Greetings. Welcome to Primerica's Fourth Quarter 2023 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. At this time, I'll now turn the conference over to Nicole Russell, Senior Vice President, Investor Relations. Nicole, you may now begin.

Thank you, operator. And good morning, everyone. Welcome to Primerica's Fourth Quarter Earnings Call. A copy of our press release, along with other materials relevant to today's call are posted on the Investor Relations section of our website. Joining our call today are our Chief Executive Officer, Glenn Williams; and our Chief Financial Officer, Tracy Tan. Our comments this morning will contain forward-looking statements in accordance with the safe harbor provisions of the Securities Litigation Reform Act. We assume no obligation to update these statements to reflect new information and refer you to our most recent Form 10-K filing, as may be modified by subsequent File 10-Q -- Form 10-Q, excuse me, 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. Reconciliation to non-GAAP measures to their respective GAAP numbers are included at the end of our earnings press release and are also 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 this morning. Primerica's strong performance during the fourth quarter and full year 2023 reflects the power of our distribution. The ongoing need for the financial solutions we provide is clear and our sales force is uniquely positioned to reach and serve middle-income families. Now more than ever, our clients need the education and guidance provided by our representatives to navigate economic uncertainty and manage the financial pressures associated with a higher cost of living. Starting with the highlights of our financial results. Fourth quarter adjusted net operating income increased 4% compared to the prior year period, while adjusted operating income per share increased 9%. On a full year basis, adjusted net operating income increased 8% and adjusted operating income per share rose 15%. In addition, we maintained our commitment to returning capital to stockholders, including the completion of our previously announced $375 million stock repurchase authorization and payment of a total of $94 million in quarterly stockholder dividends. Taking into consideration the complementary nature of our insurance and investment businesses and the predictability of cash flows, the Board approved a new $425 million share repurchase program in November 2023 to occur through December 31, 2024. The Board has also declared a 15% increase to our next quarterly dividend, bringing the payment to $0.75 per share. Over the last few years, we've become more focused on communicating the attractiveness of our entrepreneurial business opportunity and we continue to enhance our processes to keep new recruits engaged. There's also greater flexibility and more options for new recruits, who are preparing for their licensing exams. The fundamentals of our business are sound, and we are well positioned for the future. Looking more closely at our distribution progress, during the fourth quarter, we recruited nearly…

Thank you, Glenn. Good morning, everyone. In my prepared remarks today, I will review fourth quarter results and provide an outlook on key financial measures for 2024. In the Term Life segment, pretax operating income of $140 million, increased 6% during the quarter on a year-over-year basis, driven by 6% higher adjusted direct premium. Pretax operating margin at 22.6% remained unchanged comparing to the fourth quarter of 2022, reflecting stability and predictability of our results under LDTI reporting. Looking more closely at our key financial ratios. The fourth quarter benefit and claims ratio was 58.2% versus 57.8% in the prior year period and largely in line with our expectations of around 58%. The DAC amortization ratio was essentially unchanged year-over-year at 12% versus 11.9% in the same period of the prior year. Finally, the insurance expense ratio was 7.1%, compared to 7.8% from the prior year period due to additional expenses associated with the launch of our new insurance product in 2022. Mortality remains generally in line with expectations. However, we continue to see higher lapses across multiple durations, which leads us to think that recent economic pressures are putting financial stress on middle income family. The persistency of policies issued last year under the same economic conditions as today are largely in line with historical trends. As we look ahead, we expect ADP to grow around 5% to 6% in 2024, reflecting the compounding of premiums from new sales. Our estimate also take into consideration elevated lapse rates and the fading benefit from the IPO co-insured block. Looking at our key financial ratios. We expect the benefits and claims ratio and the DAC amortization ratio to remain stable in 2024 at around 58% and 12%, respectively. We expect the 2024 pretax operating margin to be around 22%, keeping in…

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question comes from the line of Mark Hughes with Truist Securities. Please proceed with your question.

Good morning, Mark.

Yes. Thank you. Good morning. Good morning, Glenn. Good morning, Tracy. Tracy, the $40 million increase on the base of $142 million. Am I seeing that properly? And if so, how much of that is related to the [conference] (ph)?

Can you say that again?

Yes. The $40 million increase in expenses, is that on the base of $142 million?

Yes.

And then how much of that is related to the conference?

To the conference. Okay. So what I would say is, overall, the conference is just one of the sales events and on a year-over-year basis, just to ensure, I give you the overall big picture, the expenses on these activities are -- we strive to keep them pretty even year-over-year, specifically conference. Specifically, conference is one of the two events that we hold per year. In terms of dollars, we have about $13 million for the event.

Mark, I would add to that. We met some of that against the registration fees and so forth. So our convention is designed to cost us after registration fees about the same as one of our leadership events or incentive trips as we call them, so that's why we do two incentives in one year and then we'll do a convention in one incentive the next year. So the convention is designed to roughly equate to the trip that we don't do in a convention year.

Okay. Does this seem relatively elevated, again, $40 million on $142 million is the meaningful increase?

Mark, you're coming through a little garble. Would you mind asking that one more time? I'm sorry.

Yes. I apologize. I was just remarking that the $40 million on the base of $142 million seems like a meaningful increase. Is that -- were there more growth initiatives or step function in staffing this year that contributes to that?

Yes, Mark, I would say that the increase year-over-year seems higher on a percentage base compared to 2023 versus 2024. If that's what you're comparing that, you would notice that 2023 comparison to 2022 was actually lower than typical because of 2022 spend being elevated for two reasons. One, in 2022 we had three sales leadership events compared to typical two. And then secondly, we had the elevated expense for launch of new products for Term Life, and that also increased the spend. So if you're comparing historical 23% to 24%, it's going to look a little bit higher. Also in 2024, we're going to continue to invest for business growth, which is why you see that in the breakdown the biggest number increase, $17 million is supporting the business growth. Some of that will go to continued investment of technology initiatives that we will certainly continue to improve for infrastructure, for productivity to support our sales force and our top line growth.

Very good. And one more, if I might. The Senior Health profit, I think, or the loss you said would be smaller than the prior year. Could that be consistent through the quarter or quarters, which is to say, consistently lower losses in each quarter? Or will it be -- will it vary?

Yes, Mark, that's a great question. There is some seasonality in the Senior Health business. In a typical year, you would see the fourth quarter being the most profitable because of the AEP and the volume, followed by the first quarter. And then second and third quarter would have higher expenses because of the hiring and preparing for the AEP season. That's a typical year. Now what I would say is coming out of fourth quarter of 2023 with a weaker AEP, the renewal season with the following activity of cash flow coming through, it will take us a little bit of time to analyze, gather the information, which we'll share next quarter. But overall, I would say that we expect to have a smaller loss than prior year, and we would have a lot more to share next quarter.

Thank you very much.

Thanks, Mark.

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

Hey, good morning, Ryan.

Hey, good morning. My first question was on lapses. Could you provide some additional color on how much higher lapses are trending relative to your longer-term expectations or trends? And any more color you can provide, as I think you have in past quarters on how lapses look on policies that had been sold prior to the pandemic versus policies that had been sold during the pandemic?

Good morning, Ryan. This is a great question. We noticed higher lapses in 2023, particularly towards the end of it. Because across multiple durations, it leads us to believe that this is really mainly due to the economic pressure and the stress from higher cost of living currently on middle-income family. Nevertheless, we see that the policies written in the last year really had persistency very much in line with historical trends, historical trend by which I mean pre-pandemic, by and large. So we expect that over time, persistency is going to return to normal and pre-pandemic levels.

Understood. Thank you. I guess somewhat related to this, it also seems like the redemption rate in ISP has been increasing in recent quarters. Are you seeing -- is that -- do you believe that's a similar dynamic? And I guess if so, do you think you'll continue to see somewhat higher redemptions in 2024 there?

Yes, Ryan, I'll take that one, because we have monitored those redemption rates as we come through the pandemic. And you're right, they varied from a fairly stable historical trend over the years. Sometimes during the pandemic, people hold their money a little closer, redemption rates went down and then when money has gotten tight, redemption rates have gone up. However, if we try to sort through the pandemic and get all of that unusual noise out of it, what we're seeing right now are redemption rates that are pretty similar to pre-pandemic rates. They might be just a little bit higher, but certainly within our normal range of fluctuations prior to the pandemic. So you're right, there are probably people that are drawing down on their accounts a little bit more because of the cost of living, but it's still within the range that we would call normal to pre-pandemic levels. It hasn't exceeded that range yet.

Okay. Great. Thank you. And then since it's your last call, I just wanted to take best wishes and retirement to Alison. Thanks.

Sure. Thank you.

Our next question is from the line of Wilma Burdis with Raymond James. Please proceed with your question.

Good morning, Wilma.

Hi. Good morning, Glenn and Tracy. I guess, is there a way to quantify the Senior Health loss you expect in the next couple of quarters? I know you mentioned it should improve year-over-year, but if there's any way you could provide a little bit more of a fine point on it?

Yes. On Senior Health, because of the renewal season and we still have a lot of cash flow coming through, it will take some time to really analyze and for us to have an accurate read on it. So we really would be able to provide more information next quarter.

Okay. Thank you. And then with the convention coming up, how should we think about the trajectory of sales and recruiting throughout the year? I know that's usually a boost, but I know that there's a kind of interesting way it can flow through the quarter. So if you can give us an update there?

Certainly, that's a great question and get that on every convention is how does the event that takes place almost right in the middle of the year impact the entire year. And as I said in my remarks, we work hard to try to get benefit from the event for the entire year. And right now, we're working and seeing results from people striving to accomplish great things by the event and be recognized for it there. And then, of course, post event, we want to use the momentum that's created by the event and stretch it as long as we can. So that's the theory is to try to level it out throughout the year. The reality is there's so much excitement that's created. And generally, we have some incentives that we launch at the convention that do create a spike in activity around the event itself as hard as we work to try to make it -- to level it out over the full year. So I would expect right now that you would see kind of reasonable growth running up to the event and in the months, maybe September, October and beyond after the event, in the month of the event in July and in August as we have some short-term incentives and the excitement immediately coming out of event, you'll probably see a spike in recruiting. And then, of course, the pull-through of that, of the licensing and impact on the sales force is much long after that, because it is a fairly long process in some states and provinces to get recruits licensed. So I would say that we would expect an impact throughout the year, but you will see the recruiting activity around the event. And then you would see licensing. And theoretically, at least, of course, if productivity stays the same, you would see some sales impact in the last half of the year and working into 2025. Was that helpful?

Yes. It sounds great. Thank you, guys.

Certainly.

Our next question is from the line of Ian Ryave with Jefferies. Please proceed with your question.

Hey, good morning, Ian.

Good morning and thank you for taking my question. Just firstly, on Senior Health, can you discuss the reason for the methodology change to marketing development revenues that's resulted in higher LTVs? And then second, can you talk about how you're thinking about increasing penetration of the underserved middle income market where you see the most opportunity? Are there regions, states or cities you're targeting for higher growth? Thank you.

Sure. I'll take a shot at both of those and see if it's helpful. We had a change in our contracts with our product providers that provided a little more clarity and perhaps even slightly more certainty in those marketing dollars, because they now -- the relationship we have around them is in riding now. It's not that it can't be changed. It can be changed, but at least I think it's a little clearer and a little -- slightly more ability to anticipate it. And so with that certainty and awareness, we could pull it into the LTV calculation, so it was primarily money we were already receiving in other lines. But with the certainty we moved it into the LTV, and I think that's a pretty standard procedure. And of course, there are additional increases as there have been some commission increases. So the change is not solely attributed to that of the increase, perhaps a little over 80% was attributed to the reclass and a little less than 20% to other increases. So that's behind that. Just -- and we like it better, because it provides more clarity to the financials of the business doing it this way. So we took it as a positive process change. But clearly, it's not all financial impact, change is not that big since it's just moving from one area to the other. And then secondly, Ian, on the question of where we target it's interesting, our business grows where we have leadership on the ground, and we do move leadership around occasionally, but not that frequently. And so our business generally runs in line with population of the U.S. and Canada and as the middle income market grows, which it continues to do, we grow, but we have not found it worthwhile to specifically target areas. If we don't have leadership on the ground than us trying to artificially grow in an area that is underrepresented in our business, we've just not found success in doing that. Now when people ask us, if they want to move to a place with more opportunity, we can tell them, because we know where we're underrepresented, but we've just not found it profitable to move people who choose not to move to a new location and have them struggle. If they want to move back home, where they came from and that's an underrepresented area, that's great. That works well for all of us, but we don't try to do that artificially from the company level.

Got it. Thank you so much.

Certainly.

Next question is from the line of Mark Hughes with Truist Securities. Please proceed with your question.

Welcome back, Mark.

Hey, glad to be back. I did want to clarify. I had framed that question badly about the expenses, the $40 million increase on a base of $570 million or so is a completely different matter. So using the $140 million was mistake on my part. And on that basis, it looks pretty reasonable. One question on the Senior Health. You said that 25% of the lead there coming from the Primerica sales force. Is that kind of full strength? Is that what you would expect over time, about 25%? Or should that continue to move up as you maybe do other internal initiatives?

Yes. There's still room for growth in the numbers, Mark, but the percentage is artificially higher right now, because of the low sales levels in the main part of the e-TeleQuote business. I would anticipate that as we grow together as we grow that business, assuming that we -- to determine that it can be grown in a profitable and sustainable way that we could grow the Primerica business or the Primerica portion of those leads that are referred in by our sales force at a similar rate. And our objective is to run in the maybe 20% range, a little either side of 20%, so it's a little artificially high percentage wise, because e-TeleQuote leads were down in the quarter. But we do expect, again, assuming that we can demonstrate the profitability of the business and gain comfort in it that we would grow that. There is more potential on the Primerica side, but we are not expecting that to become 40%, 50% of the total. That's not the model we're running to. It's as we've described it, the Primerica piece is a unique advantage that we can have in this marketplace because we do have access to those leads in a unique way through the relationships of our Primerica representatives and those leads are extraordinarily high quality, as we've all talked about before. So we want a lot of them. But at the same time, we want that business to be successful on its own. So something in the range of 20%, a little higher than that a little lower as we grow would be a target, I would say.

Thank you very much.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.