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spk05: Welcome to Primerica's second quarter 2024 earnings call and webcast. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Nicole Russell, SVP, Investor Relations. Thank you. You may begin.
spk00: Thank you, operator, and good morning, everyone. Welcome to Primerica's second 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 our Chief Executive Officer, Glenn Williams, and our Chief Financial Officer, 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 the information and refer you to our most recent Form 10-K filing, as may be modified by subsequent Forms 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.
spk03: Thank you, Nicole, and thanks everyone for joining us this morning. Primerica reported another strong quarter with solid distribution momentum and double-digit adjusted operating earnings growth. The appeal of our entrepreneurial business opportunity continues to resonate, supporting our ability to grow distribution. Primerica remains well-positioned to serve more middle-income families in the U.S. and Canada. Let's start with the highlights of our financial results. Adjusted net operating income of $163 million increased 12% compared to the prior year period, while diluted adjusted operating income per share of $4.71 increased 18%. These results reflect the stability and continued growth in term life premiums and very strong sales in our investment and savings product segment. During the second quarter, we repurchased $143 million of our common stock and paid $26 million in regular dividends. During the first two quarters of 2024, Primerica has returned a total of $304 million to stockholders through a combination of share repurchases and dividends. Looking more closely at our distribution results, During the second quarter, we recruited over 96,000 individuals, a 12% increase compared to the prior year period. We also saw a 14% increase in licensing, with 14,402 WIPs obtaining a new life license, helping propel our sales force to 145,789 life license representatives as of June 30, 2024, up 6% year over year. Leveraging the excitement of our convention, We discounted our life licensing fee during the last half of July and beginning of August to maximize momentum in recruiting and licensing. We have a proven process in place to keep new recruits engaged and help them prepare for their licensing exam. Given our continued progress, we now anticipate full-year growth in the size of our sales force to be around 5% during 2024. Turning next to our sales results, during the second quarter, we issued over 100,000 new term life policies, a 4% increase year over year. These newly issued policies added $33 billion of coverage for middle-income families, resulting in $951 billion of total enforced protection for our clients at quarter end. Productivity was at the higher end of our historical range, with a monthly average of 0.23 policies issued per life license rep. reflecting the seasonal favorability of the second quarter. Taking a conservative view for the remainder of the year compared to the strong life sales we saw in the second half of last year, we expect four-year growth in the number of policies issued to be in the low single-digit range. Investment product sales have again outpaced our forecast. Sales of $3.1 billion during the quarter increased 29% compared to the same period in 2023. We continue to see solid demand for products across the board, including U.S. and Canadian mutual funds, annuities, and managed accounts. Early results for the month of July show continued sales strength. Barring an unexpected change in investor sentiment, we believe full-year sales will go around 15% in 2024. Client asset values continue to benefit from strong equity market appreciation, ending the quarter at $105 billion of 15% year-over-year. Net flows remain positive at $423 million during the quarter. Since our May earnings call, we've made the decision to exit the senior health market after it became apparent that the business does not have a clear path toward anticipated profitability within an acceptable timeframe. Over the last several months, we've determined that the increasingly challenging senior health distribution market, including, for example, increasing policy churn, and the regulatory uncertainty facing this industry would make it difficult for us to achieve the near-term stockholder value that had been anticipated. Tracy will expand on the financial details related to the exit in just a moment. Let me end my remarks this morning with a report on the impact of our convention, which took place at the Mercedes-Benz Stadium in Atlanta between July 10 and 13. With nearly 40,000 attendees, this year's event was the ideal platform from which to cast our vision for the future. Our message was simple yet powerful. Focus on growth to serve more middle income families. Over four days, attendees were able to engage with our business partners and home office staff in our exhibit hall to obtain product information and learn how we can support their businesses. By attending our four general sessions and numerous workshops, participants could hone their skills, be recognized for their outstanding achievements, and be challenged to grow their businesses. Looking ahead, I'm optimistic about our ability to continue our growth. The need for protection and savings solutions continues to increase among underserved middle income households. The reach of our sales force uniquely positions Primerica to serve these families. Now, I'll turn it over to Tracy.
spk00: Thank you, Glenn. Good morning, everyone. Before I begin my review of second quarter results, I want to remind everyone that our reported second quarter financials included several items related to our decision to exit the senior health business, which impacted gap results for the quarter. The operating performance for our core business was strong. As you can see on slide seven, several non-cash items relating to senior health were recorded during the quarter. These included a total of $254 million to write off the remaining goodwill intangibles, partially offset by $24 million of net tax-related benefits. The quarter also included a $50 million insurance proceeds from a settlement of claims under a representation and warranties policy. We excluded these items from our adjusted operating results to provide comparability to other periods. During the third quarter, we will incur additional restructuring costs associated with a senior health exit and the amount is still in development. These charges will also be excluded from our adjusted operating numbers. From third quarter forward, we will start to exclude senior health from operating performance reporting for both current and prior periods. Turning now to our second quarter results. Operating revenues of $427 million in the term life segment rose 4% compared to the prior year period, driven by 5% growth in adjusted direct premiums. Pre-test operating income of $148 million increased 5%. Looking at our key financial ratios, the benefits and claims ratio of 57.4% was largely in line with the prior year period, although favorable overall due to a $4 million remeasurement gain largely driven by better-than-expected claims experience. The DAC amortization ratio of 11.8% and the insurance expense ratio of 7.6% remained consistent with the prior year period. Finally, the operating margin of 23.1% was unchanged compared to the prior year period. Looking more closely at the benefits and claims, mortality was better than expected during the quarter, while still within the range we consider as normal claims volatility. Higher cost of living pressure continues to impact low-income families. contributing to elevated lapses across multiple durations. However, persistency on policies issued over the last year remains largely in line with our assumptions, and we expect the overall persistency to normalize over time. While higher lapses can constrain future ADP growth under LDPI, lapses do not meaningfully impact our key financial ratios. As a reminder, we will conduct our annual assumptions setting review in the third quarter. Our guidance for full year 2024 remains unchanged. We anticipate ADP to grow approximately 5% to 6%. Our key financial ratios are expected to remain stable with the benefits and claims ratio around 58% and debt amortization ratio around 12%. We're also reiterating our full-year guidance for term life operating margin of around 22%. Turning next to the results of our investment and savings product segment. Operating revenues of $261 million increased 22%. driven by a combination of 31% higher sales-based revenue and a 16% increase in average client asset value, while pre-tax operating income of $75 million rose 26%. Revenue from sales-based commissions and fees of $101 million rose more rapidly than sales due to increased demand for variable annuities. on which we earn higher fees. Sales-based commission expenses generally rose in line with correlated revenues. Asset-based revenues of $133 million rose 17%, largely in line with an increase in average client asset value. Total expenses on asset-based products increased relatively in line with asset-based revenues. Asset-based expenses include commissions as well as segregated funds, staff, amortization, and insurance commissions. The senior health segment had revenues of $12 million, including a negative tail adjustment of $1.8 million. The pre-tax adjusted operating loss was $11 million. Both revenues and adjusted operating income were unfavorable compared to the prior period. LTV per approved policy was 914, while tax per approved policy was 1,074, for an LTV to tax ratio of 0.9. Contract acquisition cost rose 25% with preparation for the upcoming enrollment season and onboarding of new agents, as well as 13% increase in the number of approved policies. The CMO segment recorded a pre-tax adjusted operating income of $0.9 million versus a loss of $3.6 million in the prior year period, driven predominantly by 5% higher adjusted net investment income, which continued to benefit from a combination of higher yielding investments and growth in the size of the portfolio. Finally, Adjusted consolidated insurance and other operating expenses were $150 million during the second quarter, up 6% year-over-year. This increase is primarily due to higher variable expenses from growth in our ISP and term life segments and higher employee-related costs. We reiterate our full year 2024 insurance and other operating expense growth expectation is still on track for a year-over-year increase of around $40 million or 6% to 8% in 2024. With that, operator, I open the line for questions.
spk05: Thank you. At this time, we'll be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Wilma Burtis with Raymond James. Please proceed with your questions.
spk03: Good morning, Wilma.
spk01: Hey, good morning. Could you just talk a little bit about the recruiting trends? They've been very, very strong ever since the convention. And just talk a little bit more about what we should expect to see in the back half of the year. Thanks.
spk03: Certainly. Well, our convention certainly served its purpose. We're very excited about the impact of it. As we've talked about before, we try to use it to maximize momentum prior to the event with the anticipation of the event, obviously have a great event itself, and then have activity magnifiers, if you will, after the event. And I think we executed well on all of that. We've seen very strong recruiting activity going in, as we reported, in an excellent second quarter. and we're going to have even stronger recruiting activity indicated with July and the first part of August. So we're expecting that momentum in our distribution room to continue to grow led by recruiting. We are feeling much better than several years ago with the pull-through rate and licensing, so our state and province as well as the room licensing processes are running well. So we're continuing, as we indicated, to experience and expect that growth in the 5% range, 6% range, something in there for the full year. And so that would indicate a strong second half of the year as well. So we expect the momentum to continue, and we think we've got all the ingredients in place to make that happen.
spk01: Okay, thank you. And then one other thing we noticed, it seems like the mortgage balance has ticked up a little bit in the quarter. Could you talk a little bit about that and how the mortgage sales program is going and Is that something you expect to see some momentum if rates decline a little bit? A bunch of questions are there, but thanks for answering.
spk03: Certainly. Well, as you would expect, and I think as the industry is seeing as the Ultimately, we think the reality of rate cuts are ahead of us, not very far into the future. We are seeing a significant increase in activity. We're approaching now about 3,000 mortgage loan originators licensed in the U.S., and we are seeing a significant increase in our business. That's still a very small business. We reentered that business a few years ago and expected just a build as we build process and of course interest rates spiked and that slowed things down. But now we are seeing the expected increase in activity and when we have increase in activity, that creates an increase in interest among our sales force. does build momentum so we're now focusing with the attention it's beginning to receive you know let's get more people licensed we have the vast majority of states approved now about 32 33 states are approved in the US we also have a mortgage referral program in Canada it's a very different mechanism in Canada but it serves the same purpose for our clients of helping them consolidate and debt at a lower interest rate and accelerate payments so they get themselves out of debt. So the client impact is very similar, but the business model is different in Canada. But it gives us good consistency on both sides of the border to use that mortgage impact on our other business, which is very positive in both countries. So we do expect that to continue to improve. Assuming we're right about interest rate cuts in the very near future in the U.S., we've already seen some in Canada, and we would expect that momentum to continue to grow. It's going to be an important part of our future.
spk00: Thank you.
spk03: Thank you.
spk05: Thank you. Our next question has come from the line of Maxwell Fritcher with Truist Securities. Please proceed with your questions.
spk02: Hey, Max. Hey, good morning. I'm on for Mark Hughes. You mentioned the strong ISP sales were a result of solid demand for your products. Can you provide some more color on what you believe is driving that demand? Is it just the strong equity markets from Q1 and so people are are more eager to buy some of these products?
spk03: Yeah, Max, that's almost always, if not always, the primary driver. It's when there's confidence in the future based on what's happened in the recent past. Investors tend to make their move, move their assets or invest assets that are on the sideline. So that's clearly the major part of what's happening right now. Although, as the discussion we were having in the mortgage business, you've got to be in the right position on the field when the play happens. And I do think that much of the success, in addition, has been the preparation that our team has made both in the home office and in the field. to be ready when things turn. And so we've continued to focus on that business. We continue to get people licensed in that business. We continue to expand our product set where appropriate. It's not all about product set expansion, but where there's an improvement that's made in the product set. For example, on variable annuity guarantees, product providers are always ready introducing a new generation of products that has additional benefits for clients or plays off the current financial and economic conditions in a new way. And so we're seeing some fundamentals as well as the shift in momentum all come together at the same time. And we also see some pressure from the cost of living, a bit of a headwind on small investors. Those who are investing systematically as we look at the number of new accounts open and the average size of those small accounts. Those are being pressured by the cost of living, but that's being much more overwhelmed by the larger transactions, assets moving from other advisors to us and other products to us, banks and interest-bearing accounts, those types of things to us. That is so significant. You really, in the total numbers, can't see the pressure on the small investor, but there is pressure on those small, multi-systematic investors that they're struggling a little bit, and we're doing our best to help them where we can.
spk02: Yeah, thanks for that. And you kind of hit on this when answering Wilma's question, but what is the impact of the convention on the licensing? Do you typically see the convention spur more recruits to complete their licenses?
spk03: Well, the easiest impact to identify is the attraction, the excitement of both our recruiters who go out after the convention with a new understanding of the opportunity of our business, a better vision of the future of where we're going as a company and the kind of business they can build, and that generally impacts top-line recruiting the most. We get a very similar pull-through rate to licensing out of those recruits, When you have more recruits in the same pull-through rate, you get more licenses out of the effort. We will start to see the benefits on the licensing side probably August, September, October, and after that because it takes some time for a recruit to matriculate through the training process. There's classroom training. There's self-study. There's the exam to take, sometimes multiple exams in some jurisdictions. So the first thing you see is top-line recruiting increase. We're expecting a similar pull-through rate, even with the much higher recruiting, and we'll start to see that probably in the coming months and then on through the first of next year. So that's how you would expect that to kind of flow through the pipeline and impact licensing and ultimately the size of the sales force. But we're very excited about the opportunity. We do think that we have significantly increased the front end of that process, and we'll see the results over the coming months.
spk02: Got it. That's very helpful. Thank you. Certainly.
spk05: Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next questions come from the line of Ian Riave with Jefferies. Please proceed with your questions.
spk04: Good morning, Ian. Good morning. Thanks for taking my questions. Just first on the household budget index, you recently published that. It still remains over 100%. And how do you think about that as it tracks with your expectations for new policies issued, but as well as lapses on policies? You cited the increased cost of living for some of the higher lapses this quarter, but we'd just like your thoughts on that.
spk03: Certainly. Well, we're very proud of the Household Budget Index and the information it gives us to better serve clients. And you're exactly right, Ian. It has ticked over 100%. It's been hovering around 100% the last several months. And, of course, it's a measurement of the buying power of middle-income families. It's how we perceive it. And so it's good news that it's back to kind of an even keel. The challenge is that doesn't necessarily address the compounding issues of the past. I mean, the budget index was underwater if you looked at it retrospectively for months and months, several years. And so families dug a hole that they either filled by changing their buying habits or more likely by withdrawing savings or using credit. And so there is a challenge that's built up over time that still exists. And so families are now dealing with the compounding effect of the cost of living over inflation, even when inflation slows down. The cost of living is not getting better, it's getting worse more slowly. So prices are still going up. It's just the rate of increase is slow. That's better than the other way, but it's still not providing a lot of relief. So what we believe we're seeing is the buildup over time. Thank goodness it appears that there's not continuing buildup adding to the challenges, but families are struggling with the challenges that they've faced over the last several years. And at some point, they get to the end of their credit line, or they just can't live. They don't have any more savings to withdraw, or it's doing too much damage to their savings for the future. And then they start to really reprioritize their spending habits. And that's where we believe we've arrived in the last few months or few quarters, is that the pressure is just compounding. And now it's really starting to impact their spending habits when it comes to buying or keeping life insurance, or as I stated earlier, even making systematic investments. And so, you know, that's kind of how we read that. We feel good that it's at least back to 100. If it's straight line from where our process began, it should be over 110. You know, if you look at it historically and kind of project it into the future where it should have been from pre-pandemic days. So not getting worse, but not getting particularly better, not yet filling in the hole that's accumulated, still a lot of stress on families. but I'd certainly rather see it at or above 100 than where it's been in the past. So there is a little bit of a silver lining there.
spk00: So good morning, Ian. This is Tracy. I'll take the persistency question. So there are a few points I'll help clarify that would possibly answer your question on last. The first point is that we really don't have a real increase from first quarter to second quarter last. Second quarter, there's one event that I wanted to point out that caused some timing-related fluctuations. There has been, before April, there had been a restriction from Florida that's related to a hurricane that happened August of last year. This is the last restriction order from Florida Office of Insurance Regulation related to the August of 2023, Hurricane Idalia. And this particular restriction was extended multiple times until it expired in April. So that restriction required that we were to keep all the policies in force beyond grace period. So that cost some of the timing-related fluctuations on lapse. But when removing that one-time event, the lapse between first and second quarter was leveled. And so second quarter is really no real increase, and we're actually seeing it leveling. And then adding to Glenn's point, the cost of living pressure on our clients remained a contributor to the elevated lapse. However, You know, the lapse from the first duration remained well in line with our expectation prior to pandemic. And the other thing to point out is that it takes time to normalize, just like what we saw after the 2008 financial crisis. But when we look at accumulative persistency, it is at normal range and even slightly better than prior to pandemic. And as a reminder, third quarter we have our annual assumption review, and we will see when we go through the review process if there's anything to share. Nevertheless, I will say that our ADP guidance already considered the elevated lapses. So the 5% to 6% range was pretty much well consistent with what we saw in second quarter. Hopefully, that answers your question.
spk04: Yes, it does. Thank you so much. And just for a follow-up, I had a quick question on compliance protocols. Last earnings call, you mentioned that you had in-annual office visits or audits. How are you making sure you have the policies and procedures and technology in place to make sure it's up to standards and Is this something you feel you should do more regular than just annual in-office visits? Thank you.
spk03: Sure. Great question. And the annual office visit is a piece of an overall compliance plan that is extraordinarily thorough. We have a huge commitment to compliance and doing things right at Primerica and back that up with the people and the technology as well as the process. It's a multi-layered plan. It starts with a significant surveillance process real-time of our business. There are certain things that you can see, spikes in business or maybe increase in lapses or changes of address. There are all kinds of warning signs that the industry has identified over the years that indicate that it's something you should take a look at. Most of the time, you don't find there's anything wrong. There's a reason why it's happening, but it's a bit of an early warning system. The first thing And on the enforcement side is surveillance. And then we follow that up with regular communications about compliance. All rules are changing, so we've got an extensive communication process. And then the last thing is the safety net of let's go see it in person. Now, more and more industry-wide, not just at Primerica, that's a combination of live in-office visits where you can kind of kick the tires and see things, as they happen, as well as remote technology used to communicate and talk to people that are in offices, and so it's a combination of all of that. So we've got a very robust process in place that's multi-layered, and I think that the annual visit you described is appropriate in the context of that greater plan. But before it gets to the enforcement process, the best thing is to avoid challenges rather than identify them and correct them. From the very beginning, we have a very simple product set. It's very difficult to mis-sell term insurance. It's pretty difficult to mis-sell a mutual fund. As we get more sophisticated in our products to variable units and managed accounts, we have increasing licensing and training requirements as well as increasing supervision capabilities that are appropriate for the complexity of the product. then you've got to train and sensitize all of your people, both home office employees as well as the field force and as well as the supervisors in the field. Remember, we've got over 6,000 regional vice presidents, and part of their job, in addition to leading the sales force, is supervising their sales force. And so we work directly with them, and they're a part of the layered approach. So it's a very robust process. One of the things I'm proudest of in a business model that has, as you know, an extraordinarily large sales force, composed of a lot of new people that don't have a lot of experience, is we've got the appropriate systems in place. And that's one of the reasons that we have so few encounters that are negative around client complaints or regulatory issues for the size of our company is because of that robust process.
spk04: Appreciate it. Thank you so much.
spk03: Certainly. Thank you for your question.
spk05: Thank you. We have reached the end of our question and answer session. And with that, that does conclude today's conference call. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
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