Good morning. My name is Megan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Primerica third quarter earnings results webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then 1 on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. I will now turn the call over to Kathryn Kieser, Executive Vice President of Investor Relations. You may begin your conference.
Thank you, Megan. Good morning, everyone. Welcome to Primerica's third 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. We'll 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 Private Securities Litigation Reform Act. The company will not revise or update these statements to reflect new information, subsequent events, or changes in strategy.
Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's 2016 annual report on Form 10-K, as updated by our quarterly reports on Form 10-Q. I'll turn the call over to Glenn.
Thank you, Kathryn. Good morning, everyone. We're pleased to report strong financial performance and distribution growth in the third quarter. Beginning on slide three of the presentation, you can see our adjusted operating revenues increased 11% to $427.3 million. Adjusted net operating income increased 15% to $66.6 million versus the prior year period. These results were driven by increases in term life and Investment and Savings Products pre-tax income of 14% and 9%, respectively, year-over-year. Term life earnings were positively impacted by favorable mortality experience, as well as improving persistency performance relative to earlier in the year. Investment and Savings Products results primarily reflect year-over-year growth in client asset values from positive market performance and net flows. These solid results and ongoing capital deployment drove 19% growth in adjusted operating EPS year-over-year, and adjusted operating ROAE expanded to 21.7%.
Our diverse earnings streams continue to generate significant distributable free cash flow, enabling us to deliver strong returns, which are among the best in the industry. In the third quarter, we repurchased approximately $58 million of Primerica's common stock and completed our planned $150 million of repurchases for the year. We anticipate deploying capital at or above this level in 2018. Our distribution model is uniquely designed to help meet the financial needs of middle-income families, which represent about 59 million households in the U.S. On page four, you can see many of these families are underinsured, and it has been estimated they need about $12 trillion of additional life insurance to become properly protected. This provides a huge opportunity for us to fulfill this need. We are also well-aligned with emerging demographic trends because our sales force reflects the communities where we live and serve.
For example, millennials are the largest generation in U.S. history. We have worked diligently to attract this entrepreneurial-minded generation and are succeeding, with millennials now making up 40% of our life insurance-licensed sales force. We also have strong sales force leadership in strategic markets, which are expected to grow faster than the rest of the U.S. population over the next few years. Shifting to distribution results, during the third quarter, we continued to benefit from the positive momentum generated by our biennial convention in June. On page five, you can see strong recruiting growth in recent quarters led to 9% growth in new representatives obtaining life insurance licenses versus the year-ago quarter. The size of our sales force increased 8% from the prior year period and was up 2% from the second quarter.
Toward the end of the third quarter, the hurricanes in Texas, Florida, and Puerto Rico impacted the front end of our business. About 10% of our 5,000 Regional Vice Presidents either live or have offices in the disaster-designated areas and experienced disrupted activity. New life insurance licenses were impacted by pre-licensing classes and testing being postponed in these areas. In an effort to support our representatives, during September, we waived the $99 independent business application fee for new recruits residing in hurricane-affected areas. This initiative generated approximately 17,000 recruits who had fees waived, leading to a 22% increase in new recruits versus the prior year period. We are working with our field leaders to facilitate the completion of the licensing and field training process for as many of these recruits as possible.
We are also monitoring the commitment level of these recruits to determine whether their licensing rates will ultimately fall below overall company levels. We expect the overall ratio of new life insurance licenses to recruits will remain around the 17% range for the full year of 2017. In October, the life insurance license sales force expanded to over 125,000 representatives. We expect sales force growth for the full year 2017 to be 7%-8%, and we anticipate growth to continue around this level in 2018. Turning to page six, term life issued policies grew 4% in the quarter, outperforming the industry, which reported a 2% decline in life insurance applications year-over-year. Although issued policy growth was somewhat impacted in hurricane-affected areas, productivity remained at the higher end of the historical range at 0.21 policies issued per life license representative per month.
On a sequential quarter basis, term life insurance policies issued declined from the second quarter, largely reflecting higher productivity typical of the second quarter. We achieved solid Investment and Savings Products performance in the third quarter, with positive net flows of $174 million, and client asset values increasing to a record $58.7 billion at the end of the period. ISP sales increased 7% year-over-year, partially due to 10% growth in retail mutual fund sales. The successful launch of our new Lifetime Investment Platform in June drove managed account sales up 132% versus the third quarter a year ago. Both fixed index and variable annuity sales lagged the third quarter of 2016, reflecting a continued shift in larger-sized trades from annuities to other investment products. On a sequential quarter basis, ISP sales declined 9% from the seasonally higher second quarter.
We're constantly striving to drive long-term value for all of our stakeholders by evaluating uses of free cash flow and executing our strategy for future growth. We've had great success in driving organic growth over the past few years. We continue to assess opportunities to provide more solutions and value for our clients and for our sales force. Our strategy is to maximize sales force growth and productivity, broaden product offerings, and develop digital capabilities to deepen client relationships. Our most recent product enhancement was the launch of the Lifetime Investment Platform. With state-of-the-art technology and significantly expanded product offerings, our new advisory platform has been a catalyst for investment and savings product sales growth in the second half of 2017. We'll continue to look for opportunities to better serve our clients in order to drive long-term revenue growth.
In addition to broadening our product offerings, we have an ongoing commitment to developing sales force technology. In our investment and savings products business, we are working to enhance the client experience, as well as expand distribution capabilities for our representatives. Next year, we plan to launch an ISP sales tool allowing representatives to seamlessly move from a mobile life insurance application to pre-filled information in an ISP application, which will streamline the investment discussion. This tool will help guide the client through the investment decision process and ultimately provide investment alternatives based on the client's individual situation. Our new technology should create efficiencies and drive long-term productivity, as well as make the ISP business more attractive to representatives who are considering obtaining a mutual fund license. At our core, Primerica is a leadership company. We will continue to lead with great people, great products, and cutting-edge technology.
We excel at providing financial education and products to Main Street families. Our commitment to them is unwavering. We have a proven track record of success and continue to execute a strategy to deliver long-term value for all of our stakeholders. Now, I'll turn it over to Alison.
Thank you, Glenn, and good morning, everyone. Today, I will cover the earnings results for each of our business segments, followed by a company-wide review of insurance and other operating expenses and income taxes. Starting on slide seven, in the third quarter, term life revenues increased 15%, and income before income taxes grew 14% year-over-year. Adjusted direct premiums increased 16%, reflecting continued strength in term life production, as well as growth in the in-force business not subject to IPO-related coinsurance agreements. During the quarter, term life had favorable claims experience of approximately $2 million, which is consistent with our belief that the higher claims levels during the first and second quarters was normal volatility and not any indication of an emerging trend. Benefits and claims ratio of 57.6% was consistent with the prior year ratio, reflecting favorable claims experience in both periods.
We expect the benefits and claims ratio to be around 58.5% for the full year 2017 and to remain around that level in 2018. Persistency continued to improve relative to earlier in the year but was modestly unfavorable compared with the year-ago period. The DAC amortization ratio was 15.6% in the third quarter of 2017, versus 15.4% in the prior year period. If persistency remains at the level experienced in the third quarter, we would expect the DAC amortization ratio to increase to the high 16% range in the fourth quarter due to typical seasonality. This would put the DAC amortization ratio between 15.8% and 16% on a 2017 full-year basis, in comparison to 15.6% for the full year 2016. We expect to see the DAC amortization ratio run between 15.6% and 16% in 2018, with normal seasonal fluctuations. The term life business continues to produce steady and protectable long-term earnings.
While unfavorable experience impacted the first half of the year, given improvement in the third quarter, we expect the full year 2017 term life margin to be just below the 18.8% margin achieved in 2016. Assuming mortality experience stays at normal levels and persistency experience is consistent with the third quarter of 2017, adjusted for normal seasonality, we would expect the term life margin to move to just above 19% in 2018, aided by YRT reinsurance rate reductions in recent years, as well as fixed expenses continuing to be spread over a larger in-force premium base. Adjusted direct premiums have grown 15% year-to-date through the third quarter, and we expect them to grow at or slightly above this rate in 2018.
Growth continues to be delivered from the runoff of business subject to the IPO coinsurance, although this growth rate is slowly decreasing as new business is layered on each year. The strong sales levels since 2014 have also been a key contributor to adjusted direct premium growth. In 2017, a third growth driver has emerged relating to policies reaching the end of the initial level premium period that convert to new policies. Beginning in January, we stopped ceding end-of-term policy conversions to the IPO reinsurers. Retaining these conversions has increased our adjusted direct premium growth in 2017 and should continue to do so in 2018. Benefits and claims on these policies are higher than new business, but acquisition costs are lower, resulting in margins that are generally in line with new business.
The 2018 benefits and claims and DAC expectations we've shared earlier on this call reflect the end-of-term block anticipated performance. Moving to our Investment and Savings Products segment, on slide 8, you'll see ISP revenues and income before income taxes grew 8% and 9% respectively over the prior year period. Results were driven by a 14% growth in client asset values, which led to a 16% increase in asset-based revenue. Total product sales increased 7%, and revenue-generating product sales increased 2%. Driving much of the growth in total sales was a significant increase in managed account sales during the period, which was the result of the launch of our Primerica Advisors Lifetime Investment Platform in June.
While these sales do not generate sales-based revenues, they will provide about 60 basis points per year of asset-based earnings, net of sales force compensation, versus about 10 basis points per year we receive for U.S. retail mutual funds. Within our sales-based revenue generating product sales, we continue to see a shift from variable annuities to other products with lower sales-based earnings. These changes in product mix resulted in a decline in sales-based revenue of 3% versus the prior year period. Our account-based revenues increased from the year ago period, largely due to previously made changes in our account-based fee structure, as well as a higher average number of accounts subject to the fee than in the prior year period.
Canadian segregated fund DAC amortization was about $1 million higher than a year ago, mostly reflecting the deceleration of DAC amortization in the third quarter of 2016 related to positive market performance and lower segregated fund redemptions in that period. On page nine, you can see Corporate and Other Distributed Products segment results were consistent year-over-year. Net income was positively impacted by a larger invested asset portfolio, partially offset by a lower portfolio yield than the third quarter a year ago. We continue to maintain a relatively short overall portfolio duration at less than four years, as we have not seen significant incentive or opportunity to add yield by extending the duration of our portfolio.
Our overall book yield on new investments of 2.85% was in line with the second quarter, reflecting both the ongoing low rate environment and an average quality of new purchases of double A minus. Now I'll move to a discussion of the company's insurance and other operating expenses and taxes. On slide 10, you can see our third quarter expenses of $83.2 million were $5 million higher than the third quarter of last year, as expected. The year-over-year change primarily reflects $2.9 million of additional growth-related expenses, as well as $2.3 million of additional costs related to the continued development of technology platforms and mobile initiatives. The latter was partially offset by the year-over-year increase in other net revenue. On a sequential quarter basis, expenses increased by about $1 million from the second quarter, primarily due to increased growth-related expenses.
Our effective income tax rate for the third quarter of 2017 declined from the prior year period, primarily reflecting excess tax benefits of approximately $900,000 for the difference between the stock price of sales force equity awards at the time of grant and when the sales restrictions lapsed. Our income tax expense will continue to be affected by the future market prices of our common stock as sales restrictions lapse on equity awards granted to our independent sales force. We expect a tax benefit of approximately $900,000 in the fourth quarter of 2017. As I wrap up, let me say that we remain committed to maintaining a strong balance sheet and capital position. Primerica Life Insurance Company's statutory risk-based capital ratio is estimated to be around 440% in holding company liquidity at $64 million at the end of the third quarter of 2017.
We will continue to take out ordinary dividends from Primerica Life to the extent available, with the goal of maintaining our RBC ratio at or above 400%. Let's open it up for questions.
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. The first question comes from the line of Mark Hughes of SunTrust. Your line is open. Please go ahead.
Thank you. Good morning.
Good morning, Mark.
Alison, did you say there's going to be another tax benefit in the fourth quarter?
Yes, I did. We believe, obviously it's subject to the stock price, but give or take, we think it'll be around the $1 million we've been seeing the last few quarters.
Glenn, you had mentioned the number of, I think, regional leaders that were in the affected area. Did you say that was 10% area affected by the storm?
That's correct. When you combine the Primerica population of regional vice presidents in the Houston area that was impacted, the vast majority of Florida, I believe about 98% of Florida was declared counties that were within the disaster area, also Puerto Rico, which as you know, continues to struggle, the entire island does. That's about 10% of our overall RVP population.
Alison, you talked about the end of term block renewal, that as those renew, you don't have as much a ceding commission, this is in the legacy block, therefore you're retaining more of that. I see that your ceded premium relative to the legacy premium has been declining in the last few quarters. Will that continue to decline as a % of the legacy premium as this effect takes hold?
Yes, it will. We've seen, it gets a little confusing as to which line items it affects. In our financial statements, it actually impacts two different line items. It impacts the premium ceded to the IPO reinsurers, that it impacts positively, I say positively meaning we retain more of the coverage and the premiums, it also runs through other ceded premiums because we no longer get the reimbursement, if you will, from the IPO reinsurers on the underlying YRT reinsurance that also existed. That being said, we believe that we will continue to see a benefit in adjusted direct premiums. Probably it's been about 2% this year, maybe growing to about 3% next year. This business started to emerge at the beginning of 2017 when we started retaining that business from the IPO reinsurers. Again, the block will continue to grow over time.
When you say the 3% improvement, would that be next year? Because this quarter is a roughly 2% improvement. Is it another 3% next year, or is it just another point on top of the two points?
It's a great question, there's a few moving dynamics which I tried to cover briefly in my prepared comments. Remember, to sort of break down the growth in adjusted direct premiums into three components. The first component has been the general IPO reinsurance that we put in place. Back at the time, the IPO was generating very large growth in adjusted direct premiums because we had a relatively small new block of business, and that business as it started to run off, we were creating real growth. We've seen that growth subside and over periods in the past, I've said things along the lines of without any sales growth, we were looking to see about 10% growth from that component in and of itself.
That is still the case, that component does continue to decline each year as that legacy block continues to run off and the new business overshadows it continues to grow. The second component is the fact that we've seen rather strong sales growth over the last several years, since 2014, that has helped to compound and more than offset any deterioration we saw in that first component. This third component is going to grow in and of itself from the 2% to about 3% next year. You need to remember that you have the runoff of that first component continuing to happen. I think to your basic question, I would certainly not add another 3%. I think you'll continue to see some additional benefit that will help offset the runoff of the core business.
Right. The numbers I'm thinking of, I'm just looking at the premium ceded to IPO co-insurer, third quarter last year is 80.4%, this year is 78.4%, which I think is a two-point improvement. Does that drop, say, to 77 and a half? Is that the dynamic you're talking about?
I haven't looked, well, I have looked, I can't share that specific ratio, I really would drive you back to focusing on the adjusted direct premium number itself. I think what you're describing is definitely the right direction. Part of it has to do with how much direct premium we're putting on the books, that direct premium is really as much a function of new business sales and quite frankly, the sales that we've had over the last few years starting to build up in our premium base as the runoff of the co-insurance. You have two different components that you're looking at that are moving for different reasons.
Right. At the same time, you're retaining more of the legacy block, which had been running off fairly predictably. Since it's renewing and as that block renews, you're retaining more of it, then that has a tailwind to your premium. Is that a fair statement?
That is absolutely correct. I would mention that this end-of-term block in the scheme of things, is relatively small. This has been happening all year, I'd say this is probably the first quarter it started to grow to enough where I felt it was necessary to highlight it as a component of our growth. It won't ever get to be a huge component of our book of business, but it will continue to grow over the next couple of years.
The persistency you had suggested that it's been getting better, it's still not back to the norm. You gave some guidance around fourth quarter DAC, assuming it didn't improve. Is that your current anticipation that it's probably at this level, at least for the fourth quarter?
Yes. In anticipation of it not improving, it's not improving vis-a-vis where we are right now. I would highlight that the fourth quarter usually sees higher DAC amortization ratios just because of sort of some seasonality that we have. The underlying persistency component of DAC amortization is deemed or is believed to be consistent with where we are today or where we were in the third quarter. That's our assumption.
In investment and savings, that mix shift away from annuities, it sounds like that's the principal reason why your sales-based revenue is down, even though your sales are up. Am I right in hearing it's largely a mix shift? Then I'll ask, the annuity sales in the fourth quarter, when do we kind of lap some of this headwind on annuities?
I'd say the first part of your question, I'll let Glenn talk to the second part, is partially what you said. Certainly within the revenue-generating sales bucket, we're seeing less and less variable annuity and more business in the mutual fund zone, which would drive a deterioration in the sales-based net revenue ratio. That being said, I'd say probably the larger driver is the fact that so much of our sales in the fourth quarter were actually in managed accounts associated with our recent launch of a new platform, and that particular product doesn't have any sales-based earnings component. Which is why I wanted to highlight in my comments the fact that obviously, market conditions being equal, obviously I'm not going to predict what happens in the market, but we have a six times higher level of asset-based earnings on those assets than we do on mutual funds.
Obviously, can't predict what happens in the market, but assuming no real shift there, this sets us up for growth in our asset-based earnings in future periods.
Right.
Let me case this, Mark, because I agree completely with Alison's comments on the mix shift. We've been tracking the industry pretty closely on the falling variable annuity sales, and we are seeing that fall, that descent kind of slow down. The industry's reporting, I think the rule of thumb, the number that kind of comes to mind industry-wide for the last few quarters has been sales off about 15%. It looks like for the fourth quarter, that's going to slow down. That descent is going to slow down in the industry, is what they're projecting, to something maybe half that much, something in that range. Then projecting in 2018 to be down slightly, maybe right at zero, right at flat, or just a little negative. We are kind of finding, I think the industry is finding the bottom of the descent of VA sales.
As I've said, up to this point, we've tracked the industry pretty closely. That looks like similar dynamics that we've experienced in the past. I'm not going to try to project what might happen in the future, but it looks like that's what's happening across the industry as you've described it, is we're getting close to the bottom and hopefully flattening out and maybe look for some upturn somewhere in the future.
The final question here, I apologize for so many. When you look at your sales, say, in the third quarter, the fact that the annuity sales are down. Annuity sales, am I right in thinking you get a nice upfront kicker, but there are not trail commissions on that, it doesn't necessarily help your asset-based revenue? Whereas mutual fund sales and definitely the managed account sales, you get the sales volume, but it doesn't necessarily show up in the current period, but it builds a nice stream of revenue for future periods.
A little bit yes and no. When we're talking about annuities, there's actually two components. There's the variable annuities and there's the fixed index annuities. Actually, in this particular period, our fixed index annuities were down a bit more than our variable annuities were. The thing to say here is on VA, we actually do continue to have asset-based earnings that are important to us. On the fixed index annuities, that's a product where we really have virtually nothing ongoing. It's predominantly sales-based. Your comment is very true for the FIA. More modestly the case for variable annuities.
What's the mix at this point between the two?
Hey, Mark, can we move on to have somebody else ask some questions, and then can you get back in the queue?
Well, I've been having so much fun, I apologize. Yes. Have at it. Thank you.
Thanks.
Your next question comes from the line of Sean Dargan with Wells Fargo Securities. Your line is open.
Thank you, and good morning. Alison, I have a question about the DAC amortization guidance for 2018. Baked into that, is there any kind of impact from, I don't know, remediation or any proactive steps you've taken to identify sales reps who may have sold what may be problematic business?
I'll let Glenn speak to that aspect of the business. What I will say is the forecast for 2018 just really assumes that the rates that we're getting at now, which while they're a little bit lower than last year, they're not by much. I feel like they're pretty stabilized, that we continue at a stabilized rate. I'll let Glenn speak to any specifics on agents.
Yes, Sean. During the normal course of business, prior to any kind of fluctuation that's been the topic of discussion the last couple of quarters, we have monitoring processes in place that see our business and the quality of our business from hierarchy to office to individual. We absolutely can see where the challenges are emerging and what kind of patterns are emerging. In the discussion of persistency that we've had over the last couple of quarters, we said that we didn't see anything that was a fundamental flaw in the process. It looked like it was fluctuations kind of within the norms, but to the extremes outside edges of the norms, if you would.
At the same time, recognizing that better persistency is always good, started increasing our messaging about the importance of quality of business, actually increased our support levels for those that were struggling the most with their quality of business. We had very good response from the sales force to that because they understand that our interests are exactly aligned, the client's interest, the rep's interest, and the company's interest are all perfectly aligned when it comes to improving persistency. We have increased the focus on that, and we've had a great response from our sales force.
It's not that we've identified individuals whose persistency was so bad that we felt like they should no longer be part of Primerica, but we have worked with the ones that were struggling the most, and have had great response from them, and will continue to work on that front.
Okay, great. Now that we've had, I don't know, almost a week to digest the House's tax reform proposal, I'm just wondering if you have any thoughts about how that would impact your business. I don't think you do any internal quota share reinsurance, but I'm wondering if you have any thoughts on how it could maybe negatively impact statutory capital up front or, ultimately, is this tax reform a good thing for Primerica or bad, indifferent?
I will say, yes, we've had an entire week to digest this. I don't want to say that I'm an expert in it. I also don't want to say that any of it's going to actually happen exactly as it's been written so far. I think you're already hearing some commentary around looking for some changes in some of the insurance related aspects. That being said, generally speaking, the 20% rate is clearly good for us. It would bring our effective tax rate down closer to that 20%. Obviously, oddly enough, it would make our Canadian business actually an increase to our effective tax rate, where right now it's obviously a benefit to our effective tax rate.
The things that we don't have that you're seeing, I think as issues are, as you pointed out, the internal offshore reinsurance, which is, I think being hit with a pretty hard penalty. We don't have any of that as an issue. We don't have a lot of DRD, so those aren't really of much concern to us. The negatives in it are going to be, they did raise the tax DAC. They did set the deductibility of tax reserve at a number less than principle-based reserves for the future, which is not something we had anticipated. Looking at sort of the catch-up, if you will, on the reserve side, I think that might be a big component for some insurers.
Remember, for us, so much of our back book was ceded away at the time of the IPO that relatively speaking, that's not all that big of a hit for us. If it goes in as written, we would see definitely the benefits in our effective tax rate. We've seen some one-time, the catch-ups or payments. In fact, I think actually I say one-time, they're actually recognized over, I think, an eight-year period. But for those two items, but the biggest benefit we'd also have up front would be a release in our DTL. Net-net, we think it's positive. That being said, we're on board with the idea that what they've done with the tax DAC doesn't really make a whole lot of sense, although I would argue that the tax DAC in and of itself doesn't make a whole lot of sense.
It's a sort of formulaic number. With regard to RBC, we would see a deterioration for two things, the mechanics of the tax affecting of certain items as well as the reduction in the statutory deferred tax asset. That being said, we haven't spoken to the rating agencies. Our belief is that they will certainly adjust their expectations for any of those changes, because clearly that doesn't change the fundamental security or soundness of our capital position. To the extent we have to look to keep a little bit more capital in the company as we go into future, that's fine too, and we're comfortable doing that and still maintaining any other plans that we have on the agenda.
Great. Thank you.
You're welcome.
Thanks, Sean.
Your next question comes from the line of Daniel Bergman with Citi. Your line is open.
Hi. Thanks. Good morning. I guess to start with, managed account sales more than doubling in the quarter and up a lot quarter-over-quarter as well, following the recent platform launch. I just wanted to see if you could provide any more color on how the sales and reception for the Lifetime Investment Platform so far have compared to your expectations and going forward, how much more incremental upside should we expect?
Yeah. Dan, good morning. That's a great question. As you can imagine, we're very pleased with the results of the launch. We are tracking at or just above our expectations of what we hoped would occur. That is clearly a success in our book, and the team that's worked on that in our field leadership has just done an outstanding job of getting that product up and running and focusing appropriately on it for the right clients. We do believe there's more upside there. Exactly how that shapes up in the future is not something we make specific, but we think that's going to be a growing part of our business. I think that'll be driven by several things. One is our sales force gets comfortable with it and more of our sales force plugs into it. There's an upside opportunity there.
Over the longer term, as our clients age and accumulate assets, that's the natural direction of change as they move toward that type of product. Of course, you see that throughout the industry, that the managed account products have had the momentum for a number of years. We believe there's some upside there as well. We're very excited about what we've accomplished already, slightly ahead of where we'd hoped to be. At the same time, we believe there's more upside out there.
Great. That's very helpful. Thank you. Maybe just switching gears a little bit, the 4% growth in term life policies issued, it seemed like there was a modest drop in there in terms of average productivity, likely due to the hurricane activity in the quarter, at least somewhat. I just want to see if there's any color you could give to maybe help us size the amount of hurricane-related drag that was in that number and I guess also whether we should expect any related pressure from those storms into the fourth quarter.
Yeah. It's very difficult to project what might have happened had we not had the hurricanes. Clearly, we do think there was impact on our business, because we've dealt with natural disasters, weather, fire, so forth before, but we've never had this much of the sales force and our client base impacted all within the same month. That part was new to us. You're right, even with our best efforts to mitigate and keep people focused and moving, which I do believe were successful, we still did lose some pull-through on a number of fronts in our business. As we mentioned in the prepared remarks, licensing classes were canceled, states closed licensing offices, when they reopened, they focused those licensing offices on getting adjusters licensed to deal with the physical damage of the hurricane rather than getting new life insurance agents licensed.
That created some delay in that process and cost us some licenses that would've probably increased the size of the sales force more. Also, clearly, as all the state of Florida came to Georgia and evacuated went back home a week later, that cost us some sales and so forth. Again, very difficult. We've done a lot of work on trying to figure out what that might have been. You've got maybe a point or two, something like that, in there somewhere of productivity that we might have gained or licensing pull through. I believe that a lot of that will be delayed, and we'll get it later. Some of it will be lost. I mean, quite frankly, when you interrupt a sales process and delay it, you're going to lose some sales or a licensing process.
There will be a net negative impact. I do believe over time, we'll regain that. What we're seeing, if I could just comment on October since it's final, we did see a recovery of momentum in those impacted areas, both Texas and Florida. As I said, Puerto Rico is still struggling mightily, far beyond Primerica, the entire population of the island. We are seeing a nice recovery in our business, we believe that we've returned to the normal trajectory for the fourth quarter, or at least we have in October, I'd say it that way.
Great. That's very helpful color. Thank you.
Your final question comes from the line of Mark Hughes with SunTrust. Your line is open.
Welcome back, Mark.
Yes. Hey. Thank you. That renewal block within those renewal policies within the legacy block, any future persistency expectations there? If they're renewing, are they going to stick around for another decade, or are these policies that may just have a lower natural persistency because of the age?
Yeah. I like this term, I think we call them celestial lap stations. We won't get into the scheme of all of that. Understand something, what's interesting with this business is the DAC, the acquisition cost associated with this is relatively minimal. There's a little bit of field compensation, but there's no underwriting that goes on. Quite frankly, we're really not exposed to persistency so much on this business. It's sort of the exact inverse of newly underwritten business, where if we put it on the books and it lapses early on, we have to take a big write-off of our DAC. In this case, honestly, we're carrying large reserves for these policies.
While we don't want to have lapsation, and we've modeled and we price this business for a certain level of lapsation, there is sort of an expectation, given the age of the policies and, quite frankly, the ongoing need of insurance once you hit these ages, about persistency. That being said, the thing that's been driving the exposure on our financial statements, I don't think you'll see really any component of that because the DAC is relatively de minimis. Let me say there's been somebody highlighted, and it's in our Financial Supplement, we do this roll forward with terminations. The one thing that does happen, and it's not once the policy's converted, it's actually as the original policy comes to end of term, we do see a much higher level of lapsation than we do in other years.
Again, that being said, from a financial standpoint, at that point, the DAC and the reserve is essentially written off, there's no end of term lapse financial impact. We already see a much elevated level not go further with their coverage, which again, is perfectly expected given the term nature of the policy. The people that do go ahead and convert or renew, some people actually choose to renew under their existing contract. Again, there is perhaps a slightly higher persistency there, but it's not a real financial concern the way you've seen on newly underwritten business.
How about just from a duration of the business, thinking in the premium terms rather than DAC terms. The legacy block has had a fairly predictable maturation. Would this also have sort of a similar profile at the top line, or would you might see this drop off a little faster?
This is a pretty complicated block of business, the one thing that may create, or one of the things that may create more noise, more volatility is that, in any given period, for example, let's talk about the third quarter of this year. We have a block of business that was issued in 2006 and 2007 that were 10-year policies. Those have come up to end of term. Those people are for the first time. Those people are probably, in the scheme of things, relatively younger than some other end of term candidates. For example, we also have in this period, policies that were originally issued in 1986 and 1987 that were 20-year policies that have already been through an end of term conversion, and in 2006 and 2007 took a 10-year policy and are now actually considering going for another extension.
Those folks are generally older than the first group I described. It's a little bit harder to say that all of these blocks will behave exactly the same. I think the more important thing to say is this is not a huge component of our adjusted direct premium. It is driving a little bit of noise here, a little bit of, quite frankly, improvement. Given that the margins are relatively consistent, I think the bottom line should still relatively move with adjusted direct premiums. It just does create a little bit more noise in the benefit line, so you'll see more benefits and less DAC. This is a lot of geography noise for a relatively small component of the total. It is one of the pieces that's driving growth in adjusted direct premiums, so we wanted to make sure we were clear about it.
Right. Understood. The total face amount that you provide and you had referred to how you can look at the newly issued and then the policies that drop off. That total face amount, that is for all of the legacy and the direct or the new business. Is that correct?
Yes. The roll forward that we provide in the Financial Supplement is for the entire book of business.
If we wanted to try to gauge how much of that you retain, would we just kind of do a simple calculation and take the amount that you cede to the IPO co-insurer?
Yeah.
That roughly.
Kathryn shared with me that you had this question. This is not a back of the envelope. I can't do that back of the envelope. That's not how we look at it.
Yeah.
We're happy to take some look at it and see, but I can't answer that question right now. It's certainly not a back of the envelope, and again, like I said, that's not how we look at things.
Right. I understand, there's not anything obvious that jumps out at you as to why that would be a bad calculation.
There's nothing, I also before I want to say yes, do that, I want to make sure that's right. There's nothing I can see of that I'd say, "Oh, no, you must adjust for X, Y, or Z.
Yeah. Okay. Understood. Thank you very much.
Thank you.
Thank you.
There are no further questions at this time. This concludes today's conference call. You may now disconnect.