Primerica, Inc.

Hello everyone and welcome to Primerica's second quarter 2022 earnings webcast. My name is Charlie and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypad. I'm going to hand over to your host, Nicole Russell, Head of Investor Relations, to begin. Nicole, please go ahead.

Thank you, Charlie, and good morning, everyone. Welcome to Primerica's second quarter earnings call. A copy of our earnings press release, along with materials that are 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 and our Chief Financial Officer Allison Rand. Glenn and Allison will deliver prepared remarks, and then we'll open the call up for questions. During our call, some of our comments may contain forward-looking statements in accordance with the safe harbor provisions of the Securities Litigation Reform Act. The company assumes no obligation to update these statements to reflect new information. We refer you to our most recent Form 10-K filings, as well as modified by subsequent Form 10-Qs, for a list of risks and uncertainties that could result in actual results to materially differ from those expressed or implied. We also reference certain non-GAAP measures, which we believe provide additional insight into the company's operations. Reconciliations of non-GAAP measures to the respective GAAP numbers are included at the end of our press release and available on our investor relations website. I would now like to turn the call over to Glenn.

Thank you, Nicole, and thanks, everyone, for joining us today. The second quarter reinforced that we're moving beyond the influence of the pandemic, and we see the fundamental strength of our business in action. The complementary nature of our term life and ISP businesses continues to deliver important financial solutions to middle-income families. Starting on slide three, adjusted operating revenues of $672 million increased 30% year-over-year, while diluted adjusted operating income per share of $2.86 declined 12%. ROAE was 22.5% per quarter. To assess the underlying strength of the second quarter results, we have to look through a number of distortions that make year-over-year comparisons difficult. First, last year's term life results were heavily impacted by COVID, with sales and persistency benefits exceeding the higher debt claims incurred. Second, the equity market has completely reversed its momentum. The S&P 500 index was up 8% in the second quarter of 2021 versus down 16% in the current period. Finally, the eTelequote acquisition wasn't completed until July 1 of last year, which means financial results in the current period have no comparable offset in the prior year period. It's important to look beyond these factors to understand and assess the health of our core business. As such, I will focus my prepared remarks today on the clear growth path we see taking shape in the second half of this year. Term life, our largest segment, continues to provide a reliable source of earnings. Since the start of the pandemic, our in-force book has increased at a compounded annual growth rate of 5% versus our historical 3.5% growth rate, and we reached a total of $914 billion of face amount in force by the end of June. The accelerated growth was fueled by a combination of higher sales and higher face amount per policy issued, a trend that continues today. We believe the in-force block will continue to grow as we steadily layer on new insurance policies every year, creating a predictable source of recurring premiums. Our practice of reinsuring approximately 90% of our mortality risk further insulates our business from volatility and allows us to largely lock in profitability. Focusing on the term life segment on slide four, we issued approximately 77,000 new term life policies during the quarter. We believe third and fourth quarter sales will outpace our pre-pandemic results while also exceeding their prior period comparisons. We project second half sales will increase around 4% to 5% year over year. We expect our term life business to remain the primary source of deployable capital, which we plan to use to fund our growth while also providing an attractive return to investors through quarterly dividends and share buybacks. While earnings in the term life segment are steady and predictable, our investment and savings business is highly correlated to the equity markets. And the second quarter certainly demonstrated how quickly momentum can shift. Looking past the market noise to focus on the core of this business, you'll find a model built on strong fundamentals and rooted in our long-term systematic approach to investing. Every day, our licensed reps interact with clients to help them meet their financial goals, which most often include planning for retirement, Approximately 70% of our total client asset values are invested in retirement accounts, and almost 20% of all mutual fund sales are funded through automatic monthly investments. This focus on the future also results in lower redemption rates as clients stay invested despite market volatility, leading to a stickier asset base for Primerica. Looking at our second quarter ISP results on slide five, high inflation, low consumer confidence, and fears of a recession dominated the headlines during the quarter, creating significant headwinds for our ISP business. While sales had remained fairly strong earlier this year, the continued volatility and sharp decline in equity markets has impacted second quarter sales. Today, second quarter sales were lower than expected, sorry, total second quarter sales were lower than expected at $2.7 billion, although net flows of nearly $900 million continue to reflect our clients' buy and hold long-term approach to investing. Assuming this uncertainty and volatility continues, our best estimate for third quarter ISP sales is a decline in the mid-20% range, with some upside if markets improve. While we expect full-year sales to decline compared to last year's record results, it's worth noting that 2022 results are still expected to exceed pre-pandemic levels. Turning next to more recent business ventures, our U.S. mortgage business is experiencing growth challenges along with the broader industry due to the rapid rise in interest rates and slowing economy. In the second quarter, sales volumes were down nearly 50% compared to the second quarter of 2021, resulting in a cumulative year-to-date decline of about 30%. This has not altered our views on the long-term prospects of this business or deterred us from actively working to expand the number of states in which we are licensed to offer mortgages, as well as the number of mortgage license reps at Primerica. We're also working to educate mortgage license reps on how to identify opportunities to consolidate variable interest rate consumer debt, build households with cash flow, and capitalize on purchase money mortgage opportunities. On slide six, we recognize that our newly acquired senior health business has not performed as we originally expected. We remain committed to driving a turnaround by carefully managing sales volume as we work toward a sustainable ratio of revenue to acquisition cost. We have deliberately limited licensed health agent growth and made tough decisions with respect to certain of these agents who are not profitable based on reduced levels of LTV. We are focused on ensuring unit economics are headed in the right direction before we grow our licensed health agent sales force at eTeleco. Acquisition costs, while seasonably high, relative to LTV in the second and third quarters of every year continue to trend down on a net basis as we make progress on increasing our sales conversion and, as a result, reducing both lead and labor costs per sale. We anticipate instituting a new health agent compensation model in the third quarter that is intended to drive agent productivity and profitable unit economics. Using Primerica's strength in distribution provides a real advantage that our senior health competitors cannot duplicate. While it's still early, referrals from Primerica reps are outperforming leads from traditional sources, and we've already seen higher conversion rates from these leads. We believe the warm relationship with our reps will also lead to longer retention and higher LTVs based on early indications of the quality of business referred from Primerica to eTelecorp. The number of senior health certified reps entering AEP this fall will be significantly higher than last year, and we are optimistic about the volume and quality of leads Primerica's field can generate during the upcoming Medicare annual enrollment period. We made the decision to exercise our call option in early July to acquire the remaining 20% of eTeleQuote. Given the results of the trailing 12-month period, the contractual formulaic price defined in the shareholders' agreement for the exercise of the call option was $0, and the remaining stake in the shares were acquired at no cost. Turning to slide 7, recruiting remained strong compared to historical averages. Recall that we made liberal use of recruiting incentives through most of last year, which increased recruiting. In the first half of 2022, we returned to a more fundamental approach with fewer incentives and have seen sustained strength in recruiting with levels comparable to pre-pandemic results. This steady improvement in recruiting over multiple recent quarters confirms the overall strength of our message and affirms that potential new recruits are attracted to our business model. The recent changes in labor markets and the desire for more independence and flexibility further reinforces the attractiveness of building a Primerica business. We believe we have the infrastructure and processes in place to pull new recruits through the licensing and we leverage the power of our convention in July to launch new incentive to drive recruiting to new heights. We're already experiencing a strong response to these incentives and believe third quarter recruiting will be extraordinarily strong. Turning next to licensing, a total of 11,529 new life licenses were issued during the current quarter as momentum accelerates. To put this figure in proper context, licensing grew 14% compared to the second quarter of 2021, a period which included more than 2,000 COVID temporary licenses, the majority of which never converted to a permanent license. Compared to the pre-pandemic second quarter of 2019, licensing grew by nearly 6%. As I mentioned earlier, we're seeing a clear benefit from our collective efforts over the last few years to improve our licensing process in the introduction of new progress tracking tools that allow our field to keep new recruits accountable in real time. New recruits are also more comfortable with in-person classes as we continue to move further away from the COVID-related shutdowns and restrictions. To maintain our momentum, we're actively adding pre-licensing coaches and classroom sites to accommodate this increase in attendance. Our message to the field over the last 12 months has emphasized the power and the combination of recruiting and licensing, and our most recent quarter clearly demonstrated their buy-in. The ongoing strength in recruiting, along with the more robust licensing process, has led to a 2% increase in the size of our sales force year-to-date and helped propel the Primerica sales force to over 132 life license reps at the end of June. Based on current trends, we expect the size of the sales force can approach 134,000 by year-end. Now let's review the impact of our convention, which took place at the Mercedes-Benz Stadium in Atlanta between June 29 and July 2. As you know, we leveraged the power of this event to deliver a focused, consistent message simultaneously to a large number of people and to cast a vision for the future. The convention can also act as a momentum accelerator by re-energizing our sales force. We are pleased with the attendance of nearly 35,000 people at the event, although attendance was down from 2019 due to lingering COVID concerns, travel restrictions, and flight chaos that's currently overwhelming the airlines. What is most important is that we delivered on our goal to put the pandemic behind us and to shift our focus to the future. Preparation for this event begins by identifying the desired outcomes and defining appropriate messages. This year's message was focused on our unique ability to serve the middle market the attractiveness of our business model, and the importance of growing our licensed sales force through both recruiting and licensing. The convention also featured an exhibit hall where participants were able to engage with our business partners and home office staff to hear about the most recent initiatives, obtain new product information and training, and participate in demonstrations of our latest technology and tools. Convention attendees could also register for upcoming training and sign up for various portals and newsletters. Over the four days of the convention, many participants also took advantage of on-site senior health certification at the senior health booth. As we look to the future, we do so with more confidence than ever, knowing that we have the right systems in place and support needed for our reps to succeed. The recruiting incentives that were announced July 2nd have filled the licensing pipeline, and these new recruits will continue to fuel growth and sales momentum. We're excited to see results emerge over the next few quarters and into 2023. With that, I'll now turn it over to Allison.