Greetings. Welcome to Primerica's Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions]. I want to hand the conference over to Nicole Russell, Senior Vice President of Investor Relations. Nicole, you may now begin.

Thank you, Rob, and good morning, everyone. Welcome to Primerica's Fourth Quarter Earnings Call. A copy of our earnings press release along with 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, Alison Rand. Glenn and Alison will deliver prepared remarks, and then we will 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 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 during this call, 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.

Thank you, Nicole, and thanks, everyone, for joining us today. At Primerica, 2022 was a year of progress as we adjusted to a post-COVID environment and advanced our position as one of the largest providers of financial education and guidance to middle-income families in the U.S. and Canada. Among our proudest achievements in 2022 was issuing over $100 billion of term life insurance protection for the third consecutive year, bringing our total face amount in force to $917 billion at year-end. In our ISP business, our investment licensed reps play an important role in helping their clients stay focused on long-term goals. Despite significant market volatility and economic uncertainty, our clients continue to invest, contributing $10 billion in new sales during 2022, and making this our second largest sales year, exceeding prepandemic levels by more than 30%. At year-end, our life license sales force exceeded 135,000 representatives, providing a solid foundation, from which we can continue to meet the needs of our clients. Our success reflects the value that middle-income families place on protecting their income, saving for the future and the benefit of doing so in a face-to-face setting with a Primerica representative. Turning our focus to fourth quarter results. Adjusted operating revenues of $685 million declined 5% year-over-year due to the negative impact of market volatility on client asset values and lower revenue-generating investment product sales. Pressure from our ISP segment was offset by strong Term Life segment results, driven by low benefits and claims ratio, while the Senior Health business contributed $4 million to pretax income. Diluted adjusted operating income per share grew 19% year-over-year to $3.49, and ROAE was very strong at 27.1%. Alison will provide more details on fourth quarter financial results later in the call. Our distribution building capabilities remain strong. More than 77,000…

Thank you, Glenn, and good morning, everyone. My prepared remarks today will cover fourth quarter segment operating results, the implications of the adoption of long-duration targeted improvement or LDTI, and our 2023 outlook for key financial measures. Starting with the Term Life segment. Operating revenues of $430 million during the quarter grew 5% year-over-year, primarily driven by 6% growth in adjusted direct premiums, while pretax income grew 23%. Benefits and claims were a significant driver of Term Life pretax income growth, outpacing revenue fourth quarter due to weaker seasonal persistency was 56.6% versus 63% in the prior year period. A few discrete items impacted each period. The most significant was $3 million of favorable claims experienced this quarter compared to $19 million of excess claims in the prior year period, largely related to COVID. We attribute lower claims activity this quarter to normal volatility. And while it's possible that we are seeing some benefit of COVID mortality pull forward, there was nothing conclusive and we cannot say whether this will continue in 2023. The quarter also included a $4 million reduction to reserves, reflecting the positive impact of rising interest rates when we locked in new business assumptions during the current quarter for policies issued in 2022. Finally, we recognized a $2 million favorable impact from the administrative reprocessing of certain reinsurance transactions. Turning next to GAAP. The fourth quarter 2022 DAC amortization ratio of 1.6% reflected weaker seasonal persistency, while the prior year period ratio of 13.1% benefited from the tailwind of lower lapse rates during the pandemic. By the end of 2022, persistency had largely normalized in the aggregate, although we were still seeing higher lapses on policies issued at the hit of the pandemic, offset by favorable persistency on policies issued prior to 2020. Overall, on a…

[Operator Instructions]. And our first question comes from the line of Andrew Kligerman with Credit Suisse.

On the Term Life segment, I'm trying to get a little better understanding of what this new product constitutes as it sounds like the previous product at a rider and then only 15% of the people used it and now you don't have the rider. Just want to make sure I understand the difference. Is the new product cheaper, and why or why not do you think it will boost sales going forward?

Yes. If I can take that in 2 parts, Andrew. The change of the rider is a relatively minor issue. As I explained, historically, we had put 2 adults on a policy using a spouse rider or where appropriate. And over time, due to clients' desire to control their policies as individual lives and other reasons, marriages that don't make it over time, those kinds of things, people are using that less and less, and just I think some of the change in the way households are created today versus decades ago. And so we felt like the flexibility of going to separate policies for separate lives gave maximum flexibility to the client. It also enabled us, as we were adding underwriting classes to be more specific and targeted in our pricing. So it had benefits for the client, it benefits for the sales force and benefits for the company. But none of those were revolutionary and would create a real change in product sales other than the way we count the policies is more favorable by doing it as individual life. So that's what I was trying to describe. Overall, as we've normally done historically, we identify as we go things about our product set, we'd like to change at the next opportunity improvements we'd like to make. And we had a whole series of those that have built up over several years that we decided to all attack at one time. One was an effort to simplify everything about the life insurance process and product, both the process for the client and agent in the field to use advancing technology and capabilities to make the application and issue process simpler and faster, more technologically advanced. We did all of that. Then on the product construct itself -- well,…

That's very helpful, Glenn. And then if I can think about a little bit, the the sales growth outlook. And I think what I heard in the prepared remarks was that you're likely to see about a 1% increase in term sales in the first quarter. And then there would be a pickup in the second half. I want to make sure that -- because you were talking about using a different metric, so I want to make sure that I understood that right. And then also in the commentary, you talked about cost of living pressures on sales. So the first part of it is, do I understand that right, 1% in the first quarter and then in the back half, you might see a pickup? And would that be despite cost of living pressures?

Yes. That's exactly right. That takes into account both the adjusted relationship of the way policies were accounted in the past versus today. That gives us a tailwind. The new accounting method gives us a tailwind and policy count, and we wanted to be very clear that we're not including that in our optimism of growth for the future. So the 1% first quarter, mid-single digits for the year includes both readjusting historically for the policy count change and also taking into account the headwinds from inflation, all that and included in those 2 numbers of 1% in the first quarter and mid-single digits for the full year.

Got it. Very helpful. And then if I could just quickly sneak in 1 on your Senior Health business. So you cut the sales force in half. Could you give us a sense of how big the sales force is? And do you feel like all of the adjusting that was needed is done, and that you can -- and it sounds like you're moving forward very positively and your competitors have seen a lot of improvement, too. So do you feel like you're in a stable place, and how big is the sales force?

Yes, Andrew. As we described, it was a very deliberate action that we took -- took place in reducing our sales force by not hiring up, letting attrition take care of some of that and also eliminating some positions for some of our less effective, effective defined as productive but also profitable representatives. So it was exactly the type of pruning mechanism that you might describe. I believe our sales force count right now is in the mid-300 range, about 300 after those changes. And of course, that's our employed sales force, e-TeleQuote not to be confused with our primary independent contractor representatives. But it's about 300 right now after that activity is taking place.

The next question is from the line of Dan Bergman with Jefferies.

My first question was just on capital return and free cash flow generation. I think combined with the recent dividend increase, the $375 million buyback authorization applies nearly $475 million or so of capital return in 2023. So I wanted to get a sense, is that level sustainable post this year? Or is a portion of it funded by drawdown of the RBC and holdco cash from the current elevated level? Just any thoughts on that and/or the expected level of run rate capital generation, particularly if or when Term Life sales and Senior Health sales revert back to growth would be helpful?

Sure. I'll take that one, Dan. And yes, we believe it is sustainable. The beauty of our Term Life business, I talked about the predictability. We now have even more predictability on a GAAP basis, but we've always had pretty strong predictability on a cash flow basis because the business is so mature, so homogenous, so well reinsured that it's protected against a lot of anomalies. So we do believe that is very sustainable. The current RBC I mentioned, you specifically asked, but we actually are a little overstated on our RBC ratio versus what we would say our target is. But that has to do with the specific rules that are out there with regard to the maximum you can take out in any given year. We were capped out this year based on 2021 statutory earnings, which were actually a little bit lower than normal for 2 reasons. One was because of COVID, the high claims, and quite frankly, the high sales, which cost us a lot of statutory earnings because you don't get to deal with the deferrability of DAC. And then also, we had some nuances with some of our financing transactions, our reinsurance financing transactions where they were in their life cycle. But we do see that the cash flow generation out of Primerica Life was very robust in 2022, will continue to be very robust in 2023, and we do not foresee any major headwinds coming out of that operating cash flow.

Got it. That's really helpful. And then maybe just shifting gears. If I got the numbers right from the prepared remarks, it sounds like you're guiding to about 3% growth in the life license sales force in 2023. So if that's right, just any color you can give on kind of the main drivers or assumptions in the outlook? And it sounds like maybe it's moderating a little bit year-over-year, but Also, just curious what -- does that assume as far as the macroeconomic backdrop, and if there is a potential recession later this year or in 2024, would that have any impact one way or the other on your outlook for the sales force growth?

Sure, Dan. I do think we benefited in 2022 from a little catch-up from several years of being flat or flattish or at least distracted by all of the challenges at the state and provincial licensing levels of COVID. So that probably gave us a tailwind last year, and we're projecting more of a normalized year for 2023, which gives us kind of that 3% number. And once again, that's all in. We've had stronger momentum than that in 2022. And so that's taking into consideration that may have been -- we may have had that tailwind that may not exist, so a little conservatism from that point, taking into consideration the economic disruptions as we've talked about many times. People that are -- have lost jobs are probably not the prime target for a Primerica opportunity because they need to be reemployed quickly and have an income for their families, but those that are concerned about losing their jobs are probably the perfect potential recruit for Primerica. Unfortunately, I think there's going to be a lot of both probably this year, but we do think that the recruiting top line numbers are going to remain strong during the year. And then it's just going to be that day-to-day battle at every state and province level of pulling recruits through the licenses, which we've made progress on, but we're very realistic that, that's a -- every day, you have to work with every state and every province on their process and our reps and recruits to pull people through. So we don't want to be overly optimistic about that either. So it kind of takes all of that realism into account in coming up with that number. We are anticipating -- we certainly don't have a crystal ball, but we are anticipating continued cost of living pressures this year, continued disruption in the employment market, which, as I said, has both positives and negatives for our business. But we're trying to take -- put all that in the recipe when we give those numbers, and that's what's behind our thinking.

Our next question is from the line of Ryan Krueger with KBW.

Thanks for all the detail on LDTI. Maybe just to put it all together, I want to see if you agree with this. It seems like maybe LDTI is resulting in about an $80 million pretax earnings uplift. Is that in the right ballpark?

So we haven't reported 2022 yet. So I don't want to say my controller and my auditors would be very reluctant for me to give a number. We will give that number, like I said, prior to fourth quarter -- I mean, the first quarter [indiscernible] coming out. Let me just -- I mean, I know what you're getting at. I do want to just caution. From here on forward, all of our comparisons will only be on an LDTI basis. So this $80 million you're talking about, or whatever the number turns out to be, sort of miraculously comes from where we are today to where you're going to -- our new starting point will be. But I would just caution everybody. Well, I think it's positive that LDTI isn't going to hurt our financial results, I'd really focus on the fact that what it does for us moving forward is it makes our results even more predictable and stable than they've been in the past because the swings associated with persistency around DAC really get minimized. And any kind of period-related variability in claims largely gets spread to multiple periods. So that would be my focus for you. Earnings will be higher under LDTI, but the restated '22 earnings will also be higher under LDTI.

Okay. Understood. Separately, on persistency. I guess using the Term Life base amount, roll forward, it looked like maybe persistency deteriorated some, but I know that's not a perfect measure. So I was just hoping you could provide some additional detail on what you saw in persistency at this point?

Sure. And I don't know if you're comparing to last year or the previous quarter. What I would say to -- any previous quarter is the fourth quarter has typically been a week or a high last period or a week persistency season for us. So we have typically seen higher DAC ratios in the fourth quarter vis-a-vis other quarters. And then if you're talking about specifically year-over-year, last year, as I described in my prepared remarks, we still were getting a fair amount of tailwind from the benefit from the pandemic, which are largely muted at this point.

If I could sneak 1 last 1 in. Have you -- now that, I guess, we've emerged from the pandemic and are in more of an endemic phase, have you seen any changes from reinsurers in terms of pricing or if things remain pretty stable?

Yes. Things have actually remained stable. I know that's been a big area of question. We -- as Glenn described, we did -- we launched a product. We launched it just this last October. As part of that, we had to go to all of our reinsurers and get updated pricing. They have -- obviously, they needed to see what the product is and the underwriting design is going to be to give us pricing. And we landed, and I'd say, a very good state with all of our reinsurers. We were able to keep all of our key players in our pool. We did see -- what we did see was it, put aside COVID, there had been some deterioration in mortality improvements just in the normal course over the last several years. So there was some of that. But in some places, we actually saw improvements in rates, like on our blood tested business where we're getting more and more information through our testing process. So net-net, we didn't see COVID per se as having any impact on those rates. And we think that the rates we got appropriately reflect what we believe the underlying risk exposure is on our portfolio and on our new business.

[Operator Instructions]. The next question is from the line of Max [indiscernible] with Truth Securities.

I'm calling on behalf of Mark Hughes. I know you mentioned you don't have a crystal ball, but when you're looking at the interest rate for the rest of the year, are dollar assuming that the interest rate is going to stay elevated throughout the whole year? And if so, is that going to have another favorable impact when you look at the new year's business that you've locked in?

Okay. So I thought you were asking about net investment income. So just to be clear, that whole locking-in dynamic that I described under the benefit ratio for FAD60 pretty much goes away under LDTI because we'll be using current rates. I guess, theoretically, we will lock them in, but all of our assumptions that we've made for our new business in 2023 assumes a rate environment that's consistent with where it is now. So all of our forecast, all the information I provided, I would say, already has a stable rate environment embedded in it. What it doesn't have is a massively changing, either up or down, rate environment. So I'd say when you talk about NII specifically, again, we are assuming a pretty stable rate environment. Realistically, short-term rates have been extremely favorable. Don't know if that's going to last per se. But right now, we've been able to take advantage of attracting really nice yield without having to go up long on the curve. As those shifts -- as the yield curve shift, we may have to go a little further out, but again, nothing beyond our normal range. So I think we -- I think all the projections I've given you have taken into account our expectations, which is largely an overall stable yield environment.

Okay. That's very helpful. And for the average premium per policy, we saw that was down a little bit in the fourth quarter. Is that due to the new product updates or customers buying less coverage maybe due to some financial pressures?

I wouldn't attribute it to much of anything. We've had -- I mean, we had lower Canadian exchange rates that would -- so would impact our Canadian business. There's been a little bit of transitioning going on. We do -- so when all is said and done, I wouldn't read much into it specifically for the fourth quarter. That is a statistic, specifically the annualized issued premium rather than the premium per policy is going to be something that we'll be focusing on next year, especially given the change we have in our -- the way policies are getting counted. But there's nothing specific about what happened in the fourth quarter that we would say is an emerging trend.

We've reached the end of our question-and-answer session. That will also conclude today's conference. You may now disconnect your lines at this time, and we thank you for your participation, and have a wonderful day.