Kathryn Kieser - EVP, IR Glenn Williams - CEO Alison Rand - CFO.

Ryan Krueger - KBW Dan Bergman - Citigroup Mark Hughes - SunTrust Robinson Humphrey Sean Dargan - Wells Fargo Adam Klauber - William Blair.

Presentation:.

Good morning and welcome to the Primerica Q4 2016 Financial Results Conference Call and Webcast. All participants will be in a listen-only mode [Operator Instructions]. After today presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Kathryn Kieser, Executive Vice President of Investor Relations. Please go ahead..

Thank you. Good morning, everyone. Welcome to Primerica's fourth quarter earnings call. A copy of our earnings release, financial supplement, presentation and webcast of today's call are available on our website at investors.primerica.com.

Glenn Williams, our Chief Executive Officer and Alison Rand, our Chief Financial Officer, will deliver prepared remarks. Then we will open it up for questions. We reference certain non-GAAP financial measures in our press release and on this call.

These non-GAAP measures have limitations and reconciliations between GAAP and non-GAAP financial measures are attached to our press release. We will also make forward-looking statements in accordance with the Safe Harbor Provision of the Securities Litigation Reform Act.

The company will not revise or update these statements to reflect new information, subsequent events or changes in strategy. Risk and uncertainties that could cause actual events to differ material from those expressed or implied are discussed in the company's 2015 annual report on form 10-K, as updated by our quarterly reports on form 10-Q.

Now I will turn the call over to Glenn..

Thanks, Kathryn and good morning, everyone. I’ll start with our 2016 achievements then move to fourth quarter results and wrap up with the opportunities ahead of us. For the full year 2016, we continue to execute our strategy to drive growth and improve performance by expanding distribution, deploying mobile technology and repurchasing shares.

On page three, you can see our net operating income grew 13% and we achieved a 22% increase in operating EPS and a 210 basis point increase in operating ROE compared with 2015. The solid foundation we built over the last couple of years is focused on growing our sales force and its leadership to meet the expanding needs of middle income clients.

At the same time we have been working on incremental enhancements across our business to produce positive financial results. Technologies played a significant role in the improved performance of our core model.

Our commitment to developing mobile technology capabilities throughout our business has led to delivering and enhanced client experience, greater processing efficiencies, more comprehensive representative training and higher sales force productivity.

New mobile sales also appeal to a broader spectrum of age groups and provide a platform for more effective interaction with perspective clients, recruits and our sales force. By utilizing robust communications we were able to deliver messaging that informed and motivated our sales force.

We also encouraged real-time feedback from our senior leaders, which enabled us to achieve greater success with our sales incentives and real time recognition programs. These initiatives have created strong alignment between the sales force and the company.

We also continue to work on every facet of life insurance licensing, including state and prudential processes, representative education and test preparation. Our objective is to increase licensing success for the broader spectrum of recruits.

As an example, we work diligently to prepare for the implementation of the new Canadian licensing process in 2016. Our efforts resulted in continued growth of the Canadian life insurance sales force now at its record size.

These strategic initiatives have led to a very attractive value proposition for our representatives and helped increase the size of our life license sales force to 116,827 up 9% from the end of 2015.

The productivity of our life insurance sales force also remained at the top end of the historical range for seven quarters, which led to the 15% growth in life insurance policies issued in 2016.

This growth has far exceeded the 1% increase in application activity for individually underwritten life insurance policies reported by the MIB Life index in 2016. The Term Life segment achieved strong results in 2016 with revenues increasing 13% and operating income before income taxes up 23% year-over-year.

The Term Life operating margin expanded 150 basis points from 2015, reflecting business growth, improved claims experience in 2016 and the benefit of renegotiated reinsurance rates in previous years.

Turning to our Investment and Savings Products business, ISP operating revenues and operating income before income taxes remained relatively consistent year-over-year despite headwinds experienced in 2016.

Product sales were impacted by uncertainty in the market early in the year and throughout 2016 variable annuity sales were weaker industry wide, impart due to the impending DOL fiduciary rule. Market conditions improved in the second half of 2016 and ISP sales ended the year 5% lower than 2015.

Client asset values grew to a record $52 billion at year-end including $975 million of positive net flows during 2016. Over the past few years, we've focused on increasing the profile of our investment and savings business within our sales force and expanding our ISP product offerings.

Throughout 2016, we work to develop Primerica's new life time investment platform, which we expect to launch in the second quarter of 2017. It will have multiple approaches, strategies and product types.

This new platform has generated a lot of excitement from our series 65 license representatives, as well as interest from mutual fund license reps in obtaining a series 65 license. Our number of representatives with the series 65 license increased 10% from the end of 2015.

In addition to our strategic initiatives to drive organic growth, we remain committed to increasing stockholder value by actively deploying capital. Our strong and diversified cash flows have allowed us to return a significant amount of our operating earnings to stockholders on an annual basis.

In 2016, we continued optimizing capital by repurchasing $150 million of shares which enabled the retirement of approximately 6% of common stock outstanding as of December 31, 2015.

These returns reflect our confidence in our business and future prospects and we're pleased to have returned approximately 85% of operating earnings to stockholders in 2016, including stockholder dividends. We plan to repurchase another $125 million to $150 million of shares in 2017. Now let's turn to fourth quarter results on page four.

Operating revenues increased 10% and net operating income grew 11%, compared with the fourth quarter of 2015. Earnings growth and share repurchases throughout 2016 drove an 18% increase in diluted operating EPS to $1.19 and operating ROAE expanded to 19.2% in the fourth quarter of 2016.

Term Life business results reflected continued momentum in adjusted direct premiums and typically lower fourth quarter persistency experience that was also weaker than historical levels in the period.

Investments and Savings Product performance improved in the fourth quarter due to higher average client asset values and stable product sales year-over-year. ISP segment results also include the full year impact of a change to the annual account based fee structure, implemented in the fourth quarter of 2016.

Turning to page five, in the fourth quarter we saw a 6% increase in new life insurance licenses from the very strong licensing results in the fourth quarter a year ago.

The ratio of new recruits obtaining a life insurance license dipped slightly below historical levels due to the 24% increase in recruiting of new representatives versus the prior year period.

Fourth quarter recruiting growth was spurred by approximately 4,000 new recruits whose entry fee was waved, as a result of a November initiative to honor the men and women of the military. On a sequential quarter basis, recruiting and licensing both declined during the typically slower holiday season.

We expect the ratio of new life insurance licenses to recruits for the full year of 2017 to continue to be around the 2016 full year level of 17%. We also expect the ratio of license, non-renewals and terminations to sales force size to remain in the 8% per quarter range for the full year 2017.

We are optimistic about continued increase in the size of the sales force with a goal of high single-digit growth on an annualized basis.

On page six, you can see Term Life insurance policies issued increased 14% from the fourth quarter a year-ago, driven by the larger life insurance license sales force and productivity of 0.23 policies for a life insurance license representative per month, which top the high-end of the historical productivity range.

Fourth quarter Investment and Savings Product sales were flat year-over-year, reflecting higher retail mutual fund sales and fixed index annuity sales, offset by a decline in variable annuity sales consistent with industry trends.

Net flows were positive $304 million in the fourth quarter and client asset values increased to 11% to a record $52.3 billion at the end of the year. On a sequential quarter basis, ISP sales increased 5% due to market performance. This sales momentum continued in January. As we begin 2017, I am optimistic about the growth opportunities ahead.

The business environment appears to be more positive on a number of fronts. Personal financial confidence on Main Street remains high in the pendulum of regulation is reversing direction, which should be beneficial to our business.

Over the past year, we have devoted significant resources preparing for the implementation of the Department of Labor’s fiduciary rule. We believe the DOL rule will most likely be delayed for future review and Primerica plans to continue actively participating in the rule making process.

Our priority continues to be acting in the best interest of our clients. We take an educational approach delivered at the kitchen table; offering middle income families the products and help they need to make prudent financial decisions.

We believe in client choice, whether that means a mutual fund, with an upfront sales charge or an advisory account with an asset base fee. We have an unwavering commitment to serve middle income families and we are guided by their need to save for retirement.

We have been developing robust Investment and Saving Product systems and processes to comply with the DOL rule. We will continue to build our infrastructure and develop changes to our client facing sales tools to enhance our ISP business and position us for future regulatory change.

The streamline sales process will make trade execution easier, provide greater operational efficiencies and create a more attractive business for representatives considering obtaining a mutual fund license. Every day we strive to improve the business for our representatives, clients and stockholders. Our theme for this year is unfinished business.

The work we have accomplished over the past several years has paid off, but there is still a lot left to do.

Working side-by-side with our sales force, I feel good about our ability to meet the growing demands of main street clients and provide appropriate solutions for their financial challenges, in order to drive future growth and long-term value for all of our stakeholders. With that, let me turn it over to Alison..

Thank you, Glenn, and good morning, everyone. Today, I will share with you the key drivers behind our fourth quarter segment financial results, and then conclude with a companywide review of insurance and operating expenses.

Starting on slide seven, in the fourth quarter, our Term Life segment’s operating revenue increased 13% and adjusted direct premiums increased 14% year-over-year, reflecting continued strength in Term Life production as well as growth in the in force business not subject to IPO related co-insurance.

Operating income before income taxes grew 11%, while operating margins contracted modestly to 17.3% from 17.7% year-over-year. As we have typically seen in the fourth quarter, persistency was seasonally lower than in other quarters and in addition was weaker than in the prior year period.

In the aggregate, claims were largely in line with the historical trends with higher life insurance claims being offset by lower disabled life claims. As we've historically done in the fourth quarter we finalized our new business assumptions for 2016 sales increasing the persistency assumption for later policy duration based on recent experience.

The net impact of weaker persistency claims experience and finalizing business assumptions was approximately $3 million unfavorable for the quarter.

The benefits and claims ratio improved slightly to 58% from 58.3% in the fourth quarter of 2015 as lower reserves from the weaker persistency were offset by higher reserves from the finalizing a business assumption. DAC amortization ratio increased to 17.9% from 17% in the prior year mainly due to the weaker persistency.

The net insurance expense ratio was consistent with the fourth quarter a year ago. On a sequential quarter basis, both income before income taxes and the Term Life operating margins declined from the third quarter of 2016.

These trends are driven by the seasonally lower persistency in the fourth quarter combined with third quarter claims experience that was $3 million favorable to historical levels. The net insurance expense ratio was in line with the third quarter.

Looking ahead to 2017, we expect attractive adjusted direct premium growth in the mid-teens as a result of recent and continuing strength in policy issuance combined with the coinsurance transactions we enter into at the time of the IPO.

On an annualized basis, we expect the benefits and claims ratio to remain in the 58% to 59% range and the DAC amortization ratio to be around 15%. The insurance expense ratio should show slight improvement from the 2016 level and Term Life operating margins are expected to be in the 19% to 20% range for 2017.

Moving now to our Investment and Savings Products segment, on slide eight we see both our ISP operating revenues and operating income before income taxes increased 6% from the fourth quarter a year ago, while revenue generating product sales were consistent with the year ago period.

Sales based revenues declined 2% looks like being a shift in product mix from variable annuities to U.S. retail mutual funds. The sale based net revenue was consistent year-over-year. Net revenue ratio was consistent year-over-year.

Asset based revenues increased 8% year-over-year in line with average current asset value and the asset based net revenue ratio was consistent year-over-year. Canadian segregated fund DAC amortization was lower than normal, reflecting an updated assumption for lower future redemptions based on emerging experience.

The similar adjustment was made in the fourth quarter of 2015. Account based revenues grew year-over-year largely reflecting an increase in our account based fee structure on U.S. qualified accounts. The $4.1 million full year impact of this change was recognized in the fourth quarter. Although going forward it will be accrued quarterly as it is earned.

This was also the largest driver of the 14% sequential quarter growth in ISP income before income taxes. On slide nine you can see the corporate and other distributed product segment operating revenues were $28.3 million and operating losses for income taxes were $6.4 million in the fourth quarter of 2016.

Net investment income continues to be impacted by low investment portfolio and market yields. Additionally in the fourth quarter there was a $0.2 million negative total return on the deposit assets stacking an IPO related reinsurance agreement as a result of a negative $1.3 million mark-to-market adjustment on the assets.

Net unrealized gains on our invested asset portfolio decreased from $110.4 million at September 30, 2016 to $65.8 million at quarter end due to increasing interest rates during the quarter. The average book yield of our fixed income portfolio at quarter end was 4.21%, down slightly from September 30th as is generally reinvested on a short-term basis.

While rising rates should continue to provide us with better yielding investment opportunities, the impact of reinvestment will be gradual. Over the next 12 months approximately 10% or $173 million of our portfolio will mature with an average yield of around 3.7%.

The effective income tax rate for the fourth quarter of 2016 was 34.7%, up from 33.8% in the prior year period. The increase was largely due to higher nondeductible expense items and a smaller annual release of exposure reserve relative to the prior year period.

Beginning in the first quarter of 2017, we will adopt a new accounting standard which will increase the volatility of our effective tax rate. Prior to 2017, we recorded the tax benefit or expense for the difference between the stock prices of equity award at the time of grant, investing in the balance sheet.

The new accounting standards require this difference to be recorded as an income tax benefit or expense in the income statement. So, our income tax expense will be affected by future market prices of our common stock.

As an illustration, based on employee equity awards that are projected to best in 2017 and yesterday's closing price of $77.50, the impact would be a reduction to income tax expense of about $2.1 million. We will see this impact in the first quarter as that is when the bulk of the annual awards that are granted to employees best.

Additionally on a quarterly basis, sales restrictions lapped on equity awards granted to our independent sales force, which will also reduce result in an adjustment to income tax expense. For the first quarter of 2017, we expect this to further reduce income tax expense by about $700,000.

Now I'll move to a discussion of the company's insurance and other operating expenses. On slide 10, you can see our fourth quarter expenses of $77.9 million were $6.3 million higher than the fourth quarter of last year.

The year-over-year change primarily reflect a $2.7 million increase in employee related expenses, $1.6 million spend on DOL fiduciary rule preparation and $2.6 million additional investment in technology infrastructure and mobile initiative. The latter largely being offset by the year-over-year increase in other net revenues.

Premium and growth related expenses of $0.6 million higher, which was lower than the usual increase due to a favorable premium tax rate adjustment in the quarter. Looking ahead to the first quarter of 2017, we expect the typical sequential increases in our insurance and other operating expenses that we normally see.

As a reminder our first quarter expenses are usually higher due to the impact of the annual grant of management equity awards to retirement eligible employees that are fully expensed and granted as well as other annual employee-related and operational increases you need to the first quarter.

We expect a $10 million increase in employee related expenses and additional $1.5 million for seasonal expenses related to annual mailings of privacy letter and mutual fund holders' tax documents in the first quarter. On previous calls, we indicated that implementation costs for the DOL rule would be about $10 million for 2017.

As Glenn discussed, we will remain actively engaged in the fiduciary rule making process and we'll continue to invest in the development of sales tools and processes to enhance our IST business.

While it is too early to have a full view of 2017 expenses for these efforts, given the likely rule delay, we anticipate that 2017 cost will run a few million dollars less than the original $10 million estimate.

As a wrap up let me say that we've remained committed to maintain a strong balance sheet and continue to demonstrate a strong capital position with Primerica life insurance company's statutory risk based capital ratios estimated to be around 450% and holding company liquidity of $68 million at the end of 2016.

As the business builds and we continue to take out ordinary dividends we expect our RBC ratio will remain in excess of 400% in 2017. With that let me open the call up for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the Ryan Krueger of KBW. Please go ahead..

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The next question comes from Dan Bergman of Citi. Please go ahead..

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The next question comes from Mark Hughes with SunTrust. Please go ahead..

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[Operator Instructions] The next question comes from Sean Dargan of Wells Fargo. Please go ahead..

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The next question is from Adam Klauber of William Blair. Please go ahead..

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The next question is a follow up from Mark Hughes of SunTrust. Please go ahead..

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Ladies and gentlemen that concludes today's question-and-answer session and thus concludes today's call. We thank you very much for attending the presentation. You may now disconnect your lines. Take care..