Primerica, Inc. (NYSE:PRI) Q3 2023 Earnings Call Transcript November 8, 2023
Operator: Greetings, and welcome to the Primerica's Third Quarter 2023 Earnings Webcast. [Operator Instructions]. It is now my pleasure to introduce to you, Nicole Russell, Head of Investor Relations. Thank you, Nicole. You may begin.
Nicole Russell: Thank you, John. Good morning, everyone. Welcome to Primerica's Third Quarter Earnings Call. A copy of our earnings press release, along with other materials relevant to today's call are posted on the Investor Relations section of our website. Joining our call today are Chief Executive Officer, Glenn Williams; our Chief Financial Officer, Alison Rand; and our EVP of Finance and Future CFO, Tracy Tan. Our comments this morning may contain forward-looking statements in accordance with the safe harbor provisions of the Securities Litigation Reform Act. We assume no obligation to update these statements to reflect new information and refer you to our most recent Form 10-K filing, as may be modified by subsequent Form 10-Q for a list of risks and uncertainties that could cause actual results to materially differ from those expressed or implied.
We will also reference certain non-GAAP measures, which we believe provide additional insight into the company's operations. Reconciliations of non-GAAP measures to their respective GAAP numbers are included at the end of our earnings press release and are available on our Investor Relations website. I would now like to turn the call over to Glenn.
Glenn Williams: Thank you, Nicole, and thanks, everyone, for joining us today. Our third quarter results underscore the fundamental strength of our distribution capabilities and the value of our complementary insurance and investment businesses. Term Life pretax income is up 7% year-over-year, while ISP pretax income grew 9%, representing the segment's first year-over-year increase since the first quarter of 2022. We also continue to drive growth in the size of the sales force with a 4% increase since September 30, 2022. Starting with a quick recap of our financial results. Adjusted operating revenues of $713 million during the quarter rose 5% year-over-year while adjusted net operating income of $154 million increased 9% and diluted adjusted operating earnings per share of $4.28 increased 14%.
These results reflect the steady contribution from our large in-force book of term life insurance, strong term life sales, growth in client asset values and the benefit of higher interest rates on our investment portfolio. The Senior Health segment recorded a modest loss as we position the business for the start of the annual enrollment period. On the capital deployment front, we repurchased $106 million of our common stock during the quarter for a total of $302 million in the first 9 months of 2023. We also paid $23 million in stockholder dividends during the third quarter. Given the strength of our capital and liquidity positions, we believe we will meet our targeted repurchases of $375 million for the year. Turning now to distribution. Both home office and field leadership remain focused on our common goal of growing the sales force.
The attractiveness of our entrepreneurial business opportunity continues to fuel recruiting. During the quarter, we welcomed more than 92,000 individuals as new recruits to Primerica. We also -- are also seeing solid progress in licensing with a total of 12,311 individuals obtaining a new life license during the quarter, pushing the size of the life licensed sales force to over 139,000. We remain confident in our ability to expand the size of our sales force and project around 3% year-over-year growth in the fourth quarter. Turning next to the Term Life business. We issued approximately 88,500 new term life policies during the quarter, up 9% compared to the adjusted policy count in the prior year. We issued $29.5 billion in new term life protection for our clients, a 13% increase compared to the face amount issued in the prior year period.
The productivity of our sales force remains solid at 0.21 policies per life license rep per month compared to 0.20 in the prior year period. Looking ahead, we expect fourth quarter policies issued to grow approximately 6% to 7% year-over-year or around 6% on a full year basis. Let's look now at our Investment and Savings Products business. Total sales of $2.2 billion during the quarter remained largely unchanged compared to the third quarter of 2022. Sales of annuity products rose 17% compared to the prior year period as annuity providers continue to enhance products, leading to higher investor demand for variable annuities and the guarantee features they offer. During the quarter, we also transitioned our managed accounts business from TD to Pershing as our custodian.
This conversion caused a temporary disruption in sales, which is now behind us. Changes of this magnitude generally require a period of adjustment as advisers familiarize themselves with new technology and help their clients log in and navigate the new platform. With the conversion complete, we were able to retain 98% of client assets. Advisers are adjusting and sales levels normalized in October. Finally, sales of Canadian segregated funds are down substantially after Canadian insurance regulators followed the lead of securities regulators and banned deferred sales charges on new product sales. We are actively looking at alternate segregated fund solutions for our clients in Canada. Ending client asset values were $88.4 billion on September 30 or 12% above the prior year period and down approximately 3.5% versus June 30, 2023, as market volatility during the quarter pressured equity values.
Net client inflows of $192 million during the quarter reflected approximately $150 million in redemptions from the 2% applied assets that did not convert to the new managed account custodial platform. Based on October trends, we expect fourth quarter ISP sales to grow around 5% year-over-year. We've received questions about the DOL's recent fiduciary proposal that came out on October 31, that proposed rule is subject to a comment period and potential challenges that make it hard to draw any firm conclusions at this time. However, due to the nature of our ISP business, and process changes we previously adopted, we believe we will be well positioned to deal with any final DOL rule. Turning next to senior health. During the third quarter, which is seasonally the most challenging period of the year, we saw stable LTVs for the fourth consecutive quarter.
However, contract acquisition costs per approved policy of $1,263 as well as sales volumes were pressured by a higher mix of newer, less productive agents. While our agent count has grown, we've had higher-than-expected attrition of experienced agents and new hires were onboarded and trained later in the year than we planned. We also identified an inefficiency in our use of leads, which has now been corrected. As we make course corrections to further improve our agent recruiting and onboarding, we are moderating our expectations for fourth quarter and AEP and expect approved applications to be down over 10% from last year. We believe that Primerica representatives will continue to be a valuable source of quality leads for e-TeleQuote and estimate their referral activity will contribute more than 20% of submitted applications during this year's AEP.
We remain committed to our senior health business and believe there is room for more improvement. Our new leadership team established since our acquisition is fully in place, creating a strong foundation for the future. We will not need to provide capital to the subsidiary in 2023 and we do not anticipate the need to provide capital in 2024. Before turning to Alison to review of our financial results, I'd like to comment on our CFO succession process. As you know, Alison has announced her retirement effective April 1, 2024, after nearly 23 years as CFO. Her leadership has provided tremendous financial discipline and performance, which we'll continue to build upon. Alison's successor, Tracy Tan, has recently joined Primerica. Tracy is an accomplished business leader with 20 years of experience as CFO across multiple industries, including financial services.
The depth and breadth of her experience and business acumen will enable her to guide Primerica to continued growth. Tracy is working closely with Alison on the transition. Tracy, welcome to the Primerica team.
Tracy Tan: Thank you, Glenn. I appreciate the vote of confidence, and I'm excited to join Primerica. The company's mission to help middle-income families is well aligned with my own personal values. It is an honor to succeed Alison, who leaves behind a great legacy. I'm committed to leveraging my experiences to drive Primerica's continued growth and value to our stockholders.
Glenn Williams: Thank you, Tracy. It's great to have you on board. Alison, I also want to thank you for your extraordinary leadership, tireless dedication and wise counsel throughout the years. You've been an integral part of Primerica's success, and you'll be missed after your retirement next April.
Alison Rand: Thank you, Glenn. Thank you, Tracy. So really -- those really kind words, I do appreciate it. And good morning, everyone. Let me expand on our third quarter financial results by taking a closer look at the financial contribution of each segment. Starting with Term Life, we continue to benefit from the strong profits generated by this segment. Pretax operating income of $141 million increased 7% year-over-year, driven by 6% growth in adjusted direct premiums. Based on current sales and persistency expectations, we expect ADP to continue to grow by approximately 6% year-over-year in the fourth quarter. We also expect the Term Life segment to continue to be a strong source of free cash flow for the company. The Term Life pretax operating margin was 23% in the third quarter versus 22.8% in the prior year period.
We express our Term Life margin and financial ratios as a percentage of adjusted direct premiums as we believe this is the best revenue basis to evaluate performance. In doing so, we view other ceded premiums, which are the amounts paid to our YRT reinsured through lock-in mortality costs as a component of our benefit cost rather than a contra revenue as presented on a GAAP basis. Under LDTI, Term Life margins are expected to be stable and predictable. They are not highly sensitive to changes in persistency and mortality experience variances are highly mitigated by reinsurance and partially spread to future periods. Benefits and claims, DAC amortization and insurance expense ratios in the third quarter were all consistent with the prior year period at 57.9%, 11.7% and 7.3%, respectively.
We expect margins and financial ratios to remain stable in the fourth quarter. Turning to persistency. We continue to see elevated lapses most notably on policies sold near the onset of or during the pandemic when various financial aid programs were widely available to middle income marketplace. The combination of our ongoing cost of living pressures and the elimination of financial aid programs are likely contributors to the timing of these lapses. Persistency for both policies issued over the last year as well as older policies are generally in line with historical trends underlying our LDTI assumptions. While economic headwinds are likely to continue in the near term, we believe that persistency experience across all durations will revert to historical levels over time.
During the third quarter, we performed our annual assumption review. We did not identify any trends or experience that we believe require us to change our long-term assumptions for lapses or aggregate benefits including both mortality and disability rates for our waiver of premium rider. As noted, we believe the elevated lapses seen in some policy durations will revert to historical levels over time. In regard to mortality, variances are inherently limited by our extensive YRT reinsurance program. Claims have been modestly favorable to assumptions in 2023 what we believe this is near-term experience volatility in their existing LDTI mortality assumptions continue to reflect the long-term best estimate for benefit reserve. We've also seen some variability in disability rates underlying our waiver premium benefit, which we will continue to monitor.
Turning next to the Investment and Savings Products segment. Third quarter operating revenues of $219 million and pretax operating income of $64 million were both up 9% year-over-year. Sales-based revenues and commission expense both rose 7%, in line with revenue-generating sales. Asset-based revenues increased 11%, consistent with 10% growth in average client asset value. Total expenses on asset-based products, including commission expenses and for segregated funds, both DAC amortization and insurance commissions increased in line with asset-based revenue. With regard to seg fund, we have seen a drop off in sales due to new regulations. But given we earned commissions based on client assets, which were only down 3% year-over-year, the impact to earnings will emerge slowly over time.
In our Senior House segment, we continue -- excuse me, in our Senior Health segment, we recognized a $7.6 million loss for the quarter. LTV per approved policy was $911, a 5% increase over the prior year period. We recorded a $2.3 million positive tail adjustment in the quarter to reflect the impact of stabilizing persistency on import policies and annual rate increases. Marketing development revenues of $2 million were down slightly year-over-year. Beginning in the fourth quarter, most marketing development revenues will shift from other net revenues to the commissions and fees revenue line due to a change in our contracts with certain health insurance carriers. Though generally neutral to total revenues, the change will result in higher LTVs and link most marketing development revenue opportunities directly to approved policies.
CAC per approved policy of $1,263 was up significantly year-over-year based on factors Glenn described earlier. We expect to recognize a small loss in the fourth quarter, but will not need to provide capital to the segment in 2023 nor do we anticipate a need to do so in 2024. The Corporate and Other Distributed Products segment recorded a pretax operating income of $3 million during the quarter. A key driver of segment results was adjusted net investment income, which at $35 million for the quarter, up $11 million year-over-year. Our average yield on new investment purchases for the quarter was about 6% with an average rating of AA- and an average duration of about 5 years. In comparison, the average book yield on maturities for the period was under 4%.
We expect to continue benefiting from higher yields and growth in their portfolio in the fourth quarter. Our invested asset portfolio ended the period at an unrealized loss of $343 million, which continues to reflect a steep rise in interest rates since the beginning of last year. We regularly evaluate the portfolio for possible credit impairment and do not believe the large unrealized loss is due to significant credit concerns with our holdings. We continue to have the intent and ability to hold these investments until maturity. Third quarter consolidated insurance and other operating expenses were $137 million, up $6 million or 4% compared to the third quarter of 2022. The increase is mainly attributable to higher employee-related costs and normal growth in our business.
Costs increased less than anticipated in August due to the timing of certain technology projects and pullback in equity markets that led to lower ISP asset-based operating expenses than expected. Looking ahead, we expect fourth quarter insurance and other operating expenses to increase around $4 million or 3% year-over-year with increases coming mainly from higher employee-related costs and continued growth in the business. This would result in full year expense growth of about 3% year-over-year which is lower than typical due to heightened expense levels in 2022 from holding an additional sales force leadership event post COVID. With that, operator, let's open the line up for questions.
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