Bank of N.T. Butterfield & Son Q4 2023 Earnings Call Transcript

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February 14, 2024

There are 7 speakers on the call.

Operator

Greetings. Welcome to Primerica's 4th Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

At this time, I will now turn the conference over to Nicole Russell, Senior Vice President, Investor Relations. Nicole, you may now begin.

Speaker 1

Thank you, operator, and good morning, everyone. Welcome to Primerica's 4th 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 Tam. Our comments this morning will contain forward looking statements in accordance with the Safe Harbor provisions of the Securities Litigation Reform Act.

Speaker 1

We assume no obligation to update these statements to reflect new information and refer you to our most recent Form 10 ks filing as may be modified by subsequent Form 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 to non GAAP measures to the 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.

Speaker 2

Thank you, Nicole, and thanks, everyone, for joining us this morning. Primerica's strong performance during the Q4 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, 4th quarter adjusted net operating income increased 4% compared to the prior year period, while adjusted operating income per share increased 9%.

Speaker 2

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 $375,000,000 stock repurchase authorization and payment of a total of $94,000,000 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 $1,000,000 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.

Speaker 2

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 Q4, we recruited nearly 90,000 individuals, a 17% increase compared to the prior year period. We also saw a 17% increase in licensing with 13,000 reps obtaining a new life license, helping fuel 5% growth in the size of the sales force to end the year with a total of 141,572 life license representatives. Our momentum has continued into the New Year as we see a high degree of interest in our business opportunity.

Speaker 2

These dynamics are leading us to project around 3% growth in the size of the sales force during 2024. Turning next to sales results, we continue to see strong demand in our Term Life business following the launch of our new insurance products in the fall of 2022. The simple and convenient application process has increased rep confidence, while advancements in underwriting technology allow us to issue policies more rapidly. The increase in the number of rate classes often appeals to clients across a broader spectrum of face amount. During the Q4, we issued almost 89,000 new term life policies or 12% more than the adjusted policy count in the same quarter in 2022 for an annual total of nearly 359,000 new policies issued.

Speaker 2

This represents an 8% increase over adjusted 2022 figures. In 2023, we issued a record $119,000,000,000 in new term life protection for our clients, a 15% increase compared to the prior year, bringing Primerica's total amount of coverage in force to $945,000,000,000 believe we will continue to benefit from the positive response to our new insurance products during 2024. Based on our current projections, we anticipate full year growth in the number of policies issued to be around 3% to 5%. Turning next to our investment in savings products business. Total sales of $2,400,000,000 during the quarter increased 13% compared to the Q4 of 2022, driven by a combination of strong demand for U.

Speaker 2

S. Mutual funds and variable annuities. In addition, sales volume increased in managed accounts as activity resumed following a brief period of adjustment due to a platform conversion in the Q3. Net client inflows in the 4th quarter of 170 $2,000,000 reflected normal levels of client redemptions as a percentage of client asset values. Ending client asset values benefited from strong equity market appreciation in 2023, ending the year at $97,000,000,000 up 15% versus December 31, 2022.

Speaker 2

We continue to see ISP sales growth during the start of 2024. We're mindful of the continued economic uncertainty and the impact that higher cost of living has on middle income families. We're projecting an increase of approximately 5% in ISP sales during 2024. As we turn to our Senior Health business, we continue to take a deliberate approach to building the business as we evaluate its progress. Looking at the results for the Q4, LTVs were $11.09 per approved policy, up $2.21 year over year, which includes the reclass of $182 per policy for marketing development funds that were previously captured in the other revenues line.

Speaker 2

The reclass of marketing and development funds is a result of changes in our carrier contracts. Our current challenge is sales volume, with 4th quarter total submitted policies down 17% year over year due to fewer tenured eTelequo agents entering AEP. Referral activity from Primerica representatives accounted for approximately 25% of submitted policies. Lower productivity by untenured ETQ agents led to a 22% increase in CAC to $8.78 per approved policy during the Q4 of 2023. The LTV to CAC ratio was 1.3.

Speaker 2

The new leadership team at E Telequot is now at full strength and focused on increasing the percentage of tenured agents while managing the cost structure to improve the LTV to CAC ratio. In closing, let me provide a few observations about our upcoming convention. This summer, we returned to the Mercedes Benz Stadium in Atlanta, and our team is already working hard to ensure another successful event. We had a solid turnout coming out of the pandemic at our 2022 convention, and we expect to see an even larger group at this year's event. The magnitude of this event provides the perfect platform to quite cast a clear vision for the future to the entire Primerica team.

Speaker 2

The speakers serve as coaches motivating and unifying the sales force toward a common goal of growing the business. And the event creates unique opportunity to recognize and celebrate past accomplishments, while renewing commitments for future success. The months leading up to the event, field leaders are pushing teammates to stretch for the finish line and earn an opportunity to be recognized as a top performer. Following the event, we reinforce our vision with additional messaging to drive activity and sustain momentum well beyond the convention itself. Before turning the call over to Tracy, I want to congratulate her on officially taking over as CFO in December.

Speaker 2

I'm proud to say that the transition has been seamless. I also want to thank Allison for her tremendous contributions to Primerica. The entire team wishes her the best in retirement, which becomes effective April 1. Now, I'll hand it over to Tracy to review our financial results.

Speaker 3

Thank you, Glenn. Good morning, everyone. In my prepared remarks today, I will review 4th quarter results and provide an outlook on key financial measures for 2024. In the term life segment, pre tax operating income of $140,000,000 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 Q4 of 2022, reflecting a stability and predictability of our results under LDTI reporting.

Speaker 3

Looking more closely at our key financial ratios, the 4th 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 GAAP amortization ratio was essentially unchanged year over year at 12% versus 11 0.9% in the same period of the prior year. Finally, the insurance expense ratio was 7.1% compared to 7.8% from products 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 families.

Speaker 3

The persistency of policies issued last year under the same economic conditions 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 takes into consideration elevated lapse rates and the fading benefit from the IPO coinsurance 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 mind that there is some seasonality in insurance expenses, which can result in some variability to the pre tax margin between quarters.

Speaker 3

Turning next to the results of our ISP segment. 4th quarter operating revenue of 2 $22,000,000 and pre tax operating income of $63,000,000 increased 12% and 11%, respectively. Our sales force delivered good revenue growth, while equity market depreciation pushed average client asset values higher. Sales

Operator

Sales

Speaker 3

Asset based revenue grew 12%, while average client asset values rose 9%. We continue to see growth in U. S. Managed accounts as well as higher asset levels in Canadian mutual funds in the PD model on which we earn asset based fees in lieu of upfront sales commissions. Asset based commission expenses increased in line with related revenues.

Speaker 3

Based on the 5% sales projection Glenn provided earlier, we estimate sales based revenue less commissions to increase between $4,000,000 to $5,000,000 in 2024. As a good rule of thumb, on an annual basis, every $1,000,000,000 change in average client asset value translates to around $2,000,000 change in asset based revenue, less commissions and associated operating expenses. Turning next to Senior Health segment, I will focus on the financial results for the quarter since Glenn has already discussed most of the business dynamics. The segment incurred a 2,700,000 pretax operating loss compared to pretax income of $4,300,000 in the Q4 of the prior year, driven by lower sales volume and higher cost of acquisition due to lower productivity from a higher mix of less tenured agents. Looking ahead to 2024, we anticipate an operating loss, albeit smaller than prior year, as we continue to work towards improving business fundamentals.

Speaker 3

Meanwhile, we do not expect the need for a capital infusion in 2024. The CNO segment recorded a pre tax adjusted operating loss of $5,400,000 versus a loss of $8,800,000 in the prior year period. The year over year improvement is due to $7,500,000 of higher adjusted net investment income as we continue to benefit from higher interest rates on both new investments and cash balances. Partially offsetting this was higher benefits and claims costs, mainly due to a one time $3,300,000 adjustment to the ceded reserve for a closed loss of long term life insurance business. Our invested asset portfolio ended the year with a net unrealized loss of 2 $16,000,000 versus a net unrealized loss of $343,000,000 at the end of September, as interest rates fell and credit spreads tightened with a rich lifted fund market.

Speaker 3

We continue to believe that remaining unrealized loss is a function of interest rates and not due to underlying credit concerns, and we have the intent and ability to hold these investments until maturity. The portfolio continues to be well diversified and high quality with an average rating of 8. Finally, consolidated insurance and other operating expenses were $139,000,000 during the Q4, up 2% versus the Q4 of 2022. The prior year period included elevated costs associated with the launch of the new term life insurance product. Looking ahead to 2024, we expect insurance and other operating expenses to increase by around $40,000,000 or 6% to 8 dollars $17,000,000 to support growth in the business and $10,000,000 for ongoing technology initiatives.

Speaker 3

We expect term life, ISP and C and O to each incur about 1 third of the year over year increase. With that, operator, I open the line for questions.

Operator

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

Speaker 4

Good morning, Mark. Yes, thank you. Good morning. Morning, Glenn. Good morning, Tracy.

Speaker 4

Tracy, the $40,000,000 increase on the base of $142,000,000 am I seeing that properly? And if so, how much of that is related to the conference?

Speaker 3

Can you say that again?

Speaker 4

Yes. The $40,000,000 increase in expenses, is that on the base of $142,000,000

Speaker 2

Yes.

Speaker 4

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

Speaker 3

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, it's 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 2 events that we hold per year. In terms of dollars, we have about $13,000,000 for the event.

Speaker 4

Okay. Let me

Speaker 2

Mark, I would add to that. We net 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 2 incentives in 1 year and then we'll do a convention in 1 incentive the next year. So the convention is designed to roughly equate to the trip that we don't do in a convention year.

Speaker 4

Okay. Does it seem relatively elevated, again, 40 on 142 is a meaningful increase?

Speaker 2

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

Speaker 4

Yes, I apologize. I was just remarking that the $40,000,000 on the base of $142,000,000 seems like a meaningful increase. Is that were there more growth initiatives or step function and staffing this year that contributes to that?

Speaker 3

Yes, Mark. I would say that the increase year over year seems higher a percentage base compared to 2023 versus 2024. If that's what you're comparing at, you would notice that 2023 comparison to 2022 was actually lower than typical because of 2022 spend being elevated for two reasons. 1, in 2022, we had 3 sales events compared to typical 2. And then secondly, we had the elevated expense for launch of new products for term life and that also increased the spend.

Speaker 3

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 increased 17,000,000 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, productivity to support our sales force and our top line growth.

Speaker 4

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. Did that be consistent through the quarter or quarters, which is to say consistently lower losses in each quarter or will it be Willard Barry?

Speaker 3

Yes, Mark, that's a great question. There is some seasonality in the senior health business. In a typical year, you would see the 4th quarter being the most profitable because of the AEP and the volume followed by the 1st quarter and then second, 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 Q4 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 will share next quarter.

Speaker 3

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 on next quarter.

Operator

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

Speaker 4

Hey, good morning, Ryan.

Speaker 5

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?

Speaker 3

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 families. Nevertheless, we see that the policies written in the last year really had persistency very much in line with historical trend. Historical trend, by which I mean pre pandemic by and large.

Speaker 3

So we expect that over time persistency is going to return to normal and pandemic prependemic levels.

Speaker 5

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?

Speaker 2

Yes, Brian. I'll take that one because we have monitored those redemption rates as we've come through the pandemic. And you're right, they varied from a fairly stable historical trend over the years. Sometimes during the pandemic, people holding their money a little closer, redemption rates went down. And then when money has gotten tight, redemption rates have gone up.

Speaker 2

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.

Speaker 5

Okay, great. Thank you. And then since it's her last call, just want to say best wishes in retirement to Allison. Thanks.

Speaker 2

Sure. Thank you.

Operator

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

Speaker 2

Good morning, Wilma.

Speaker 3

Hey, good morning, Glenn and Tracy. I guess, if you is there a

Operator

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?

Speaker 3

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 a accurate read on it. So we really would be able to

Operator

interesting way it can flow through the quarter. So if you can give us an update there?

Speaker 2

Certainly, that's a great question and get that one 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.

Speaker 2

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 a 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 August as we have some short term incentives and the excitement immediately coming out of the 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 license. 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.

Speaker 2

Was that helpful?

Speaker 3

Yes, sounds great. Thank you, guys.

Speaker 2

Certainly.

Operator

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

Speaker 2

Hey, good morning, Ian.

Speaker 6

Good morning. 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 under served middle income market where you see the most opportunity other regions, states or cities you're targeting for higher growth? Thank you.

Speaker 2

Sure. I'll take a shot at both of those and see if it's helpful. Yes, 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 writing 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.

Speaker 2

So it was primarily money we were already receiving and 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.

Speaker 2

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.

Speaker 2

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, then 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.

Speaker 2

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 company level.

Speaker 6

Got it. Thank you so much.

Speaker 4

Certainly.

Operator

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

Speaker 4

Welcome back, Mark. Yes. Hey, glad to be back. I did want to clarify, I had framed that question badly about the expenses, the $40,000,000 increase on a base of $570,000,000 or so is a completely different matter. So using the $140,000,000 was mistake on my part.

Speaker 4

And on that basis, it looks pretty reasonable. One question on the Senior Health. You said that 25% of the leads are 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?

Speaker 2

Yes. There's still room for growth in the numbers, Mark, but the percentage is a little is artificially higher right now because of the low sales levels in the main part of the Nutellaquo business. I would anticipate that as we grow together, as we grow that business, assuming that we 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. And so it's a little artificially high percentage wise because the eTele quote leads were down in the quarter.

Speaker 2

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.

Speaker 2

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 take.

Speaker 4

Thank you very much.

Operator

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

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