reform Act the company well.
Not revise or update these statements to reflect new information subsequent events or changes in strategy risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the Companys 2016 annual report on Form 10-K as updated by our quarterly reports on Form 10-Q .
Turn the call over to Glenn.
Thank you Catherine and good morning, everyone.
Pleased to report strong financial performance and distribution growth in the third quarter beginning on slide three of the presentation. You can see our adjusted operating revenues increased 11% to $427 $3 million and adjusted net operating income increased 15% to $66 $6 million versus.
The prior year period.
These results were driven by increases in term life and investment and savings products pre tax income of 14% and 9% respectively year over year.
Term life earnings were positively impacted by favorable mortality experience as well as improving persistency performance relative to earlier in the year invest.
Investment in savings products results, primarily reflect year over year growth in client asset values from positive market performance and net flows. These.
These solid results and ongoing capital deployment drove 19% growth in adjusted operating EPS year over year, and adjusted operating <unk> expanded to 21, 7%.
Our 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.
In the third quarter, we repurchased approximately $58 million of primary because common stock and completed our planned $150 million of repurchases for the year.
We anticipate deploying capital at or above this level in 2018.
Our distribution model is uniquely designed to help meet the financial needs of middle income families, which represent about 59 million households in the U S.
On page four you can see many of these families are under insured and it has been estimated they need about 12 trillion dollars of additional life insurance to become properly protected this provides a huge opportunity for us to fulfill this need.
We are also well aligned with emerging demographic trends because our sales force reflects the communities, where we live and serve.
For example, millennials are the largest generation in U S. History, we've worked diligently to attract this entrepreneurial minded generation and are succeeding with millennials now, making up 40% of our life insurance license sales force. We also have strong sales force leadership and strategic markets, which are expected to grow faster than the rest of the <unk>.
S population over the next few years.
Shifting to distribution results during the third quarter, we continued to benefit from the positive momentum generated by our biannual convention in June on <unk>.
Page five you can see strong recruiting growth in recent quarters led to 9% growth in new representatives, obtaining a life insurance licenses versus the year ago quarter Lasalle.
SaaS for our sales force increased 8% from the prior year period and was up 2% from the second quarter.
Towards the end of the third quarter, the Hurricanes in Texas, Florida, and Puerto Rico impacted the front end of our business about 10% of our 5000 regional Vice presidents either live or have offices in the disaster designated areas and experienced disrupted activity <unk>.
New life insurance licenses were impacted by pre licensing classes and testing being postponed in these areas.
In an effort to support our representatives during September we waived the $99 independent business application fee for new recruits residing in hurricane affected areas.
This initiative generated approximately 17000 recruits who had fees waived leading to a 22% increase in new recruits versus the prior year period.
We're working with our field leaders to facilitate the completion of the licensing and field training process or as many of these recruits as possible.
We're also monitoring the commitment level of these recruits to determine whether they are licensing rates will ultimately fall below overall company levels. We expect the overall ratio of new life insurance licenses to recruits will remain around the 17% range for the full year of 2017.
In October the life insurance license sales force expanded to over 125000 Representatives, we expect salesforce growth for the full year 2017 to be 7% to 8% and we anticipate growth to continue around this level in 2018.
Turning to page six.
Term life issued policies grew 4% in the quarter outperforming the industry, which reported a 2% decline in life insurance applications year over year.
<unk> issued policy growth was somewhat impacted in hurricane affected areas productivity remained at the higher end of the historical range at two one policies issued per life licensed representative per month.
On a sequential quarter basis term life insurance policies issued declined from the second quarter, largely reflecting higher productivity typical of the second quarter.
We achieved solid investment and savings products performance in the third quarter with positive net flows of $174 million and client asset values, increasing to a record $58 $7 billion at the end of the period.
ISP sales increased 7% year over year, partially due to 10% growth in retail mutual fund sales.
The successful launch of our new lifetime investment platform in June drove managed account sales up 132% versus the third quarter a year ago.
Both fixed indexed and variable annuity sales lagged the third quarter of 2016, reflecting a continued shift in larger SaaS trades from annuities to other investment products.
On a sequential quarter basis, ISP sales declined 9% from the seasonally higher second quarter.
We're constantly striving to drive long term value for all of our stakeholders by evaluating uses of free cash flow and executing our strategy for future growth.
We've had great success in driving organic growth over the past few years, and we continue to assess opportunities to provide more solutions and value for our clients and for our sales force.
Our strategy is to maximize sales force growth and productivity broadened product offerings and develop digital capabilities to deepen client relationships.
Our most recent product enhancement was the launch of the lifetime investment platform with.
With state of the art technology and significantly expanded product offerings, our new advisory platform has been a catalyst for investment and savings product sales growth in the second half of 2017.
We will continue to look for opportunities to better serve our clients in order to drive long term revenue growth.
In addition to broadening our product offerings, we have an ongoing commitment to developing salesforce technology.
And our investment and savings products business, we are working to enhance the client experience as well as expand distribution capabilities for our representatives.
Next year, we plan to launch an ISP sales tool, allowing representatives to seamlessly move from a mobile life insurance application to pre filled information and ISP application, which will streamline the investment discussion.
This tool will help guide the client through the investment decision process and ultimately provide investment alternatives based on the client's individuals' situation.
Our new technology should create efficiencies and drive long term productivity as well as make the ISP business more attractive to representatives, who are considering obtaining a mutual fund license.
At our core Prime Erika as a leadership company.
We will continue to lead with great people, great products and cutting edge technology, we excel at providing financial education and products to main street families and our commitment to them is unwavering.
We have a proven track record of success and continue to execute a strategy to deliver long term value for all of our stakeholders.
Now I'll turn it over to Al <unk>.
Glenn and good morning, everyone. Today I will cover the earnings results for each of our business segment, followed by a companywide review of insurance and other operating expenses and income taxes.
Starting on slide seven in the third quarter term life revenues increased 15% and income before income taxes grew 14% year over year.
Adjusted direct premiums increased 16%, reflecting continued strength in term life production as well as growth in the in force business not subject to IPO related coinsurance agreements.
During the quarter term life had favorable claims experience of approximately $2 million, which is consistent with our belief that the higher claims level during the first and second quarter with normal volunteer volatility and not any indication of an emerging trend.
Benefits and claims ratio at 57, 6% was consistent with the prior year ratio, reflecting favorable claims experience in both periods.
We expect the benefits and claims ratio could be around 58, 5% for the full year 2017 and to remain around that level in 2018.
Persistency continued to improve relative to earlier in the year that was modestly unfavorable compared with the year ago period.
The DAC amortization ratio was 15, 6% in the third quarter of 2017 versus 15, 4% in the prior year period.
If persistency remains at the level experienced in the third quarter, we would expect the DAC amortization ratio to increase to the high 16% range in the fourth quarter due to typical seasonality.
This would put the DAC amortization ratio between $15 eight and 16% on a 2017 full year basis in comparison to 15, 6% for the full year 2016.
We expect to see the DAC amortization ratio run between 15, 6% and 16% in 2018 with normal seasonal fluctuations.
The term life business continues to produce steady and protect about long term earnings.
While unfavorable experience impacted the first half of the year given improvement in the third quarter. We expect the full year 2017 term life margin to be just below the <unk>.
18, 8% margin achieved in 2016.
Assuming mortality experience is at normal levels and persistency experience is consistent with the third quarter of 2017 adjusted for normal seasonality. We would expect the term life margin to move from just above 19% in 2018 aided by wire <unk> reinsurance rate reductions in recent years as well as fixed expenses.
Continuing to be spread over a larger in force premium base.
Adjusted direct premiums have grown 15% year to date.
Through the third quarter, and we expect them to grow at a rate at or above slightly above this rate in 2018.
Well it continues to be delivered from the run off of business subject to the IPO coinsurance. Although this growth rate is slowly decreasing as new business is layered on each year.
The strong sales levels. Since 2014 has also been a key contributor to adjusted direct premium growth.
In 2017 third growth driver has emerged relating to policies, reaching the end of the initial level premium period that convert from new policies.
Beginning in January we stopped ceding end of term policy conversion to the IPO reinsurers pertaining. These conversions has increased our adjusted direct premium growth in 2017 and should continue to do so in 2018.
Benefits and claims on these policies are higher than new business, but acquisition costs are lower resulting in margins that are generally in line with new business.
The 2018 benefits and claims and DAC expectations. We've shared earlier on this call reflect the end of term block anticipated performance.
Moving to our investment savings product segment on slide eight Youll see ISP revenues and income before income taxes grew 8% and 9% respectively over the prior year period.
Results were driven by a 14% growth in client asset values, which led to a 16% increase in asset based revenue.
Total product sales increased 7% and revenue generating product sales increased 2%.
Driving much of the growth in total sales with a significant increase in managed account sales during the period, which was the result of the launch of our Primerica advisors lifetime investment platform in June .
While these sales do not generate sales based revenue a will provide about 60 basis points per year of asset based earnings net of sales force compensation versus about 10 basis points per year, we receive for U S retail mutual funds.
Within our sales based revenue generating product sales, we continue to see a shift from variable annuities to other products with lower sales based earnings.
These changes in product mix resulted in a decline in sales based revenue of 3% versus the prior year period.
Our account based revenues increased from the year ago period, largely due to previously made changes in our account based fee structure as well.
The higher average number of accounts that get to the fee and in the prior year period.
Canadian segregated fund DAC amortization was about $1 million higher than a year ago, mostly reflecting the deceleration of DAC amortization in the third quarter of 2016 related to positive market performance and lower segregated fund redemptions in that period.
On page nine you can see corporate and other distributed products segment results were consistent year over year.
Net income was positively impacted by a larger invested asset portfolio, partially offset by a lower portfolio yield than than the third quarter a year ago.
Continued to maintain a relatively short overall portfolio duration at less than four years, as we have not seen significant incentive or opportunity to add yield by extending the duration of our portfolio.
Our overall book yield on new investments at 285% was in line with the second quarter, reflecting both the ongoing low low rate environment and an average quality of new practice is a deadly miner.
Now I'll move to a discussion of the company's insurance and other operating expenses and taxes.
On Slide 10, you can see our third quarter expense expenses of $83 2 million for $5 million higher than in the third quarter of last year as expected.
Year over year change, primarily reflects $2 9 million of additional growth related expenses as well as $2 3 million of additional costs related to the continued development of technology platforms and mobile initiatives.
The latter was partially offset by the year over year increase in other net revenue.
On a sequential quarter basis expenses increased by about $1 million from the second quarter, primarily due to increased growth related expenses.
Our effective income tax rate for the third quarter of 2017 declined from the prior year period, primarily reflecting excess tax benefits of approximately $900000 for the difference between the stock price at Salesforce equity awards at the time of grant and when the sales restriction flat.
Our income tax expense will continue to be affected by the future market prices of our common stock sales restrictions lapse on equity awards granted to our independent sales force, we expect a tax benefit of approximately 900000 in the fourth quarter of 2017.
As I wrap up let me say that we remain committed to maintaining a strong balance sheet and capital position <unk>.
America life insurance company's statutory risk based capital ratio is estimated to be around 440% and holding company liquidity at $54 million at the end of the third quarter of 2017.
We will continue to take out ordinary dividends, primarily from primary care life to the extent available with the goal of maintaining our RBC ratio at or above 400%.
Now, let's open it up for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. The first question comes from the line of Mark Hughes of Suntrust. Your line is open. Please go ahead.
Thank you good morning, good morning.
Alison did you say theres going to be another tax benefit in the fourth quarter.
Yes, I did and we believe.
It's a subject to the stock price, but give or take we think it'll be around $1 million, we've been seeing the last few quarters.
And then Glenn you had mentioned the number of I think regional leaders that were in the affected area did you say that was 10% very affected by the storm.
That's correct when you combine the population or the primary population of regional Vice presidents.
In the Houston area that was impacted the vast majority of Florida I believe about 98% of Florida was declared counties within the disaster here in Puerto Rico, and also Puerto Rico, which as you know has continued to struggle the entire island does that's about 10% of our overall RVP population.
Alison you talked about the.
As at the end of term block renewal.
That is.
That is those renew you don't have as much of a ceding commission.
And this is in the legacy block and so therefore, you're retaining more of that I see that your ceded premium relative to the legacy premium has been declining in the last few quarters.
Will that continue to decline as a percentage of the legacy premium is this.
<unk> takes hold.
Yes, it will and we have seen and it gets a little confusing as to which line items it affects it.
Our financial statements it actually impacts to different line items and impacts the.
Premiums ceded to the IPO reinsurers and it also impact and that would impact positively.
And I say positively, meaning we retain more of the coverage and the premiums and then it also runs through other ceded premiums because we no longer get the.
Reimbursement, if you will from the IPO reinsurers on the underlying why our T reinsurance that also existed.
That being said, we believe that we will continue to see a benefit in adjusted direct premiums probably its been about 2%. This year, maybe growing to about 3% next year.
This really this business started to emerge at the beginning of 2017, when we started with painting that business from.
From the IPO reinsurers and again at the block will continue to grow over time.
When you say the 3% improvement would that be next year, because this quarter is it roughly a 2% improvement.
Is it another 3% next year or is it just another point on top of the two point of view.
So it's a great question and there's a few moving dynamics, which I try to.
Cover briefly in my my prepared comments that remember sort of break down the growth in adjusted direct premiums into three components. The first component has been the general IPO reinsurance that we put in place and that you know back at the time, the IPO was generating very very large growth in adjusted direct.
Premiums because we had a relatively small new block of business and that business was as it started to run off we were creating real growth we've.
We've seen that growth subside and over.
Periods in the past I've said things along the lines of without any sales growth, we were looking to see about 10% growth from.
From that component in and of itself.
That is still the case, but that component does continue to decline each year as that legacy block continues to run off and the new business over overshadow that and it continues to grow.
Second component is the fact that we've seen rather strong sales growth over the last several years since 2014 and that has helped to compound and more than offset any deterioration we saw in that first component.
And then the third component is going to grow in and of itself from the 2% to about 3% next year, but you need to remember that you have the runoff of that first component continuing to happen. So so I think to your basic question I would certainly not add another 3%.
I think youll continue to see some additional benefit that will help offset the run off of the core business.
Right.
The numbers I'm thinking I'm, just looking at the premium ceded the IPO Coinsurer third quarter last year was 84%.
And then this year is 78, 4%, which.
The two point improvement.
Does that drop say to $77 77, and a half.
Dynamic youre talking about.
Yes.
I haven't looked habilis, but I'm not I can't share that specific ratio, but I really would drive you back to focusing on the adjusted direct premium number itself.
I think I think what Youre describing is is definitely the right direction.
But part of it has to do with how much direct premium we're putting on the books and that direct premium is really as much a function of new business sales and quite frankly, the sales that we've had over the last few years starting to build up in our premium base as the run off of the Coinsurance. So you had two different components.
That youre looking at are moving for different reasons.
Alright.
Benefiting from your strong sales and at the same time, you're retaining more of the legacy block, which had been running off fairly predictably, but since it's renewing and as that block renews youre retaining more of it than that as a tailwind to your premium.
Is that correct.
That is that is absolutely correct I would mention that if end of term block in the scheme of things is relatively small.
This has been happening all year and I'd say this is probably the first quarter. It started to grow to enough where I felt it was necessary to highlight it as a component of our growth.
So it is not and it won't ever get to be a huge component of our book of business, but it will continue to grow over the next couple of years.
The.
Persistency you had suggested.
Been getting better its still not back to the norm.
You gave some guidance around the fourth quarter deck, assuming it didn't improve is that your current anticipation that it's probably at this level at least for the fourth quarter.
Yes, and Andy.
In anticipation of it not improving it's not improving vis vis where we are right now I would highlight that the fourth quarter. It usually sees higher DAC amortization ratios, just because of sort of some seasonality that we have but the underlying persistency component of DAC amortization is is deemed or I believe.
<unk> to be consistent with where we are today or where we were in the third quarter, that's our assumption.
The.
Investment in savings that mix shift away from annuity annuities.
It sounds like Thats the principal reason why.
Your sales.
Sales based revenue was down even though your sales are up is that.
Alright hearing, it's largely a mix shift.
And then I'll ask.
The annuity sales in the fourth quarter when do we.
Lap some of this.
Wind on annuities.
I'd say the first part of your question I'll, let Glenn talk to the second part is partially what you said so certainly within the revenue generating sales bucket, we're seeing less and less variable annuity and more business in the mutual funds, now, which which would drive a deterioration in the.
In the sales based net revenue ratio that being said I'd say, probably the larger driver is the fact that so much of our sales in the fourth quarter were actually in managed accounts associated with our recent large launch of a new platform and that particular product that didn't have any sales.
Earnings component.
Which is why I wanted to highlight in my comments. The fact that obviously market conditions being equal I think I'm not going to predict what happens in the market, but we have a at a higher at six times higher level of asset based earnings on those assets than we do on mutual funds. So.
You know, obviously cant predict what happens in the market, but considering assuming no real shifts there.
That's up for growth in our asset base earnings in future periods.
Let me cases.
Mark I, because I agree completely with allison's comments on the mix shift, yes, we've been tracking the industry pretty closely on the falling.
Variable annuity sales and we are seeing that fall that descent kind of slow down.
The industry's reporting I think the rule of thumb the number kind of comes to mind industry wide for the last few quarters has been sales off about 15%.
It looks like for the fourth quarter, that's going to slow down that San is going to slowdown in the industry is what they're projecting.
Something maybe half that much something in that range.
And then projecting in 2018 to be down slightly maybe right at zero run it flat or just a little negative and so we are kind of finding I think the industry is finding the bottom of the descent of VA sales.
As I've said up to this point, we've tracked the industry pretty closely that looks like similar dynamics that we've experienced in the past I'm going to try to project what might happen in the future, but it looks like thats whats happening across the industry as you've described it as we're getting close to the bottom and hopefully flattening out and maybe look for some upturn somewhere in the future.
And the final question here I apologize for.
For so many.
When you look at your sales say in the third quarter, the fact that.
The annuity sales were down but annuity sales am I right in thinking you get a nice upfront kicker but they are not the trail commissions on that and so it doesn't necessarily help your asset based revenue, whereas the mutual fund sales and definitely the managed account sales.
You get the sales volume, but it doesn't necessarily show up in the current period, but.
Ed.
Bill.
Nice.
Stream of revenue for future periods.
So a little bit, yes, and no. So when we were talking about variable annuity when we're talking about annuities, there's actually two components, there's the variable annuities in there.
Fixed index annuities.
And are actually in this particular period, our fixed index annuities were down a bit more than our variable annuities were.
So the thing to say here is on VA, we actually do continue to have asset based earnings that are you know.
Important to us on the fixed index annuities that their product, where we really have virtually nothing ongoing.
Predominantly sales base. So your comment is very true for the FIA.
More modestly the case for variable annuities.
What's the mix at this point between the two.
Hey, Mark can we move on to have somebody else ask some questions and then you can you get back in the queue.
Well I've been having so much fun I apologize yeah.
Got it thank you.
Okay.
Your next question comes from the line of Sean Dargan with Wells Fargo Securities. Your line is open.
Thank you and good morning.
Alison I have a <unk>.
About the DAC amortization guidance for 2018.
Into that is there any kind of impact from I don't know remediation or there any proactive steps you've taken to identify sales reps who may have.
What may be problematic business.
So I want to I'll, let Glenn speak to that aspect of the business, but I will say is the forecast for 2018.
That being said you know generally speaking the 20% rate is clearly is good for us and it would bring our effective tax rate down closer to that 20%, obviously [laughter] oddly enough. It would make our Canadian business is actually an increase to our effective tax rate where right now, it's obviously a benefit to our effective at that.
Tax rate.
Things that we don't have that you're seeing I think as issues are as you pointed out the internal offshore reinsurance, which is I think being hit with a pretty hard penalty. We don't have any of that as an issue. We don't have a lot of it is we don't have a lot of D. R. D. So those arent really much concern.
And to us.
You know the negatives in it are gonna be they did raise the tax DAC they did.
That the deductibility of a tax reserve that you know a number less than principle based reserves for the future.
Which is not something we had anticipated looking at sort of the catch up if you will on the reserve side, you know I think that might be a big component for some insurers you know remember for us so much of our back book was seeded away at the time of the IPO that relatively speak.
And that's not all that big of a hit for us.
So you know if it goes in as written.
We lose some pull through on a number of fronts in our business as we mentioned in the prepared remarks licensing classes were cancelled in states close licensing offices and then when they reopened they focus those licensing offices on getting adjusters license to deal with the physical damage of the hurricane rather than getting new life insurance agents licensed so.
And that created some delay in that process and cost to some licenses that would have.
Probably increase the size of the sales force more.
Also clearly as all of the state of Florida came to Georgia.
<unk> and then went back home a week later that cost us some sales and so forth. So again very difficult. We've done a lot of work I'm trying to figure out what that might have been and you've got maybe a point or two.
Like that in there somewhere.
Productivity that we might have gained or pull licensing pull through.
I believe that a lot of that will be delayed and we will get it later.
And some of them will be lost I mean quite frankly, when you interrupt.
Our sales process and delay if youre going to lose some sales or licensing process. So there will be a net negative impact, but I do believe over time, where we're getting that.
What we're seeing if I can just comment on October since it's final.
We did see a recovery of momentum in those impacted areas, both Texas and Florida as I said, Puerto Rico still struggling mightily far beyond primary because the entire population of the island.
We are seeing a nice recovery in our business and so we believe that we would return to.
The normal trajectory for the fourth quarter or at least we have in October I would say it that way.
Okay. That's very helpful color. Thank you.
Yeah.
Your final question comes from the line of Mark Hughes with Suntrust. Your line is open.
Welcome back.
Thank you. Thank you.
The.
That renewal block within the.
Those renewal.
Policies within the legacy block any.
Future persistency.
Expectations. There if they are renewing are they going to stick around for another decade or are these policies that may just have a lower natural persistency because of the age.
Yeah, well, yeah, no I think I like this time I think recon celestial last station.
To do a simple calculation and take the the amount that you see that the IPO co.
Coinsurer.
And that roughly.
Kathryn shared with me that you had this question. This is not a back of the envelope I can't I can't do that back them up that's not how we look at it.
Happy to take them look at it and see but I can't answer that question right now, it's it's certainly not a back of the envelope and again like I said, that's not how we look at things.
And I understand that there is not anything obvious that jumps out at you as to why that would be a bad.
There is nothing but I also before I want to say, yes to do that I want to make sure that's right, but theres nothing I can see of that I'd say, Oh, no you must adjust for X y or Z.
Okay.
Thank you very much.
Thank you. Thank you.
There are no further questions.