Greeting and welcome to Primerica's First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nicole Russell, Head of Investor Relations. Thank you, you may begin.

Thank you, Maria, and good morning, everyone. Welcome to Primerica's first 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'll open the call up for your 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 obligations 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, 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 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. We're encouraged by our first quarter performance reflecting positive results from our focus on growing distribution capabilities and improving the attractiveness of our products. Our unique ability to meet the financial needs of middle-income families is attracting more people to our entrepreneurial opportunity. These dynamics have created momentum in recruiting and licensing, resulting in sales force growth. In addition, both our clients and our sales force have reacted positively to our new series of Term Life products, leading to growth in sales. Although securities market conditions continue to create resistance to growth in our ISP sales, clients desire for financial guidance remained strong. Starting with a quick recap of our financial results. Adjusted operating revenues of $695 million remain largely unchanged year-over-year, while adjusted net operating income of $129 million grew 10%. These results reflect the continued growth in Term Life premiums, the benefit of higher interest rates on net investment income and our progress in improving the results of our Senior Health business. The quarter was also negatively impacted by persistent inflation and continued equity market volatility that pressured ISP and Term Life sales and led to a modest increase in policy lapses. On the capital deployment front, we repurchased $85 million of our common stock and paid $24 million in regular dividends during the first quarter. Given the strength of our capital and liquidity positions, we believe we will meet our targeted repurchases for the year of $375 million. Recognizing the importance of growing the sales force both the home office and field leadership teams are focused on its key components, recruiting and licensing. Starting with recruiting, momentum remained solid with approximately 93,500 individuals joined Primerica during the first quarter. This represents a 10% increase over the prior-year…

Thank you, Glenn, and good morning, everyone. A quick housekeeping item to mention before I review our first quarter financial results. Last Tuesday, we filed a Form 8-K which provided financial results for the year ended December 2021 and for each quarter of 2022 under the new accounting standard for long-duration targeting improvements or LDTI. The revised results also recognize all net investment income in the Corporate and Other segment. An adjusted version of our fourth quarter 2022 financial supplement can be found on the Financial Info tab of our Investor Relations website. Starting with the Term Life segment. Operating revenues of $421 million during the quarter increased 3% year-over-year and pre-tax operating income of $127 million increased 7% compared to the first quarter of 2022. The pre-tax operating margin during the quarter was 21.4% versus 21.2% in the prior-year period. Adjusted direct premiums grew 6% year-over-year in the first quarter in line with expectations. Assuming the mid-single digit sales growth, Glenn discussed earlier, combined with the size and stability of our in-force premium days, we expect ADP growth of around 6% to continue for the remainder of 2023. The DAC amortization ratio for the quarter was 11.8% versus 11.7% in the prior-year period. As discussed in the last earnings call, we expect the DAC ratio under LDTI to be very stable from period-to-period and around 12% each quarter. Moving to the benefits and claims ratio. The first quarter ratio was 58.7% compared to 58.9% in the prior-year period, reflecting the stability we expected from LDTI. The benefits and claims ratio came in slightly higher than the preliminary estimate of around 58% we provided during our fourth quarter earnings call. As we finalized all of our processes related to the adoption of LDTI, we found a modification that was needed…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Dan Bergman with Jefferies. Please proceed with your question.

Good morning, Dan.

Thanks. Good morning. I guess to start just with recruiting continuing to be strong this quarter. I just want to see if you could give any more color on the key drivers of the strength? Were there any incentives or discounted fee offers in place during the quarter? And just any thoughts given the macroeconomic backdrop on the outlook for recruiting over the remainder of the year?

Yes, Dan, it was a good recruiting quarter. There were no incentives used during the quarter. So it was a good fundamentally sound growth in the quarter that we're very pleased with. And what we're seeing is that we're getting better at telling our story. There's a better story to tell with our success as we go forward. And we just see the desire in a disrupted kind of employment dynamic around us of people looking for alternatives, looking for additional part-time income to offset the higher cost of living or looking for alternative career paths. And so we just believe that right now, we've got a very appealing story, which is being well received, but there was no artificial stimulus used in the first quarter. We generally -- I will modify that. We generally kick off the year in January with -- and we've done that every year, so the comparisons are equal. So we do have a discount in January to start of the year, but it was identical to what was used in the same month last year.

Got it, got it. Makes sense. Thanks. And then maybe just one on the Term Life business. It sounded like persistency was modestly unfavorable versus pre-pandemic levels this quarter. So I just wanted to see if there's any more color you can give on the drivers and how different cohorts of policies are behaving? And anything you can quantify in terms of the magnitude of the change in the lapse rate versus either pre-pandemic levels or where it had been in recent quarters? Thanks.

Yes, I'll take that one. Really, it's best to look at it in line with pre-pandemic because obviously, during COVID, we were dealing with some very unusual results that we did not anticipate would stay in place forever. But looking at it versus pre-pandemic I'd say there's been a slight deterioration. I'd say, especially in most years, it's less than 5%, so you're not talking about anything significant. The interesting thing is we are seeing it across all durations. And that, to me, indicates that it's more economy driven than anything else. The last time we really saw it across all durations putting aside COVID, was back in 2008 during the financial crisis during that period. So again, nothing to that level of extreme. Just a little bit of a downtick and something we're keeping our eyes on. And really that's probably the best I can provide right now.

Got it. Really helpful. Thank you.

Our next question comes from Wilma Burdis with Raymond James. Please proceed with your question.

Good morning, Wilma.

Hey, good morning. The Term Life policy count grew 2%, but the face amount of new business grew 14%. Could you talk a little bit about why the face amount grew some much more quickly and give us some insight into which metric is better -- gives us better insight into the adjusted direct premium growth?

Yes. Wilma, I'd be happy to do that. What we attempted to do because we've changed the basis. Normally, we've tracked the number of issued policies, but by changing the way we issue those policies to one life per policy rather than on occasion multiple lifes for policy in the past, even though we changed the historical numbers to try to adjust for that. We realized that we were getting a little noise in that comparison, and so we wanted to give more color. And so traditionally, you have a policy count in our industry is one way of tracking, premium is another way of tracking and face amount is another way of tracking. They obviously relate to each other. But as we made the change to our products, as we anticipated, more accurately pricing the product and the risk gives our clients an opportunity to be able to increase their purchase, their dollar goes further when we more correctly priced good risk and your dollar doesn't go quite as far as we more correctly priced bad risk. So it's some rates went up and some went down. But ultimately, people are getting more for their money in a lot of cases and are often buying a little more. So we felt like tracking all three of those numbers gave the outside world a better opportunity to kind of triangulate how our life business was moving. The others are estimate. The new premium use and face amount use, so we have to make some estimates in that. But it gives you a little more color around that. And I think it gives you a better flavor of our business. We did anticipate that when we changed the product, we would have this kind of movement, so it's clearly what we expected. And as I said, we're pleased with the excitement around the new product line and our sales force. I think that's part of what's giving us some sales momentum in this high-cost economy, inflationary economy, high cost of living that Alison was just describing, we're overcoming that resistance on sales and continuing to grow sales which I think a lot of that goes to the excitement around the new product set.

Yes. One thing I would add is the 2% is our best estimate, I mean, we used to sell multiple lives per policy. Now it's a single adult life per policy. So we did a calculation to estimate what we saw through that it looked like last year. But really the 2% is not necessarily indicative of the activity that's happening day-to-day in our sales force right now. So when you look at the other two metrics with it, we thought you get a fuller picture. The other important thing is that the other two metrics, both annualized issued premium and face amount include things like add-on riders or IBR riders. So it's not just the new business. It's what we're increasing the book of business for us. So just a couple of other things. We just felt like given the nuances in the definition year-over-year on issued policies, so more color was necessary.

Thank you. And then just on Senior Health, should we expect Primerica to put any capital into that in 2024? And also, if you could just talk a little bit about -- sorry? And then if you could just talk a little bit about the -- how many leads are coming from the life licensed reps to the Senior Health license reps?

So 2024, I don't think -- I think what we said thus far is we won't mean to put any capital in for 2023. In 2024, we'll use up the remainder of the net operating loss carryforwards that we have. So once that's done, there will probably be some means for capital. That being said, we will position ourselves to be putting anything significant into the business until we're comfortable with the profitability metrics of the business and are comfortable with our game plan going forward. So I think at this point with regard to 2024, we should put that on hold until we continue to work through our operating plan. But the one thing I can say is we will definitely limit whatever capital we did. We will continue to grow the business judiciously and we will only put capital into the extent that we feel like we can create a profitable book of business that will ultimately become cash generating. Obviously, just like life insurance, if we do try to grow the business, there's a lot more that goes out upfront than you get in the first year. So there would be some strain. But again, we will maintain good control of whatever those levels will be. So I think that's what we should wait until later in the year to discuss further. I'll just quickly talk about the sellers. It's just I think an important thing to note -- it doesn't have to be a life license representative on our side to be able to participate in this program, and that's one of the attractive things is that people who are going through the process of getting a life license can actually get involved in it can get certified to sell Senior Health or to refer Senior Health, excuse me. And then specifically, I think what Glenn said was we're about 10% this -- we were 10% during AEP.

Absolutely. Our leads accounted for about 10% of the sales. And again, we are seeing those leads are higher quality than what can be generated just out from the public lead sources. So we're encouraged by that growth, but we recognize that's a business that needs to have multiple sources of leads. And so we're continuing to grow on all fronts.

Thank you.

Certainly.

Our next question comes from Ryan Krueger with KBW. Please proceed with your question.

Good morning, Ryan.

Hey, good morning. I had couple of related follow-ups. First was on lapses. When lapses deviate from your expectations under LDTI, is the primary way that will come through results in -- will that come to remeasurement gains and losses or annual assumption updates because I know it doesn't come through DAC anymore?

Yeah, it's interesting that it's pretty unlikely it's going to come through anywhere that you'll notice it. You're right, where we used to see it extensively with DAC, and as I explained last quarter, we're not going to see that anymore. Even if you remember when we were talking during COVID, we used to have a very large impact from DAC with a much smaller offset in reserve. So the reason you don't see a whole lot of impact in reserves is because a lapse decreases both the expected future premiums you're going to get and the expected future benefit. So both components go down. So net-net, the liability hasn't changed all that much. It would be a pretty tough, it would be a very dramatic change for us to see something come through. Really what you're seeing in remeasurement gain loss is going to largely be claims activity.

Okay, got it. And then can you comment on your subsidiary dividend expectations from the Life subs. I guess you've had this year, but also just what you can go a reasonable annual amount would be?

Yeah, and one of the reasons the RBC has crept up a little bit over time is because the way the rules work is, it's the greater 10% of surplus or the gain from operations before realized gains and losses from the prior year. And our 2021 statutory gains from operations which is the higher of the two metrics with $257 million because in 2021 we were still having significant claim payments at -- from COVID. So our statutory earnings were a little bit lower, which constrained what we took out in 2022. In 2023 -- looking at 2023, the equivalent number for 2022 a gain from operations is $446 million. So without asking for an extraordinary dividend, we have the ability to take $446 million of Primerica Life in addition to what we would take from the Canadian operation and our non-Life operations. So in and of itself, that number has gone up significantly. We can always ask for an extraordinary dividend but we really see no need to do so at the current time. But anyway, I think looking at the $257 million versus the $446 million gives you some feeling of how much more we're going to be able to take out from subsidiaries year-over-year. The one thing to keep in mind is, on the non-Life side depending how the markets go, we could continue to see some strain on what we can take out from our ISP business.

Understood. Thanks a lot.

Our next question comes from Andrew Kligerman with Credit Suisse. Please proceed with your question.

Good morning, Andy.

Hey, good morning, nice to talk to you. Shifting over to Senior Health again. So I think Alison talked about a 5% full year net loss. Given your efforts and the terrific progress that you've made over the prior year, do you think line of profitability is in sight for 2024? And another slide on that topic is, have you considered layering in other products maybe Term Life onto the platform to help scale it?

I'll start and then Glenn can fill-in with some of the product discussion. Just to be clear, it wasn't 5%, it was a $5 million. But just as you know, obviously it's early in the year, we will continue to update that figure as the year goes by. My rationale in giving you that number is just to frame up that we're not expecting much of an ultimate financial impact out of this segment, good or bad, if you will, on a full year basis. I do think we are doing the things necessary to put the business into a profitability mode. The real thing as we go through this year will be as we continue to build out the agent force making sure that we can -- as we scale the business we can maintain the level of profitability we're comfortable with. The team there is very actively working on all sorts of things both on the lead acquisition side, the lead identification side as well as the cost side and making sure we have the best agents available paying them the best way possible and so forth, but it is not an immediate do this then that happens, there is a lot of fine tuning, we've been doing and we'll continue to do throughout this year. Glenn, I don't know if you have anything you want to add on that.

Just on the question about the other products. First priority is to make our current profits profitable and so that's where the focus has been, but the e-TeleQuote team is doing a fantastic job of looking for adjacent products and adjacent markets, lead generation from adjacent markets that might be possible and also are there other products to round out the product set that are still relatively close to the Senior Health business. There are no plans right now to load Primerica products into that sales center that would create a tremendous amount of channel conflict potentially, but also it's a very different client base, those -- our team down there are experts at dealing with seniors and their needs and we feel like right now branching them out into other markets that aren't adjacent would work against us rather than for us. So there is no plans for that on the horizon.

Got it, Glenn. That's very helpful. And then just sort of thinking about Term Life sales, you came in with policies of 2% growth and then per wellness question, you were talking about face amounts up 14%, it feels like the face amount is the better metrics, so maybe a little more color on that? And then more importantly with the license sales force up about 5% and again you had -- is that kind of a good indicator of where we could start to see sales coming in maybe next year, is that kind of give it a year and we'll start to see that mid-single digit kicking in on a steady basis, maybe even better if productivity picks up?

There's a lot in that question. We don't think that -- that's all right. We do think that, as Alison said, using the additional premium and face amount metrics in addition to policy count gives you a little better feeling for how the business is evolving. And I will say that I do believe we are overcoming the headwinds of the higher cost of living with our sales numbers right now. So to your -- the second part of your question, it's going to be tricky to project how this looks throughout the year or beyond the year without getting some clarity on how we feel like cost of living and the budget pressure on middle-income families, which is extreme right now, how that might change. If it gets worse, it won't be good for sure, if it gets better, then we could see some easing of that pressure and families might have a little more leeway to make some different financial decisions. So, looking into next year, it's very cloudy right now. But we do believe, and Alison pointed out, the face amount and premium numbers include additions that don't come into a brand-new app through our increasing benefit rider, which is automatic or manual policy additions the client just asked for. So it gives a more holistic view of our entire life insurance business than just a new issued policy count. So that's why we believe that adding those -- not moving completely away from policy count, but adding those give you a fuller picture.

Very helpful. And it seems like you're doing the right stuff with the sales force. So thank you for that.

Certainly. Thank you.

Our next question comes from Mark Hughes with Truist. Please proceed with your question.

Good morning, Mark.

Yeah, thank you. Good morning. I missed some of the earlier call, so I apologize if this has been gone over, but the YRT ceded premium ratio was a little bit higher in the first quarter compared to Q1 of last year, I think compared to last full year it wasn't that dramatically different. Is this kind of 31% -- is that what we should expect? Was there any increase in costs, anything like that?

Actually, I'm going to tell you, Mark, you win the price, because that is the technicality of the business that I didn't know if anybody was going to pick-up on. But really what it is, we didn't put it in the script, because if you're getting back to it, here is a pretty technical answer, but YRT ceded premiums are paid annually on the policy anniversary which is very different than how we collect our direct premiums obviously. And also that if you look at last year, the -- if you look at how COVID happen and when our sales were growing tremendously, that cycle sort of ended the first quarter of what every year it was, I'm sorry I'm locked on that right now. I have a head cold, I apologize. Anyway, so this is the last year that you see sort of it step up in the first quarter and it's why the rate is a lot closer to what you saw sort of for the rest of last year. It's because it all steps up annually. If you take that up in the first quarter and it has nothing to do with the change in rates or anything like that and you'd never see a change in YRT rates be that impactful that quickly because one they're only for new business, which is a small part of our total business and two as we've mentioned in the past YRT rate are at level. They match the mortality curve. So if you think about it, the first year policies in the YRT rates probably over zero and it grows very quickly after that. That's why the rate of that other ceded premium line actually grows faster than any other line in that revenue -- premium revenue section. I will remind you also that if we had our druthers and we didn't have to follow DAC we would actually treat the other ceded premium in our case as a benefit line item which is why when we do the benefits and claims ratio, we actually include that piece in the benefits cost and you'll see that on a year-over-year basis the benefits and claims ratio was very consistent.

Okay. So it does look for the full year pretty consistent with last year, is that the way to think about it?

I have to actually look at the number, but I think last year had a lower first quarter. I think the rate you're seeing right now is more consistent with what you're going to see for the rest of the year. So I don't think -- you're not going to see a pickup like you saw in the first quarter in the next three quarters. But just to remind you and I think it's important because I want to make sure everybody is doing the calculations the way we do since we put all these rates, that 58.8% I think what's the number, 58.7% number we quoted included the other ceded premiums.

Right. Like last year the YRT ceded premiums, it went from 29% in the first quarter to 32.5% in the second quarter, is there some normal seasonal phenomenon or is that just another one of these variability?

So if you were -- we've talked about in the past that the second quarter has historically been our strongest quarter. Maybe end of incentives, whatever the case is people are happy in the spring, but the second quarter has historically been a very, very strong quarter for us. So it seems like I said the YRT premiums renew annually, if that's when we have a large amount of policies coming up on their annual policy renewable date, that's when those warranty rates are going to go up for all of those policies. And again, they're going to grow at much faster rate because they match the mortality curve.

Well, I will wait for my prize. I'll send you my address, so you can give it to me directly. Maybe you can Primerica. Second question would be Investment and Savings asset based revenue was down 1% even though the asset -- average assets were down 9%. Anything there that is noteworthy that seems like a good trend, but I don't know whether that's just something else driving that?

Yeah, and that really has to do with a mix shift we've seen. So two things have happened, one, and we continue to see more and more of our sales going towards managed accounts, and as that's happening, we're obviously not getting the sales based revenue, but our ability to generate asset based revenues are growing. So you're seeing that compounding of that. And the other is the PD model that we've launched for mutual funds in Canada last year that is continuing to grow, which again will put some pressure on what you recall revenue generating sales, because there are a lot of those are no longer creating a front end sales load, but that contribute to our ability to grow faster on an asset base.

Okay, great appreciate it. Thank you.

Thank you.

We have reached the end of our question-and-answer session. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.