Primerica, Inc. (NYSE:PRI) Q4 2023 Earnings Call Transcript
Primerica, Inc. (NYSE:PRI) Q4 2023 Earnings Call Transcript February 14, 2024
Primerica, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to Primerica's Fourth Quarter 2023 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. At this time, I'll now turn the conference over to Nicole Russell, Senior Vice President, Investor Relations. Nicole, you may now begin.
Nicole Russell: Thank you, operator. And good morning, everyone. Welcome to Primerica's Fourth Quarter Earnings Call. A copy of our 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 our Chief Executive Officer, Glenn Williams; and our Chief Financial Officer, Tracy Tan. Our comments this morning will 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 File 10-Q -- Form 10-Q, excuse me, 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. Reconciliation to non-GAAP measures to their respective GAAP numbers are included at the end of our earnings press release and are also available on our Investor Relations website. I would now like to turn the call over to Glenn.
Glenn Williams: Thank you, Nicole, and thanks, everyone, for joining us this morning. Primerica's strong performance during the fourth quarter and full year 2023 reflects the power of our distribution. The ongoing need for the financial solutions we provide is clear and our sales force is uniquely positioned to reach and serve middle-income families. Now more than ever, our clients need the education and guidance provided by our representatives to navigate economic uncertainty and manage the financial pressures associated with a higher cost of living. Starting with the highlights of our financial results. Fourth quarter adjusted net operating income increased 4% compared to the prior year period, while adjusted operating income per share increased 9%.
On a full year basis, adjusted net operating income increased 8% and adjusted operating income per share rose 15%. In addition, we maintained our commitment to returning capital to stockholders, including the completion of our previously announced $375 million stock repurchase authorization and payment of a total of $94 million in quarterly stockholder dividends. Taking into consideration the complementary nature of our insurance and investment businesses and the predictability of cash flows, the Board approved a new $425 million share repurchase program in November 2023 to occur through December 31, 2024. The Board has also declared a 15% increase to our next quarterly dividend, bringing the payment to $0.75 per share. Over the last few years, we've become more focused on communicating the attractiveness of our entrepreneurial business opportunity and we continue to enhance our processes to keep new recruits engaged.
There's also greater flexibility and more options for new recruits, who are preparing for their licensing exams. The fundamentals of our business are sound, and we are well positioned for the future. Looking more closely at our distribution progress, during the fourth quarter, we recruited nearly 90,000 individuals, a 17% increase compared to the prior year period. We also saw a 17% increase in licensing with 13,000 reps obtaining a new life license, helping fuel 5% growth in the size of the sales force to end the year with a total of 141,572 life-licensed representatives. Our momentum has continued into the new year as we see a high degree of interest in our business opportunity. These dynamics are leading us to project around 3% growth in the size of the sales force during 2024.
Turning next to sales results. We continue to see strong demand in our Term Life business following the launch of our new insurance products in the fall of 2022. The simple and convenient application process has increased rep confidence, while advancements in underwriting technology allow us to issue policies more rapidly. The increase in the number of rate classes often appeals to clients across a broader spectrum of face amount. During the fourth quarter, we issued almost 89,000 new Term Life policies or 12% more than the adjusted policy count in the same quarter in 2022 for an annual total of nearly 359,000 new policies issued. This represents an 8% increase over adjusted 2022 figures. In 2023, we issued a record $119 billion in new Term Life protection for our clients, a 15% increase compared to the prior year, bringing Primerica's total amount of coverage in force to $945 billion.
We believe we will continue to benefit from the positive response to our new insurance products during 2024. Based on our current projections, we anticipate full year growth in the number of policies issued to be around 3% to 5%. Turning next to our Investment and Savings Products business. Total sales of $2.4 billion during the quarter increased 13% compared to the fourth quarter of 2022, driven by a combination of strong demand for U.S. mutual funds and variable annuities. In addition, sales volume increased in managed accounts as activity resumed following a brief period of adjustment due to a platform conversion in the third quarter. Net client inflows in the fourth quarter of $172 million reflected normal levels of client redemptions as a percentage of client asset values.
Ending client asset values benefited from strong equity market appreciation in 2023, ending the year at $97 billion, up 15% versus December 31, 2022. We've continued to see ISP sales growth during the start of 2024. We're mindful of the continued economic uncertainty and the impact that a higher cost of living has on middle-income families. We are projecting an increase of approximately 5% in ISP sales during 2024. As we turn to our Senior Health Business, we continue to take a deliberate approach to building the business as we evaluate its progress. Looking at the results for the fourth quarter, LTVs were $1,109 per approved policy, up $221 year-over-year which includes the reclass of $182 per policy for marketing development funds that were previously captured in the other revenues line.
The reclass of marketing and development funds is a result of changes in our carrier contracts. Our current challenge is sales volume. With fourth quarter total submitted policies down 17% year-over-year due to fewer tenured e-TeleQuote agents entering AEP. Referral activity from Primerica representatives accounted for approximately 25% of submitted policies. Lower productivity by untenured ETQ agents led to a 22% increase in CAC to $878 per approved policy during the fourth quarter of 2023. The LTV to CAC ratio was 1.3. The new leadership team at e-TeleQuote is now at full strength and focused on increasing the percentage of tenured agents while managing the cost structure to improve the LTV to CAC ratio. In closing, let me provide a few observations about our upcoming convention.
This summer, we returned to the Mercedes-Benz Stadium in Atlanta, and our team is already working hard to ensure another successful event. We had a solid turnout coming out of the pandemic at our 2022 convention, and we expect to see an even larger group at this year's event. The magnitude of this event provides the perfect platform to cast a clear vision for the future to the entire Primerica team. The speakers serve as coaches, motivating and unifying the sales force toward a common goal of growing the business and the event creates a unique opportunity to recognize and celebrate past accomplishments while renewing commitments for future success. In the month leading up to the event, field leaders are pushing teammates to stretch for the finish line and earn an opportunity to be recognized as a top performer.
Following the event, we reinforce our vision with additional messaging to drive activity and sustain momentum well beyond the convention itself. Before turning the call over to Tracy, I want to congratulate her on officially taking over as CFO in December. I'm proud to say that the transition has been seamless. I also want to thank Alison for her tremendous contributions to Primerica. The entire team wishes her the best in retirement, which becomes effective April 1. Now I'll hand it over to Tracy to review our financial results.
Tracy Tan: Thank you, Glenn. Good morning, everyone. In my prepared remarks today, I will review fourth quarter results and provide an outlook on key financial measures for 2024. In the Term Life segment, pretax operating income of $140 million, increased 6% during the quarter on a year-over-year basis, driven by 6% higher adjusted direct premium. Pretax operating margin at 22.6% remained unchanged comparing to the fourth quarter of 2022, reflecting stability and predictability of our results under LDTI reporting. Looking more closely at our key financial ratios. The fourth quarter benefit and claims ratio was 58.2% versus 57.8% in the prior year period and largely in line with our expectations of around 58%. The DAC amortization ratio was essentially unchanged year-over-year at 12% versus 11.9% in the same period of the prior year.
Finally, the insurance expense ratio was 7.1%, compared to 7.8% from the prior year period due to additional expenses associated with the launch of our new insurance product in 2022. Mortality remains generally in line with expectations. However, we continue to see higher lapses across multiple durations, which leads us to think that recent economic pressures are putting financial stress on middle income family. The persistency of policies issued last year under the same economic conditions as today are largely in line with historical trends. As we look ahead, we expect ADP to grow around 5% to 6% in 2024, reflecting the compounding of premiums from new sales. Our estimate also take into consideration elevated lapse rates and the fading benefit from the IPO co-insured block.
Looking at our key financial ratios. We expect the benefits and claims ratio and the DAC amortization ratio to remain stable in 2024 at around 58% and 12%, respectively. We expect the 2024 pretax operating margin to be around 22%, keeping in mind that there is some seasonality in insurance expenses, which can result in some variability to the pretax margin between quarters. Turning next to the results of our ISP segment. Fourth quarter operating revenue of $222 million and pretax operating income of $63 million, increased 12% and 11%, respectively. Our sales force delivered good revenue growth, while equity market appreciation pushed average client asset values higher. Sales-based revenue increased 15%, while commission expense was up 13%, in line with the revenue generating sales growth.
Asset-based revenue grew 12% while average client asset values rose 9%. We continue to see growth in U.S. managed accounts, as well as higher asset levels in Canadian mutual funds in the PD model on which we earn asset-based fees in view of upfront sales commission. Asset-based commission expenses increased in line with related revenue. Based on the 5% sales projection Glenn provided earlier, we estimate sales-based revenue less commissions to increase between $4 million to $5 million in 2024. As a good rule of thumb, on an annual basis, every $1 billion change in average client asset value translates to around $2 million change in asset-based revenue less commission and associated operating expenses. Turning next to Senior Health segment. I will focus on the financial results for the quarter since Glenn has already discussed most of the business dynamics.
The segment incurred a $2.7 million pretax operating loss, compared to pretax income of $4.3 million in the fourth quarter of the prior year, driven by lower sales volume and higher cost of acquisition due to lower productivity from a higher mix of less tenured agents. Looking ahead to 2024, we anticipate an operating loss out by smaller than prior year, as we continue to work towards improving business fundamentals. Meanwhile, we do not expect the need for capital infusion in 2024. The C&O segment recorded a pretax adjusted operating loss of $5.4 million versus a loss of $8.8 million in the prior year period. The year-over-year improvement is due to $7.5 million of higher adjusted net investment income as we continue to benefit from higher interest rates on both new investments and cash balances, partially offsetting this was higher benefits and claims costs, mainly due to a onetime $3.3 million adjustment to the ceded reserve for a closed block of non-term life insurance business.
Our invested asset portfolio ended the year with a net unrealized loss of $216 million versus a net unrealized loss of $343 million at the end of September as interest rates fell and credit spreads tightened with which listed bond market. We continue to believe that remaining unrealized loss is a function of interest rates and not due to underlying credit concerns, and we have intense and ability to hold these investments until maturity. The portfolio continues to be well diversified and high quality with an average rating of 8. Finally, consolidated insurance and other operating expenses were $139 million during the fourth quarter, up 2% versus the fourth quarter of 2022. The prior year period included elevated costs associated with the launch of the new Term Life insurance product.
Looking ahead to 2024, we expect insurance and other operating expenses to increase by around $40 million or 6% to 8% in 2024. This includes $13 million of higher staffing-related costs, $17 million to support growth in the business and $10 million for ongoing technology initiatives. We expect Term Life, ISP and C&O to each incur about one-third of the year-over-year increase. With that, operator, I open the line for questions.
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