Earnings Call Transcript - PRI Q4 2024

Operator, Operator

Greetings, and welcome to the Primerica Fourth Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Nicole Russell, SVP, Investor Relations. Thank you. You may begin.

Nicole Russell, SVP, Investor Relations

Thank you, operator. And good morning, everyone. Welcome to Primerica's fourth quarter earnings call. A copy of our press release issued last night 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, 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. These statements will reflect new information and are subject to various risks that could cause actual results to differ from those expressed or implied. We also reference certain non-GAAP measures, which we believe provide additional insight into the company's financial results. Reconciliation of non-GAAP measures to their respective GAAP numbers are included at the end of our earnings release and are available on our investor relations website. I would now like to turn the call over to Glenn.

Glenn Williams, CEO

Thank you, Nicole, and thanks everyone for joining us this morning. Our fourth quarter and full year results highlight an outstanding year for Primerica, with record-breaking results across the board. These range from the expansion of our distribution network to achieving unprecedented investment sales and delivering solid financial performance. These milestones highlight the strength of our business and our ability to create value for all stakeholders. Starting with a quick recap of our financial results, the prior year period. Fourth quarter adjusted net operating income increased 11% compared to the prior year, while diluted adjusted operating income per share increased 17%. On a full-year basis, adjusted net operating income increased 14% and adjusted operating income per share increased 20%. These results reflect very strong sales volume and higher client asset values in our investment and savings product segment. We appreciate the continued support and look forward to sharing more updates as we progress through the year. With that, I'll hand it over to Tracy.

Tracy Tan, CFO

Thank you, Glenn. Good morning, everyone. In my prepared remarks today, I will review our full quarter financial results and then provide an outlook for key financial measures for 2025. We ended the year with great momentum, reaching the $3 billion revenue mark for the first time and delivering strong performance for our stockholders. Starting with the term life segment, regarding our financial ratios, fourth quarter revenue of $451 million increased 4%. The benefits and claims ratio during the fourth quarter of 2024 was 58.6% compared to 58.2% in the prior year. Benefits and claims were adversely affected by a $4.2 million remeasurement loss recognized during the period, which resulted from a refinement to our actuarial model for estimating reserves, which was not related to any assumption changes. Excluding the model adjustment, the benefits and claims ratio was 57.9%, favorable to the prior year period, primarily due to better mortality experience and in line with our full-year guidance of around 58%. The DAC amortization and insurance commissions ratio at 12.2% was largely consistent with the prior year period. Overall, the lapse rate remained elevated but year-over-year trends appear to be stabilizing. We believe persistency will normalize over time. While we recognize that higher lapses can constrain future ADP growth, they have not meaningfully affected our key financial ratios. The fourth quarter insurance expense ratio increased from 7.1% in the prior year period to 8% in 2024. This year-over-year change was driven primarily by increased variable expenses associated with growth in direct premiums, recruiting and licensing, higher performance-based employee incentive compensation, as well as higher ongoing technology investments in digital tools. Finally, the Term Life operating margin was 21.3% compared to 22.6% in the prior year period. While pre-tax income remains unchanged year over year, as we look ahead, we expect ACP growth of around 5% in 2025. We believe the benefits and claims ratio and the DAC amortization and insurance commissions ratio will remain stable at around 58% and 12% respectively. For the full year, we expect the operating margin to be around 22%, although we foresee some level of variability due to the normal seasonality inherent in insurance expenses. As a reminder, our first quarter expenses are usually higher due to the annual grant of management equity awards to retirement-eligible employees that are fully expensed when granted, along with other annual employee-related and operational expenses unique to the first quarter. Turning next to the investment and savings product segment, fourth quarter revenues of $286 million increased 29% due to a combination of favorable equity market conditions driving client asset values higher and strong demand for our investment solutions. Pretax income of $82 million increased 31%. Sales-based revenues increased 42% while revenue-generating sales rose 39%. Revenues grew at a higher rate than sales due to continued strong demand for variable annuities, while sales commissions generally rose in line with correlated sales. Asset-based revenue increased 27%, slightly outpacing the growth in average client asset values due to continued growth in the US managed accounts and Canadian mutual funds sold under the proprietary distributor model for which we earn higher asset-based fees. The corporate and other distributed product segment incurred a pre-tax adjusted operating loss of $1 million during the fourth quarter of 2024 compared to a pre-tax adjusted operating loss of $5.4 million in the prior year period. The improvement was due in part to a $3.3 million adjustment to the ceded reserve for a closed block of non-term life insurance business in the prior year period, and $2.6 million of higher net investment income as the settlement continues to benefit from higher yielding investments and the growth in the size of the portfolio. The segment also incurred higher operating expenses which I will address shortly when I review total consolidated operating expenses. Our invested asset portfolio ended the year with a net unrealized loss of $206 million versus the net unrealized loss of $131 million at the end of September. We believe the change in unrealized losses during the quarter was a function of interest rate movement and not underlying credit concerns, and we have no present intention to dispose of them. The portfolio is well diversified and of high quality with an average rating of A. Finally, fourth quarter consolidated insurance and other operating expenses were $152 million, up 13% year over year. The primary drivers of expense growth were higher variable costs associated with growth in our ISP and term life segment, as well as higher employee-related incentive compensation due to the company's strong overall performance in 2024, along with increased investments in technology. Looking ahead to 2025, we expect full-year consolidated insurance and other operating expenses to increase by around $40 million or 6% to 8%. This includes $12 million to support business growth, $12 million in higher employee staffing costs, and $16 million higher technology costs. As I mentioned earlier, we expect operating expenses on a dollar basis to be elevated in the first quarter, with year-over-year growth rates in line with our full-year guidance. We also expect fourth quarter 2025 expenses to normalize compared to the prior year, due to strong performance driven by higher expenses in 2024. Moving to our capital position, the holding company had cash and invested assets of $497 million at the end of December 2024. As of December 31, 2024, Primerica Life's estimated RBC ratio was 430%. With that, operator, I open the line for questions.

Operator, Operator

Thank you. We will now be conducting a question and answer session. Please press star two to remove yourself from the queue. Lift your handset before pressing the star key. One moment please while we poll for your question. Our first question comes from the line of Wilma Burdis with Raymond James. Please proceed with your questions.

Wilma Burdis, Analyst

Good morning, Wilma.

Tracy Tan, CFO

Hey, good morning. Could you talk about whether 5% ADP growth is a good run rate or if there's still a boost in that figure from the IPO reinsurance transaction? Thanks.

Glenn Williams, CEO

Good morning, Wilma. The ADP growth guidance of 5% has considered the runoff of co-insurance. Clearly, the ADP growth is directly impacted by the large in-force block that we have and the premiums that it continues to generate, as well as the new sales that get layered on. We have also considered the higher lapses in this guidance. So the 5% does consider the co-insurance runoff, which is running off at a faster pace. That's being considered as well. Thank you, Wilma.

Wilma Burdis, Analyst

Okay, great. And could you talk about what's driving this strong ISP sales despite some pressure on the life side due to cost of living pressures? And along those same lines, how do you see lapses trending for 2025? Is there evidence that we've reached a peak? Thanks.

Glenn Williams, CEO

Sure. Let me take the first part of that, and then we'll turn to Tracy for the lapses, Wilma. Fortunately, our two businesses are complementary, but they also have different dynamics that drive them in different directions at different times. That's part of the uniqueness of our model. While we are seeing cost of living pressures that are a headwind for our life business and even the smaller transaction business on the ISP side, the systematic savers—those saving $25, $50, or $100 a month—are under similar budgeting pressures at home as our life clients. They are the same people, so they are experiencing the same pressures. What we see gets a little bit or a lot exempt from that are those that are rolling over retirement plans, particularly moving retirement plans either out of a 401k from a former employer or a previous plan sponsor over to Primerica. Those aren't generally impacted by cost of living. They are retirement plans, so people are not prone to withdraw from them as often either, so that money is a little stickier. The larger transactions aren’t impacted by cost of living pressure, and that's really what drives the volume significantly or the large sales. It takes a lot of small sales to add up to one large sale. So those large sales, that money is still in motion. We’re experiencing that, and I think most of our peers are seeing a lot of movement between big accounts. As such, we're benefiting and not experiencing headwinds from cost of living on that front. Tracy, do you want to discuss a bit about how we see persistency?

Tracy Tan, CFO

That's right, I will. On the persistency and the lapse experience for 2024, overall, we continue to see elevated lapses, but we have seen the trend stabilizing. In the fourth quarter, clearly, there was a leveling of lapses, so we're not seeing that increasing on a year-over-year basis. One thing I definitely want to point out is that 2024 had an adverse impact from the prior year lapse restriction. So overall, in 2024, if you remove that lapse restriction, the 2024 trending is coming down in terms of the elevated levels. Higher lapses have affected multiple durations, but mostly pronounced in earlier durations, for example, two to five years. The persistency for those—when we look at a cumulative basis—is actually improving and slightly better on a cumulative basis than the pre-pandemic period. During the pandemic, we had extraordinarily low lapses—those who would have lapsed stayed on with those policies. After the pandemic, we are experiencing elevated lapses because of the catch-up. However, overall, when we look from 2020 forward, the cumulative impact is now better than the pandemic period. We also believe that the higher lapses are mostly driven by the cost of living pressure on middle-income families, which takes a few years for them to recover; it depends on the speed and degree with which their purchasing power and ability to afford things improves. But over time, we do believe we will return to our normal levels, and our ADP guidance has already considered those elevated lapses as well. So I hope that helps, Wilma.

Glenn Williams, CEO

Wilma, did that answer your questions, or is there more we can share?

Wilma Burdis, Analyst

No, I think that covered it. Thank you, guys.

Operator, Operator

Thank you. Our next question comes from the line of John Barnidge with Piper Sandler. Good morning, John.

John Barnidge, Analyst

Good morning. Thank you for the opportunity.

Glenn Williams, CEO

Certainly.

John Barnidge, Analyst

Just kind of building on that comment about cost of living pressures taking a couple years to correct. What's the expected duration of that catch-up? Can that really be corrected without improvement in the cost of living?

Glenn Williams, CEO

I think we are going to need to see more improvement in the cost of living. There is a buildup of high expenses people are bridging in their budgets—withdrawling savings and using credit cards while it continues. Thus, we would need improvement for a sustained period before we start to see it flow through and witness some easing of people's buying habits, especially when it comes to purchasing life insurance or small investments. I believe that it depends on how much longer the cost of living pressures might persist. We saw a bit of a surprise this morning, and I think the market reacted to that; they are still here. However, I would say once we get on the other side and things normalize, you can measure that over the next year or more, and you will still see some of that impact. It will improve over time, and we’re monitoring the numbers Tracy just described. We see it in persistency, obviously, as well as sales. But this is entirely just consumer behavior.

John Barnidge, Analyst

Thank you for that. My follow-up question is regarding the opportunity in that backdrop to increase operational leverage through improved speed and automation. For example, what took ten minutes could take three, allowing application volume to increase and the average agent to be more productive.

Glenn Williams, CEO

Sure. That's a great question and one that is always at the forefront of our minds. Tracy mentioned some of the expense numbers, and the largest number she cited was for technology—higher technology costs. These are some of the things we’re looking to react to regulatory demands, requirements, and other costs of doing business. We are always seeking ways to streamline our processes for both clients and representatives, under the assumption that we gain two benefits. Number one, clients are more likely to complete the process themselves. Someone who is motivated and in the purchasing process is more likely to follow through if the process is easy, short, and convenient. Thus, it's more efficient, and that frees up more time for our representatives to see more clients, should their productivity limits be determined by the number of people they can engage. Unfortunately, it doesn’t solve that problem entirely, as sometimes, the issue is not having enough people to see. However, absolutely, this is a big part, and as we introduced our new product and process for NextGen a couple of years ago, we saw significant improvements. Now, of course, we’re revisiting what we can accomplish in the field, along with policy processing and issuing, to do it faster and more efficiently here in the home office. All of these initiatives are on our technology agenda as we move through 2025.

John Barnidge, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Mark Hughes with Truist Securities. Please proceed with your questions. Good morning, Mark.

Mark Hughes, Analyst

Morning, Glenn. Morning, Tracy.

Tracy Tan, CFO

Good morning.

Mark Hughes, Analyst

The good VA activity you mentioned—how large transactions drive volumes—is there a demographic tailwind that should persist?

Glenn Williams, CEO

It is driven by demographics. We're seeing older generations that have accumulated wealth move that money to find the best options for their next phase of life as they transition from accumulation to distribution. There’s definitely a demographic piece involved. It's also those not quite ready for retirement or those not yet preparing for retirement, but who are changing jobs and careers; as more job changes occur, more people move their 401k out of their previous employer. So we are benefiting from that at Primerica. We have long relationships with our clients and tend to offer a higher level of hands-on service to middle market clients than some of our peers. As demographics move in our favor in this range, we are there to service these clients in ways that others may not. Therefore, it's driven by demographic trends, more options—like variable annuities, particularly those with income guarantees as people move into income mode. They want to make sure they don't outlive their income. So we have multiple driving factors working in our favor right now. Some of the conservatism you heard stems from uncertainty—not pessimism—just uncertainty as we navigate a new administration with new policies and methods. Not sure how that will unfold, hence we approach 2025 with a path of conservatism due to those unknowns.

Mark Hughes, Analyst

Thank you for that. Tracy, anything on the mortality front? Any changes you might have observed in either the U.S. or Canada?

Tracy Tan, CFO

Yes, Mark. Our experiences on the mortality front have been stable and favorable. For all of 2024, we have observed positive trends on mortality. Both in the U.S. and Canada, mortality has been very low. There isn’t much unfavorable experience to discuss. Specifically, the U.S. has seen real improvements, particularly in the fourth quarter. We are hoping to see that trend continue, which would be beneficial. In terms of long-term projections, mortality is difficult to predict, but we believe that the pandemic may have reduced some of the population, leading to the benefits from mortality improvements we are now seeing across the industry, and especially within our demographics given the experiences during the pandemic. We are currently observing a positive trend.

Mark Hughes, Analyst

It does. And then, final question: you mentioned that the remeasurement loss is not related to assumption changes, but rather a refinement of the model. Can you elaborate on that? Was it more technical?

Tracy Tan, CFO

Yes, the refinement was indeed more a technical software improvement we've made on the actuarial side of the calculations. Since we transitioned to LDTI, we continue to look for ways to enhance our calculations' accuracy and improve how we generate results based on those methods. This really has nothing to do with experience or long-term assumptions; it's purely a technical adjustment, and it's relatively small in the grand scheme of the $7 billion in reserves we manage.

Mark Hughes, Analyst

Thank you for that clarification.

Operator, Operator

Thank you. Our next question is coming from the line of Suneet Kamath with Jefferies. Please proceed with your questions.

Suneet Kamath, Analyst

Hello, Suneet.

Glenn Williams, CEO

Hey, Glenn. Hey, Tracy. Good morning. I wanted to focus on the Life segment just for a moment. It looked like the rep count was up about 7% year over year, but policies issued were up maybe 1%. Shouldn't we see a tighter correlation between those two growth rates? Yes, generally, Suneet, there has been a very close relationship between the sales force size and our policy growth. Often, there is a lag in timing. We had significant growth in a relatively compressed timeline, so one productivity dynamic we are focusing on in 2025 is bringing this new class of licensed agents up to productivity levels. That represents an opportunity for us moving forward in 2025. The productivity math tends to work against you as you build the sales force; the denominator gets larger, especially with brand-new representatives. However, we believe there's some upside as we integrate this all together, along with the headwinds of cost of living we discussed earlier. We also face other uncertainty headwinds for middle-income families. On the positive side, the potential tailwinds can certainly contribute to that productivity catch-up, which we expect to see in 2025.

Suneet Kamath, Analyst

Got it. That makes sense. If I heard correctly, your guidance for life agent growth for 2025 is around 3%, which is lower than historical trends. Is there something unusual about 2025, or are we reaching a point where the sales force has grown so large it becomes harder to expand on top of these already sizable numbers?

Glenn Williams, CEO

I think it's a bit of reversion to the mean, Suneet. If you look back in the years prior, our sales force growth has been around 4% historically. Prior to last year’s surge, this slip back to around 3% represents a bit of conservatism and thus a return to historical average. The uncertainty we face early in the year also plays a factor into this projection. However, as the year progresses, we can further refine that projection, but starting out, it closely resembles what a typical year would look like.

Suneet Kamath, Analyst

If I could sneak one more question in regarding the variable annuity: you currently sell the RYLA product. Is that a significant part of what you're selling these days?

Glenn Williams, CEO

Yes, the index-linked variable annuity. Correct. We are indeed seeing our product mix shift more toward that category, similar to what industry trends are displaying. A significant proportion of our variable annuity sales are moving to the index-linked VA product.

Operator, Operator

Thank you. Our next question comes from the line of Dan Bergman with TD Cowen. Please proceed with your question.

Dan Bergman, Analyst

Good morning, Dan.

Glenn Williams, CEO

Hey. Good morning. I guess to start off, the higher share repurchase authorization for 2025 and the significant dividend increase suggest that capital return will step up this year. Are 2024 statutory earnings unusual, or is there something boosting that? Should we expect this to be a sustainable level going forward? Additionally, with capital return, I understand it was around 79% of earnings in 2024; can we anticipate that ratio to sustain longer term?

Tracy Tan, CFO

Good morning, Dan. This is a great question. One of the focuses at Primerica has been our ability to generate consistent, sustainable cash and capital return as a percent of earnings. Historically, we've shown resilience in generating free cash consistently, regardless of the economic environment we face. That’s what we continue to experience. In 2024, we were able to return around 79%, close to 80%. This also highlights our distribution model, whereby we can grow sustainably without tying up our capital as we scale. The increase in our share buyback and dividend is evidence of this continued trend, and we aim to deliver similar returns in 2025. The characteristics of our business model allow for such consistency, giving us confidence in the sustainability of our operating model and capital return.

Dan Bergman, Analyst

That was very helpful, thanks. Additionally, regarding the statutory earnings, were there any one-time items that bolstered those results?

Tracy Tan, CFO

There is nothing unusual regarding that line, and we are focused on maintaining a healthy capital position on the insurance side of the business. In general, we aim for an RBC ratio around 400%, which is conservative and provides significant leeway, as Glenn noted, to drive top-line growth. We are well-positioned to support capital growth as we deliver our results.

Dan Bergman, Analyst

That’s very helpful. Lastly, shifting gears a bit: following up on earlier comments about technology, it seems that higher tech spending is a primary driver of the growth in insurance and operating expenses you're guiding toward in 2025. Should we view this increased technology spending as a new ongoing trend, or are there some lumpy expenses that should even out moving forward? What inning are we in regarding upgrading our technology capabilities?

Tracy Tan, CFO

This aligns with our capital return focus and how we utilize our cash. Besides generating robust cash for shareholder returns, we have to ensure we have sufficient capital to support our insurance and non-insurance businesses, and invest in organic growth. We are confident in our abilities to drive our sales force to reach more demographics that remain underserved. Part of our organic investment in technology aligns with our strategic vision to improve productivity—both in processing transactions and in enhancing our communication with our sales team. We want to enrich client experiences and give our representatives better resources. This includes making our call center scalable to accommodate more growth, as well as handling transaction volume. To address trends, we will continue to focus on robust capital returns to our shareholders while also using remaining capital effectively to foster organic growth.

Dan Bergman, Analyst

Perfect. Thanks so much.

Operator, Operator

Thank you. Our next question comes from the line of Jack Matin with BMO Capital Markets. Please proceed with your question.

Jack Matin, Analyst

Good morning, Jack.

Glenn Williams, CEO

Hey. Good morning. I have a follow-up question on the outlook for term life issued policies. You mentioned that cost of living headwinds have pressured lapse rates. Could you quantify how much of a headwind that has posed to sales levels over the past year? Additionally, how has it influenced your guidance for the 2% growth in issued policies this year? I believe you mentioned it may have been a somewhat conservative estimate. Jack, I don't think we've broken out exactly what we believe our sales might have been without these headwinds. There are multiple factors at play, including economic pressures, which are driven not just by prices but also by wage growth and the lack of it for our clients. It’s hard to accurately say that sales would have been 2% greater without any adversities. There are so many additional factors in play. The time we spend addressing client budgets to allocate room for their expenses is crucial, as every dollar is significant when we are with a family; it’s not like they call us and say they have an extra $80 or $100 monthly to discuss life insurance options. We must partner with them to reprioritize their budgets, which is where we face the headwinds. Our analysis shows that most household budgets have little to no waste, making it tough to have prioritization discussions. Thus, it’s more qualitative in our reporting through our budgeting index and financial security monitor. It’s challenging to quantify exactly how much resistance is out there, but that’s our approach to understanding and addressing it. While we recognize headwinds, our growth persists despite them; we project continued growth, though we know some resistance exists due to those circumstances. Sorry I can’t provide something more specific regarding the impact.

Jack Matin, Analyst

That's very helpful. I also have a question about the ISP redemption rates; outflows as a percent of beginning assets have started to trend lower in recent quarters. Could you talk about what's driving that? Should we expect continued upward pressure from those cost-of-living challenges, considering client asset values are higher following strong market performance over the past couple of years?

Glenn Williams, CEO

Generally, this trend will be driven at Primerica predominantly in smaller accounts where homes are closer to the financial edge—redemptions will increase as financial circumstances tighten and cost of living pressures arise. We coach our clients to avoid taking withdrawals unless necessary, as they could be working against themselves; however, it is essential to note that three-quarters of our accounts are retirement accounts. These are for long-term purposes, and if they involve IRAs or types of registered plans in Canada, penalties apply to withdrawals. Those factors present barriers to simple withdrawing. We also recommend clients set up emergency funds, so those accounts can be used for ‘put and take.’ As a result, we believe our redemption rates are significantly lower percentage-wise than companies in our industry. It stems from our dedication to coaching clients about sticking with their long-term investments, as well as a focus on retirement planning. This keeps redemptions lower. Fortunately, while we see small increases in number as clients grapple with challenging economic pressures, larger accounts do not appear to be as significantly influenced, which mitigates broad impacts.

Jack Matin, Analyst

Thank you.

Glenn Williams, CEO

Certainly.

Operator, Operator

Thank you. There are no further questions at this time. And with that, that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Have a great day.