Greetings. Welcome to Primerica's Second Quarter 2023 Earnings Webcast. [Operator Instructions]. Please note that this conference is being recorded. At this time, I'll turn the conference over to Nicole Russell, Senior Vice President of Investor Relations. Ms. Russell, you may now begin.

Thanks, Rob, and good morning, everyone. Welcome to Primerica's Second Quarter Earnings Call. A copy of our earnings press release, along with materials that are relevant to today's call, are posted on the Investor Relations section of our website. Joining our call today are our Chief Executive Officer, Mr. Glenn Williams, our Chief Financial Officer, Ms. Alison Rand. Glenn and Alison will prepare -- 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 which we believe provide additional insight into the company's operations. Reconciliations of these non-GAAP measures to their respective GAAP numbers are included at the end of their earnings press release and available on our Investor Relations website. I would now like to turn the call over to Glenn.

Thanks, Nicole, and thanks, everyone, for joining us today. Our strong second quarter results highlight the value of Primerica's complementary lines of business, and the continued efforts of our team to grow our distribution capabilities. Growth in our sales force and the appeal of our life insurance products are creating sales momentum despite the continuing financial pressure on middle income households. Adjusted operating revenues of $690 million rose 3% year-over-year, while adjusted net operating income of $145 million increased 11% and diluted adjusted operating earnings per share of $3.99 increased 18% compared to the prior year period. These results reflect the predictable growth in our Term Life business and the benefit of higher interest rates on our investment portfolio, both of which more than offset the continued pressure of lower sales commissions in our Investment and Savings Products business. In addition, the absence of a negative tail revenue adjustment in the Senior Health segment this quarter was an improvement versus the $5.4 million negative tail adjustment recorded in last year's second quarter. Our life licensed sales force growth continues to be driven by 2 key dynamics: the attractiveness of additional income from our entrepreneurial business opportunity during uncertain economic times; and our focus on an improvement in our life licensing process. During the quarter, we recruited over 86,000 individuals, a 23% increase compared to the second quarter of 2022. We also continue to see our hard work over the last few years in creating a clear path through the entire licensing process payoff with over 12,600 new reps license during the quarter, a 10% improvement over the prior year period. We ended the quarter with nearly 138,000 life licensed reps and remain confident that our momentum will lead to a 3% or 4% increase in the size of our sales…

Thank you, and good morning, everyone. Now that you've heard from Glenn on distribution trends, let me expand on our second quarter financial results. Before doing so, I'd like to briefly discuss the immaterial errors in prior period results associated with the adoption of LDTI that we identified this quarter. The errors were related to double counting certain reinsurance premiums and excluding a small portion of capitalized costs from the historical cash flows used in our valuation model. In aggregate, these adjustments were due to the full year 2022 benefit and claims ratio by approximately 70 basis points to 57.9% and increased the 2022 DAC amortization ratio by 10 basis points to 11.8%. The adjustment added approximately $3.5 million to pretax income each quarter or roughly $0.07 to diluted adjusted operating earnings per share. While these changes were immaterial to the quarter's results, it was necessary to revise results back to the January 1, 2021 LDTI adoption date to properly reflect the cumulative effect on the balance sheet. Financial inflammation prior to the second quarter of 2023 has been revised as reflected in the fourth quarter of 2022 revised restated financial supplement and the second quarter 2023 financial supplement, both of which are available on our Investor Relations website. All year-over-year comparisons that follow are in relation to 2022 revised results. Now let's turn to our second quarter results, starting with the Term Life segment where pretax operating income grew 9% year-over-year. Adjusted direct premiums grew 6% year-over-year, in line with our prior guidance. While lapse rates remain elevated across many durations, the heightened demand for our new Term Life insurance products has helped mitigate the associated loss of premium revenues. With solid projected sales growth during the second half of 2023, we remain confident that ADP growth will stay…

[Operator Instructions]. Our first question comes from the line of Wilma Burdis with Raymond James.

I guess first question just on Senior Health. Should we expect the 3Q results to be similar to 2Q given some feasible unfavorable -- unfavorability for the business?

Yes. Well, generally, the second and third quarters are very similar in their reaction. As you know, the fourth quarter is the largest production quarter with AEP and then the following first quarter with OEP is where the second level of business is done. But second and third quarters generally look very similar. Third quarter could be even a little less activity than the second quarter, but generally, they're pretty close.

Okay. And then a quick follow-up on that one. It sounds like you're committed to no capital contributions for 2023, but should we think of -- how should we think for 2024.

Wilma, I would say at this point, we do not expect to have any significant capital contributions in 2024. As we've done throughout this year, and we'll continue to do next year, we're going to build this business very prudently. The only way we would ever really need some capital to be infused is if we try to have very dramatic growth and that would then be a short-term infusion of capital. But our plans right now are to continue with a relatively controlled growth based on what we are finding throughout this AEP and next OEP and to see where 2024 should grow from there. So again, there may be some, but if anything, it would be very small.

And then one more. Could you just talk about the Term Life sales appear to be better than expected while the ISP sales were a bit worse than expected, but it seems like there's a lot of cost of living pressures as you discussed. So maybe just talk about why it's impacting the segment a little bit differently.

Yes. Wilma, that's not that unusual to have the 2 businesses go in different directions temporarily. That's the reason we enjoy the complementary nature of the 2 is often one is strong when the other is a little weak. And that's what we're seeing right now. The strength in the life business is driven by our growing sales force. We have stronger distribution. And also, I believe there's a continued positive impact of the improvements we made to our product set almost a year ago now. And so that is really overcoming the headwinds we believe, of the higher cost of living and middle-income households, which we definitely feel that's a headwind. It's just that we've got a stronger tailwind from those 2 positives on the life side. The investment side, we believe, is being hampered by the continued uncertainty and negativity that people are hearing about the marketplace, even though returns are certainly improving in the market, there's still so many questions about what does the future hold, which are interest rates, have they gotten as high as they're going to get, has inflation slowed down. It certainly hasn't turned the opposite direction. And so prices are still increasing just at the slower rate and there are alternatives because of the higher interest rates. So all that's working together, I think, to impede the growth in our ISP business more so than you see in the life business. But as we stated, we were coming off of record levels in 2022, particularly the first quarter of last year and during 2021. And where we've landed right now is we're getting pretty close to the same quarterly numbers for sales as last year within a few percentage points is still significantly higher than where we were there pre-pandemic. So we had that spike during 2021, the first part of 2022 and things have come back down due to all those headwinds we described, but we're at a pretty strong position where we've landed, and we do see that the comparisons are growing more favorable. As we noted in the prepared comments, down just probably a few percentage points in the next quarter. And so things are starting to stabilize. And if we can get some confidence in some of the conversations around the future, we believe we're in a good position for the future of our ISP business.

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

I had, I guess, a somewhat similar but slightly different question. Why do you think the in Term Life specifically that year that the inflationary pressures are impacting lapses, but not sales? Is it just more of a function of the new product and the excitement around that?

Yes. Again, I think it's the same thing. I mean sales generally follows sales force growth fundamentally. And then the new product and the excitement around it, our ability to meet the needs of families more easily, more quickly and with more clarity, I think, has got our sales force energized and excited about talking to more new clients. But we do see every month as clients struggle with the higher cost of living, they're making those priority decisions about what bills get paid and what bills maybe are delayed to a later time. And that does tend to impact persistency of sales that were made previously, whether it was earlier this year or in past years. And so it is normal for those 2 dynamics to travel more together, but we just got positives on the front end of the business that I think are a little stronger and are pushing sales. While the families are struggling with all of their payments for all of their bills in a lot of situations, and that's having the negative impact on persistency.

Okay. And then on the assumption review. Is -- Alison, as you -- just from your earlier comments, is your view that the higher lapses because they are likely a short-term phenomenon? Would it need to be factored into the longer-term assumptions?

Yes, that is correct. We are -- Our plan at this point is to treat any fluctuations that we're seeing in lapses as experience variances, not assumption changes.

Our next questions come from the line of Jeff Schmitt with William Blair.

Question on the lap rates. I think that you had mentioned this in your prepared remarks, but have they fully normalized from the pandemic and now they're sort of weaker than historical levels? Or are they still moving back to historical levels?

Yes. So they have definitely normalized from what we saw through COVID and that actually happened last year. So that wasn't a 2023 event. Again, this is a little bit of an art here. We're going back and trying to determine what pre-pandemic was. So historical norms pre-pandemic, the pandemic was a significant event. It did create new patterns. And we don't know how much if any of that will continue on a long-term basis. So just so you know the way we come up with our version of what we're on pre-pandemic because we're looking at 2019 activity. So when all is said and done, we are looking at things in relation to where we were just prior to the pandemic. And from that perspective, in aggregate, we're looking at about 5% to 7% higher. Is that perfect? Is 2019 an exact picture of historical trends? No, but we think it's a good proxy for where we were heading into the pandemic. So again, 5% to 7% above right before the pandemic, I do believe it's mostly driven by economic, the economic environment. simply because we're seeing it not just in sort of early duration persistency where maybe you would say somebody wasn't committed to the product. We're seeing it across many durations. And when you start to see people giving up a policy after several years of paying premiums on the term policy, you suspect it's largely because of economic factors.

Got it. And then how many agents are licensed to sell investment products now? I think historically, it was around 24,000, but just given how strong sales have been and sort of continue to be interested in getting those licenses increase? Or how is that -- how is the number trending?

Yes. We're a total U.S. and Canada, just a little over 25,000 at this point. And that's been fairly stagnant. It doesn't move quickly. It has a different set of dynamics that drive is much like the difference in our 2 business lines, 2 major business lines that we discussed earlier. And you're right, when sales are strong and growing, there's more interest in getting license when people see success in a business line they're not in, they tend to get interested in getting in that line of business. So we have seen some slowing of that licensing momentum as sales have come down off the record peaks. And we anticipate as we level out and start the next phase of growth we'll see increased interest. And we always recognize that by growing the size of our life sales force we're increasing the number of those that are eligible and likely to get licensed. So that's a good indicator of what could happen in the future. So the growing life sales force is a positive for our investment business in the years to follow. We think when the attitudes turn around, we'll see some energy in that line of business, we'll see licensing increase at that point.

Our next question comes from the line of Suneet Kamath with Jefferies.

Just to go back to the lapse rate, one more time in term. Can you give us any color in terms of how the lapse is sort of developed as we moved through the second quarter? I guess what I'm trying to figure out is, is the trend sort of that the lapses remain high? Or are they getting higher or lower? Just some directional help would be helpful.

Yes. And again, all of this put the caveat on what I said earlier that it's all done in relation to what we were seeing in 2019 and there is seasonality in our lapse rates. We've always seen it. The second quarter is historically a very strong quarter for persistency. But with all that said, it looked like it was about in the 3% to 5% range in the first quarter, and it's in the 5% to 7% range in the second quarter. What I don't know is that actually a progression that something deteriorating or if some of that is simply because of the seasonality in the business. But I'd say, again, given the fact that this is sort of a rough comparison just to 2019 and nothing exact, if you will. I think going from maybe the 3% to 5% to 5% to 7% is saying it's largely in the same zone, maybe a slight bit of deterioration.

Got it. Okay. That's helpful. And then I guess pivoting to senior health. You've talked a lot about wanting to get comfortable with the profitability of the business before you sort of accelerate growth just from a timing perspective, I guess, how long do you think it will take for you guys to get your arms around this business? Is it a couple of quarters? Or are we going to need to see results sort of through 2024 before you have a real good handle on kind of what's going on under the hood.

Yes. That's a great question, Suneet. As we look at it, we obviously are impatient to be able to make conclusions and decisions, but we've balanced that with some patience as well because we recognize in this business, the real quarters that we -- as we talked about earlier, that you can evaluate your success and your progress on or primarily the fourth quarter and the first quarter. So while we are working hard during quarters 2 and 3 to improve the business, you often don't see the results of your improvement and then can assess it until after you experience the fourth quarter and the following first quarter and then you have time to assess that business. Obviously, sales are real time, but the quality of that business and the persistency of it takes some time. So we're definitely going to be beyond this next AEP and OEP for us to be able to evaluate where we are and whether we think it's time to accelerate. So we think by the time we get beyond the next 2 periods, Q4 of this year and Q1 of next year, we'll have much more information about the results of the efforts we've made and we'll be able to make some more decisions at that point. We're taking it a step at a time. We're moving very deliberately. We don't want to get too far out over our skis until we really think we've got our arms wrapped around the business. So it's better to be a little too conservative than it is too aggressive in our opinion.

Our next question is from the line of Mark Hughes with Truist Securities.

Alison, in the Term Life business, the ceded premium ratio, I think you touched on this earlier, and you probably explained this in the past, but I'll ask again. The ratio has been moving up 100, 150 bps year-over-year for the last several quarters. Does that continue? Is that a function of the interaction between the benefit ratio and the adjusted direct premiums. Should that stabilize? I'm just sort of thinking how to model that on a go-forward basis. Should it continue to inch up? Or does it stabilize at some point here?

Yes. And again, like I said in my comments, according to GAAP, I have to call that a contra revenue. But realistically, the way we look at other ceded premiums analytically, it's a component of our benefits and claims ratio. That number is going to continue to grow. We see 90% of our mortality risk under YRT reinsurance. Our direct premiums are level. So what our insured pays is the same for the entire level term period of their policy. But when you go -- the difference of the mortality cost in year 1 versus year 5 is significant. So the other ceded premium line has always and will continue to grow much faster than the direct premium line. So there is nothing unusual about this. This trend will not stop. I think what's really important to understand from a P&L perspective, if you don't see any of that volatility hitting the bottom line because the ceded reserve take all that into consideration and see that or levelize out the cost of the reinsurance. So it is a function of the fact that GAAP requires the presentation a specific way, but economically, you have to look at what we're paying in line with the benefit cost we're getting through a reduction in our reserves. So you have to think about those 2 holistically again, which is why we included as a component of the benefits and claims ratio. It does create a really strange anomaly when we look at our revenue growth because it artificially suppresses it when realistically, again, that is just balancing out the growing cost of benefits as our block of business .

And then did you give guidance for Term Life operating profit relative to just the direct premium?

We didn't -- there's a little bit of lumpiness this quarter. Again, two things. One is persistent seasonally strong in the second quarter. And also, this is the last quarter we have, where we have this benefit, if you will, of the fact that we had elevated operating expenses last year because of the timing of our field leadership events. So I think it will come down a little bit from where it was in the second quarter, but it should stay about this range. If you remember all the things I've been saying about LDTI and what you've seen thus far, is from period-to-period, especially because we're not expecting any large assumption changes. The benefit ratio and the DAC ratio are going to remain pretty consistent the real anomaly or driver could be if there's any quarterly fluctuation in expenses, although at this point, like I said in my comments, we're not assuming anything outside of what we've been saying for the third and fourth quarter on operating expenses. So [indiscernible].

Does that say sort of -- so maybe high 20s if that was 23% this quarter. High 22s?

No, it will be lower than that. It will be lower than that.

High 22s.

High 20s, I see what you're saying. It will be somewhere lower than the 23%. Again, it's really going to be a function of how operating expenses come in. And if we have -- the one thing that could be a volatility, and we see a little bit of it in the last 2 quarters is if we have to do any remeasurements based on mortality actual experience. But again, that's been in the $1 million to $2 million range, so nothing too significant.

Yes. Okay. And then Glenn, on the recruiting front, could you -- I think you gave guidance for the sales force growth for the full year. Did you make any comments about what you expect in terms of recruiting growth next quarter balance of the year?

Yes, Mark. We -- because we provide incentives and recruiting numbers tend to move pretty significantly quarter-to-quarter. For example, and our comparisons for the third quarter be comparing to the convention incentives that we ran a year ago coming out of the convention and we really spiked recruiting in the third quarter. So we won't recruit at those levels in the third quarter because we're not running any incentives at this point. It's all kind of fundamental organic growth that we're seeing right now. So we expect recruiting continue to be strong, but we started trying to provide the net -- the sales force growth so that you really understand when recruiting spikes and sometimes we don't get to pull through from licensing, rather than go through all that noise, we just kind of cut to the bottom line, which is the sales force growth. So for the third quarter specifically, we're expecting a strong recruiting quarter. It won't compare in top line numbers to all of the special incentives we had a year ago, but we're expecting it to be a good quarter for us.

This will conclude today's question-and-answer session. And this also concludes today's conference. Thank you for your participation. You may now disconnect your lines at this time and log off your computers. Thank you for your participation.