Hello, and welcome to the Primerica, Inc. Third Quarter 2014 Financial Results Conference Call and Webcast. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Kathryn Kieser, Executive Vice President of Investor Relations. Ms. Kieser, please go ahead.
Good morning, everyone. Thank you for joining us today as we discuss Primerica's results for the third quarter of 2014. Yesterday afternoon, we issued our press release reporting financial results for the quarter ended September 30th, 2014. A copy of the press release is available in the investor relations section of our website at investors.primerica.com. With us on the call this morning are Rick Williams, Chairman of the Board and Co-Chief Executive Officer, John Addison, Chairman of Primerica Distribution and Co-Chief Executive Officer, and Alison Rand, our CFO. We reference certain non-GAAP financial measures on our press release and on this call. These non-GAAP financial measures are provided because management uses them in making financial operating and planning decisions and in evaluating the company's performance. We believe these measures will assist you in assessing the company's underlying performance for the periods being reported.
These non-GAAP measures have limitations, and reconciliations between non-GAAP and GAAP financial measures are attached to our press release. You can see our GAAP results on page three of the presentation. On today's call, we will make forward-looking statements in accordance with the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may project, indicate, or imply future results, events, performance, or achievements and may contain words such as "expect," "intend," "plan," "anticipate," "estimate," and "believe," or similar words derived from those words. They are not guarantees, and such statements involve risks and uncertainties that could cause actual results to differ materially from these statements. For a discussion of these risks, please see the risk factors contained in our Form 10-K for the year ended December 31st, 2013. This morning's call is being recorded and webcast live on the internet.
The webcast and corresponding slides will be available in the investor relations section of our website for at least 30 days after the presentation. After the prepared remarks, we will open the call to questions from our dial-in participants. Now I'll turn the call over to Rick.
Thank you, Kathryn, and good morning, everyone. As you can see on page four, during the third quarter of 2014, our operating revenues grew 9%, and net operating income increased 2% compared with the prior year period. Net operating income per diluted share was $0.76, and net operating income return on adjusted equity was 13.8% for the quarter. These results were driven by strong product performance, including a 10% increase in total Investment and Savings Products sales and a 16% growth in average client asset values, as well as an 11% growth in Term Life adjusted net premiums year-over-year. During the quarter, operating revenue outpaced net operating income, partially due to the accelerated recognition of expenses related to changes in retirement provisions of employee equity awards issued in February of 2014.
Following the change, Primerica's most long-term employees, who are at least 55 years old and whose age plus years of service equals at least 75, will, upon retirement, receive the full vesting of those equity awards. Since approximately one-third of our 2014 employee equity award recipients meet this criteria, insurance and operating expenses increased by $5.1 million during the period. This third quarter expense reduced net operating income per diluted share by $0.06 and net operating income return on adjusted equity by 1.1%. During the third quarter, we also experienced high claims volumes, with incurred claims reported at approximately $3 million, or $0.04 net operating income per diluted share higher than historical trends. Adjusting for the accelerated equity compensation expense and higher incurred claims, return on adjusted equity was in line with the expected 15%-16% range, and operating earnings per share would have been higher by approximately $0.10.
Net investment income continued to experience downward pressure in the third quarter from lower yields on invested assets and limited growth in our invested asset base from share repurchases. During the quarter, we retired $30.5 million of Primerica's common stock. Through October, we have repurchased $96.8 million of common stock, retiring 2 million shares year-to-date. The redundant reserve financing transaction completed in July, which enabled the execution of our multi-year capital strategy to return approximately $150 million of capital to shareholders annually through 2016. Now turning to production results. In the third quarter, Term Life insurance policies issued increased 2% from the year ago period and declined 7% from the seasonally strong second quarter. Average annualized issued premium per policy remained consistent with both the third quarter of last year and the second quarter of 2014.
Productivity in the third quarter of 0.19 policies issued per life license representative per month was consistent with the prior year period and lower than the seasonally higher second quarter. Year-over-year Investment and Savings Products sales increased 10%, aided by favorable market conditions and recent product introductions. retail mutual funds grew 18%, driven by market performance. variable annuity sales benefited from recent product additions, increasing 12% from the third quarter of last year. variable annuity products underwritten by Lincoln Financial and AXA represented 79% of variable annuity sales in the third quarter. managed account sales increased 16%, while managed account average client assets grew 46% year-over-year. During the third quarter, net flows were positive $171 million, and average client asset values were $47.83 billion, up 16% from the third quarter a year ago.
Sequentially, Investment and Savings Products sales decreased 4% from the strong sales in the second quarter during the IRA season. Average client asset values were up 3% from the second quarter. The quality of our Investment and Savings Products business is a result of the financial education we provide middle-income families. One of the basic investment principles we teach our clients is how dollar-cost averaging through systematic investing over time can help them reach their retirement goals. Due to this educational and systematic approach, roughly half of our total retail mutual fund sales are from existing clients, and over 70% of our client accounts are in qualified retirement plans. In the third quarter, over 580,000 or 24% of the U.S. mutual fund accounts on our platform invested new money through previously authorized bank drafts.
The majority of our clients are long-term investors, they are less likely to act on short-term market movements, and their actions generally lag both positive and negative longer-term market trends. Primerica's redemption rate has historically been lower than the industry, and was 10% in the third quarter. John will discuss distribution results.
Thanks, Rick, good morning, everybody. We are pleased with the continued growth of the size of our sales force, the increase in Term Life policies issued, and the double-digit growth in ISP sales achieved in the third quarter. As you can see on slide five, the size of our life license sales force increased 4% to 97,966 representatives in the third quarter versus the prior year period. Although year-over-year recruiting and licensing comparisons were difficult. The post-convention incentives in July and August of 2013 resulted in elevated recruiting levels that led to more life insurance licenses in September and October of last year. In the third quarter of 2014, recruiting and new life licenses declined 5% and 9% respectively compared to the year-ago period.
On a sequential basis, the size of our life insurance license sales force grew 1%, while new life licenses declined 3% compared with the second quarter due to recent recruiting levels, as well as seasonally higher licensing in the second quarter. The ratio of new representatives obtaining a life insurance license declined slightly on a year-over-year basis and was consistent with the second quarter of 2014. The ratio of representatives renewing their life insurance licenses slightly improved over both the prior year and the prior quarter period. In each quarter of 2015, we expect this non-renewal ratio to be approximately 8% with some quarterly variation. We are working to increase recruiting levels through incentive modifications and promotions in order to feed the licensing pipeline and grow the size of the sales force.
We've also recently increased our focus on the millennial market, including new millennial-centric media, mobile sales tools, and training. Incremental enhancements are also being made across the business to drive sales growth. As an example, our PC-based financial needs analysis has been migrated to web-based technology, enabling the recent introduction of a mobile financial needs analysis application. We've added more robust illustration software for our investment business. We continue to work with key states to improve the life licensing test pass rates and administrative processes. We have simplified representative administration by greatly expanding the functionality of our client web portal with the ability to execute policy amendments, policy change forms, and child rider conversions. We feel good about the positive momentum that has been created from these initiatives. In September and October, activity levels increased.
The recruitment of new representatives, the life insurance policies issued, and the sales of investment and savings products all experienced solid growth over the prior year period. In the fourth quarter, we anticipate the number of representatives in the life license sales force to increase from the third quarter of 2014, in line with the increase in the size of the sales force between the third and fourth quarter last year. As we drive towards 2015, we continue to work on initiatives and business enhancements focused on supporting our sales force and building long-term distribution growth. Now I'll turn it over to Alison to walk through our financial results.
Thank you, John. Good morning, everyone. Today, I will cover segment operating results followed by a review of company-wide operating expenses and invested assets. Starting with Term Life on slide six, year-over-year operating revenues increased by 9%, largely driven by an 11% increase in adjusted direct premiums. Total direct premiums grew 2% year-over-year, generally driven by the growth in face amount in force. Primary direct premiums grew 22%, while legacy direct premiums declined 3%. We expect primary direct premiums to continue to experience strong growth as we layer on new business. Legacy direct premiums, as well as premiums ceded to Citi, should continue to decline approximately 3%-4% on a year-over-year basis as this closed block runs off. Allocated net investment income was relatively flat with the prior year period as growth in assets required to support the segment was offset by lower yield on invested assets.
We will continue to see pressure growing allocated net investment income while yields available on new investments remain lower than maturing assets. Total benefits and claims, net of other ceded premiums, increased to 60% of adjusted direct premiums, higher than the typical 59% range due to incurred claims that were approximately $3 million above the historical trend. We believe this was a statistical fluctuation and is not atypical of incurred claims volatility we experience from time to time. The increase largely relates to the average face amount of reported claims, which increased by 11% in the quarter. The number of reported claims was in line with historical experience. We expect total benefits and claims to return to the typical range experienced in prior periods, although volatility from quarter-to-quarter should always be expected.
DAC amortization and insurance commissions increased as a percentage of adjusted direct premiums from 14.9% in the prior year to 15.4% this year, reflecting the shift in our incentives towards more deferrable programs in recent years. This higher level of commission deferrals will continue to put pressure on this ratio, but barring any changes in our compensation structure, should normalize in 2015. Persistency slightly improved compared with the third quarter a year ago. In the fourth quarter, persistency should slightly decline in line with typical seasonality, causing DAC amortization to increase as a percentage of adjusted direct premiums versus the third quarter. Term Life insurance expenses included a $2.5 million acceleration of equity compensation expense that I will discuss further in a minute. Adjusting for that item, Term Life insurance expenses increased with normal business growth, the run-off of Citi allowances, and the annual accrual true-up for employee benefits.
The ratio in insurance expenses to adjusted direct premiums increased to 10.1%, or adjusting for the equity compensation accelerated expense, was 9.1%, roughly in line with recent trends. For the quarter, Term Life operating income before income taxes declined 8% to $45.9 million, and the segment's operating margin declined from 24.4% to 20.1% year-over-year. Adjusting for the accelerated equity award vesting and the higher than normal mortality, the operating margin would have been 22.5%. On a sequential quarter basis, operating income before income taxes declined 17% as growth in adjusted direct premium was offset by higher employee-related expenses and incurred claims in the third quarter, as well as seasonally favorable persistency in the second quarter.
Looking at the Term Life sub-segments, new term pre-tax operating income as a percentage of direct premiums slightly declined versus the prior year period due to elevated insurance expenses and incurred claims, as well as higher DAC amortization in the third quarter of 2014 from increased commission deferrals in recent years. In Legacy, pre-tax operating income as a percentage of direct premiums declined to 5.5% year-over-year, reflecting higher incurred claims and downward pressure on allocated net investment income due to the low rate environment. As a reminder, we will discontinue reporting new term and Legacy sub-segment results in our financial supplement in 2015. Now let's move to the Investment and Savings Product segment on slide seven. Operating revenues increased 13% in the third quarter, driven by 12% growth in sales-based revenue and 15% growth in asset-based revenue compared with the prior year period.
Strong mutual fund and variable annuity sales drove a 10% increase in revenue-generating product sales, leading to the growth in sales-based revenue. Sales-based commission expense grew roughly in line with sales-based revenue. The increase in asset-based revenue was consistent with the growth in average client asset values, primarily reflecting U.S. and Canadian market performance. Asset-based revenues and asset-based commission expense growth were in line year-over-year when considering that Canadian segregated fund sales commissions paid to our sales force are recognized over future profit stream as amortization of DAC, or to a lesser extent, insurance commissions. DAC amortization remained consistent with third quarter a year ago. Year-over-year account-based revenue increased 5%, reflecting the 4% growth in our fee-generating accounts, which was primarily driven by growth in managed accounts.
Investment and savings products operating income before income taxes year-over-year grew 17%, driven by the aforementioned factors as well as lower legal fees and expenses, partially offset by higher employee and growth-related expenses in the year ago period. On a sequential basis, ISP revenues increased 1% and operating income before income taxes grew 2%, primarily reflecting growth in average client asset values in the third quarter, partially offset by seasonally higher product sales and slightly lower Canadian segregated fund DAC amortization in the second quarter. On slide eight, you can see that corporate and other distributed products operating revenues declined 9% to $16.6 million. The decline results from lower allocated net investment income, reflecting share repurchases and a run-off of assets with book yields higher than those currently available in the market. We also experienced a lower return this period on the deposit asset backing a reinsurance agreement.
Operating loss before income taxes in this segment remained consistent year-over-year. Revenue trends, combined with the accelerated equity compensation expense and an annual employee benefit accrual true-up, more than offset a $4.4 million increase in policy reserves in the prior year period for certain non-Term Life insurance products underwritten by our New York subsidiary. Turning to insurance and operating expenses on slide nine. Insurance and operating expenses were at $76.7 million for the quarter, up $8.9 million from the prior year period. The year-over-year increase was largely driven by the $5.1 million of accelerated employee equity award expense that I'll discuss further in a moment. In the third quarter, employer-related expenses increased $2.2 million from the year ago period. $1.1 million of the expense was related to an annual accrual true-up of employee benefits, with the balance reflecting annual merit increases.
The decline in legal fees and expenses from the prior year was offset by increases in expenses, largely related to growth in our Term Life lines and ISP businesses and the run-off of Citi reinsurance expense allowances. On a sequential quarter basis, insurance and operating expenses were up $6.2 million, mainly due to accelerated equity compensation and the annual employee benefit accrual true-up. Adjusting for the accelerated equity compensation expense, third quarter insurance and operating expenses were $71.6 million. We expect our fourth quarter insurance and other operating expenses to be roughly consistent with the adjusted third quarter level. Before I move on from expenses, let me provide some detail on what you should expect expense-wise going forward from the retirement provision we added to equity awards this quarter. The plan modification affects only the timing of expense recognition and not the total amount of expense to be recognized.
Beginning with the 2014 equity grant, expense will be recognized immediately for retirement-eligible recipients rather than being recognized over the three-year vesting period of the award. To the extent we continue to grant equity awards in the first quarter each year, the resulting portion of equity award compensation expense attributable to retirement-eligible employees will be recognized upon the grant date in the first quarter rather than spread over three years. For example, in the first quarter of 2015, we expect to issue another grant that will include these new vesting on retirement provisions. Assuming grant levels and distributions consistent with the 2014 awards, the impact of those provisions should accelerate roughly $6 million of expense into Q1 2015 that otherwise would have been spread over three years.
The accelerated expense should be offset by lower expenses in each of the following quarters, for a net higher expense of approximately $3.1 million in full year 2015 than would have been recognized under our original vesting program. We anticipate annual expenses will return to a normalized run rate once we have three tranches actively vesting under these new terms. On Slide 10, you can see that investments in cash totals $2.23 billion as of September 30, 2014, up from $2.04 billion at June 30, primarily due to the $189.8 million asset that was received as part of the redundant reserve financing transaction. This asset was offset by a surplus note in the same amount reflected in liabilities and is not included in our discussion of portfolio metrics.
The average book yield of investments excluding cash at quarter end was 4.62%, down slightly from 4.76% at June 30, as the yield on new purchases were lower than the assets that matured. During the quarter, the new money rate on purchases was 2.29%, down from 2.55% in the second quarter. This rate was negatively impacted by the purchase of short duration, high-quality asset-backed securities in Primerica Life in anticipation of ordinary dividend payments to the holding company. Excluding the purchases of these asset-backed securities, the average yield on purchases for the quarter was 3.63%, which is more in line with recent periods. The liquidity profile of our holding company continues to be very good.
As Rick mentioned earlier, the completion of the reserve financing transaction puts us in a strong position to execute our stated capital deployment plan of returning approximately $150 million of capital to stockholders annually through 2016. While our general expectation is to return capital to shareholders ratably throughout the year, the pace at which we will move capital from Primerica Life to the holding company will be governed by our ordinary dividend capacity pursuant to Massachusetts statutes. We moved $68 million of capital from Primerica Life to the holding company in the third quarter and plan to move about $165 million in the fourth quarter. Our RBC ratio is expected to fall to the low to mid-400 range in the near term. As of September 30, 2014, the holding company had invested assets and cash of $93.8 million, more than ample to cover its modest cash needs.
Our anticipated ordinary dividend to the holding company in the fourth quarter will result in a buildup of capital at the holding company by year-end in the $190 million to $200 million range, which will support capital deployment in 2015. I'll now turn it back over to Rick.
Third quarter results were marked by solid growth in recurring life insurance revenue and strong Investment and Savings Products sales. As we look to the future, we will execute initiatives to grow distribution capabilities and increase earnings. Continued success in executing our organic growth strategy coupled with our share repurchase program will drive operating earnings per share and return on adjusted equity expansion long term. We'll now open it up for questions.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone.
If you're using a speakerphone, please pick up your handset to ensure good sound quality. If at any time your question hasn't been addressed and you would like to withdraw it, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Sean Dargan with Macquarie.
Thank you, and good morning. My first question is about claims experience. I'm wondering if you saw a different experience in the new Term Life block versus the legacy block. I think Alison said that the number of claims was in the expected range. Does that suggest we're talking about severity and not frequency?
The answer to the last question is yes. We did see, and as I mentioned in my comments, about an 11% increase in the average size of the claims. The frequency was very much in line with our historical expectations. I will mention that we've just closed out October. We did see both frequency and severity come back to normal trends in October. That was encouraging news for us. With regard to the breakout between new Term Life and legacy, most of it was legacy. I'd say two-thirds was legacy, with about less than one-third being new Term Life.
Okay, thanks. Just in terms of capital at the holding company, I think you mentioned ratable capital return over the course of the year, but it seems that you would have enough capital to front-load, say, $150 million of share repurchases in 2015. Is that correct?
We would have enough, most likely because we're planning to take out another $165 million in the fourth quarter. That said, we are, as we've mentioned in the past, trying to stick to a very ratable throughout the year approach, consistency, et cetera. Another thing is by doing it throughout the year, it gives us the ability to watch the stock price and hopefully maximize how we are doing these repurchases.
All right. Thank you.
Thank you. The next question comes from Steven Schwartz with Raymond James & Associates.
Hey, good morning, everybody. Got a few. First for John. John, could you explain why there's seasonality in the second quarter versus the third quarter in converting people from recruits to licensed agents?
Well, the seasonality was that we had lower recruiting in the first two months of the quarter because a year ago we had a big incentive coming out of the convention that ran for those two months that was very recruiting focused. It was a significant incentive. That recruiting level fills the pipeline of what you're getting licenses. The good news is that in September and October, after that comparison left, as I said, we had solid recruiting comparisons to a year ago. The goal is to continue to drive that, fill the pipeline, and as I said, our view is that in the fourth quarter, we will have growth in the sales force in line with what it was a year ago. It really kind of falls, Steven, on the comparison of convention year versus non-convention year, is what drives that difference for us.
Okay. I was thinking about it relative to, and maybe I'm just not understanding, but relative to second quarter of this year, for example. I tend to look at, and I think you've suggested in the past, kind of look at licensed agents relative to recruiting the quarter before. Recruiting was higher in the second quarter than in the first quarter of this year. New licensed agents are down third quarter versus second quarter. That's kind of what I'm looking at.
This is Rick. Let me just sort of comment. As you correctly said, we do talk about sort of a quarter delay in looking at the licenses. It's actually a little bit more complicated than that, and the true dynamic is that March was a very big month, a recruiting month, and typically is a very big recruiting month, and they get licensed in the second quarter so that even though the first quarter recruits is not a very high recruit quarter by the fact that you get a lot of recruits in March, it drives licenses in the second quarter. Does that help?
Yeah. That makes sense. Thanks, Rick. Okay. If I can continue, I just want to stick with distribution here.
Okay.
ISP has really been growing. It's been growing great. It's been growing as a % of income, as a % of sales, the whole bit. Is there anything going on with regards to maybe increasing the number of agents who become registered?
We have been focusing on that, and we have been seeing a slight growth in the number of agents that get securities licensed. That is a piece of the improvement in total sales. Quite frankly, the larger piece of it relates to the introduction of new products and the enhancements that we've made to the business. We've talked about we now have TurboApps on our mutual fund business
70% of our mutual funds, over 70% of our mutual funds are being done on a mobile device. That's different than this time last year. By making it easier for the field to do business, and by adding new products, that's a large part of the growth in the ISP business, with some slight growth in the number of securities licensed agents.
Okay, one more, Rick. Anything new on the Canadian licensing requirements?
No, not at this point in time. It's a work in progress. The issues that we've raised have gotten attention in the industry, we're hopeful that the regulators will focus on these concerns. Beyond that, nothing more to comment on.
Okay. Thank you, guys.
Thank you. The next question comes from Dan Bergman with UBS.
Hi, good morning. I guess I'll start just a couple ones on ISP sales. It looked like the variable annuity sales continued to tick up in the quarter. I wanted to see if there's any sense you can provide on how much of the recent momentum in this product is related to the AXA product that was introduced earlier in the year. I guess relatedly, should we think of the current VA sales level as potentially sustainable, or would you expect it to fall off as that kind of initial wave of AXA sales fades away?
In the quarter, 21% of sales were the new AXA product. It has been a successful introduction. Having said that, we don't believe that that's driving overall sales more than sort of what's going on in the market. I would expect normal seasonality as you look at the quarters. I would not look at the third quarter being abnormally high.
Okay, great. That's helpful. I guess just on indexed annuities, it looked like the sales in that product dropped a decent amount in the quarter. Similarly, just wanted to see if you can give any color on what drove the third quarter result and how we might expect that product to trend.
When you look at the dynamics of the fixed indexed annuities, the product guarantees are a core component of the attractive nature of that product. If you look at what's going on with the positive market movement over the last couple of years, and sort of the improvement in consumer confidence, people have had a greater appetite for investment risk. We just see that as a siphoning of consumer appetite for risk. That's primarily driving the decline in the third quarter from year-over-year.
Okay, great. Last one, I believe you mentioned earlier in the call some efforts you're making to better reach the millennial generation. I was just hoping you could expand a little bit on your strategy for how you're targeting this group.
A big piece of it, the biggest piece is messaging. One of the things that drives things at Primerica is focus. There has been a huge focus both in recognition, in message, and then also we've been running the initiatives we do, our communication, our recognition, all of those through a millennial filter, where we've had a working group of some of our top young millennial sales force people that are growing like crazy right now in to look at everything we're doing instead of just a bunch of 55-year-olds in here sending things out to them to make sure that what we're doing, both message and delivery wise. As Rick talked about it, as we talked about in there, we've been doing more with mobile apps and with being able to do the business the way millennials communicate and do business.
I will just say the biggest issue and the biggest thing we've been doing is focus and message that we have a great business opportunity for young people who want to be entrepreneurs instead of being in a J-O-B, just over broke. We're seeing very good results from it and plan on continuing to focus and continuing to improve, in all honesty, using them to help us drive the deliveries that we have for them.
Very helpful. Thank you.
Thank you. The next question comes from Mark Hughes with SunTrust.
Thank you. Good morning. Any observations now that you've closed the month of October about ISP sales given the extreme volatility, let's say, in the month in the market? Did you see an impact on your business?
As I said, again, without giving specifics, no, we have not. When we look at the front of our business, October recruiting was good, life insurance production was good, and investments production was good. Okay? We have not seen any result yet where people are going, "Oh, the market is getting squirrely." Again, though, as we've told you many times, we tend to lag from a production standpoint, the market. When things go down, we look better for a while because we lag it, and when things go up really quickly, we lag it in production also that direction. What we saw in October was a solid month in each of those metrics.
Given how short-lived that the correction was, we're hopeful that it won't impact sales in November as well.
Any broader thoughts on why you've seen some strength lately? The easier comps, I know, any new recruitment incentive programs? The economy's getting better. Just any more global thoughts?
Again, as I said on the millennial, biggest thing has been focus. Primerica is kind of, I've used the analogy, whack-a-mole. I mean, you hit one thing, something else pops up. It is a what you focus on grows business. We're running a contest right now to the El Conquistador in Puerto Rico, which closes in November, where people get to go in February. That seems, based upon what we're seeing, to have been a very successful contest. With some of the things we changed to meter recruiting up a little bit to bring more young people to it. Again, what we're just trying to do is to make adjustments, not changes, just adjustments to things that focus the business more on recruiting and building. Again, two months does not a trend create. Those two months have looked good on that front.
Alison, in the legacy block, the pre-tax profit relative to premiums, you mentioned was 5.5%. I know it was impacted by some higher severity this quarter. Where do you think that should settle out in time?
Well, what we've said in the past, it's in just a couple things. One was the claim severity, and the other was, and we've been seeing this pressure, is the low interest rate environment has also put pressure on legacy block. What we have said historically is that we thought that that number would get to the low sixes over the near term, maybe into even the high fives. This is definitely an abnormally low level. I will remind you that we are going to discontinue that form of presentation after one more quarter. That's not going to be a trend that we're going to be discussing into the future. Specifically for legacy, we're going to focus on the entire block.
Still high fives, low sixes, perhaps?
Yes.
Okay. That's it. Thank you.
Thank you. The next question comes from Alan Devine from Jefferies.
Good morning. I have a couple questions. One, can we drill in a little bit more into the sales force and sort of how it drives your earnings? And specifically, I'd like to understand the size of the registered rep force right now and what portion of your earnings it contributes. Obviously, the missing piece here is how much of your life insurance earnings are coming from that, and how is that trending over time? It seems to me that's still one of your biggest growth levers. Second, for Alison, with respect to Canada, I know you made some comments about what the earnings were doing, but I don't think you actually gave a specific number in terms of what they're contributing to the overall bottom line for you and how that's changed year-over-year.
Then on persistency, again, you talked about the trends, but I was wondering if we could get a bit more granularity on what you're really seeing in loss experience. Thanks.
Okay. I'm going to work backwards and take the last and the middle, and I'll hand the first one. Anyway, I'll go on the last two. Persistency, what we've normally said is that the second quarter is our strongest persistency quarter, and the fourth quarter is our worst, and the first and third are, we'll call them average. That's been a trend we've seen basically for as long as I can remember. It has something to do with when the business comes in, how we associate a lot of our incentives. Our trips tend to end in May and November, so that has something to do with it as well. It's been a very historical approach.
It could even have on the ISP side, you get a lot of activity happening in your tax season, and that does give us opportunities to get into people's homes. That's the seasonality we've seen, and it's been both persistency and production have been along that. They tend to follow each other. The second item or the middle item was about Canada. We do disclose that in our K and our Q. It has stayed relatively stable. It's below 20% of our earnings. There's different ways to look at it if you're looking specifically by segment. It has stayed very stable.
If you look at it from a foreign currency perspective, the modifications that we've seen or the movement we've seen, I should say, in foreign currency for the Canadian exchange rate really doesn't give us too big of a hit on the earnings side, largely because what we saw this particular quarter was a drop-off at the very end of the quarter, and obviously the P&L is translated on an average basis. We do keep an eye on that, and we do actually show you in at least a 10-K, I have to remember whether it's just in a 10-K, is what the sensitivities are with regard to movements in exchange rate.
Have you thought about hedging that? Just coming back on persistency, I appreciate the seasonality by quarter. What about on a rolling 12-month basis?
Okay.
Where is it sitting today on the [life pace]?
Okay. On the hedging concept, we certainly keep it on our radar. Historically, the Canadian exchange rate hasn't been particularly volatile. Obviously, the dollar has strengthened some in recent times, but again, it's not all that volatile. As of now, we do not hedge the income component. Clearly, from the balance sheet perspective, all of our Canadian-denominated liabilities are backed by Canadian-denominated assets. We do hedge inherently that way. Right now, we don't think it's necessary to put hedges on our income exposure or our equity exposure.
Okay, thanks.
On the persistency piece, when you look at rolling 12, really the way we think it's appropriate to look at persistency is by the duration of the business. We obviously look very closely at what we call 13th-month persistency, so who continues their policy after that first year, and then obviously each duration thereafter. What we have seen over time, that's always been very stable. When we had the economic downturn in the 2008, 2009, 2010 period, we saw deterioration really across the board, so at every duration, which really led us to believe that it was the economy versus anything associated with the business. We have seen, since then, constant improvement in those metrics, again, by duration, to a point where we are now back to what we would call our historical averages.
We don't look at it per se on a rolling 12, but on a duration by duration basis, we see a lot of consistency and modest improvement continuing each year.
Okay. Perhaps we could start getting the 13-month persistency numbers put in the stat side so we can track them. It just makes it a little easier to understand the underlying metrics.
This is Rick. Let me talk about the registered reps. We agree very much they are a critical component of our sales force. 22%-23% of our life sales force are registered to sell securities. I think part of your question might be is, what percentage of our life sales come from those 22%-23% of the total sales force? I don't have a number to give you, but I can talk a little bit about the dynamics. About 10% of our sales force is full-time. Call it 10,000 agents being full-time, plus or minus. If you look at the 22,000, 23,000 securities reps, most of those full-time people will be securities licensed. By definition, they are much more productive.
Having said that, if you look at the securities sales force, a component of the sales force focuses primarily on securities and just does a little bit of life there. It is clearly more productive by the fact that it's full time, but there is a component of that that focuses more on the securities business and less on the life side. I don't have a number off the top of my head as what percentage of our life sales come from the registered reps number.
One follow-up to that. If you had to estimate, nobody's going to hold you to the exact number, but taking on the registered reps where their business, I assume, is more persistent, they've been with you a long time, how much of your earnings is really being driven by your registered rep force versus the new agent recruits, where obviously, inherently in that there's a lot of turnover, a lot of them don't make it?
Okay. Obviously all of the securities earnings come as a result of those numbers, and you have the 45% or whatever is disclosed. Your question does go back to what percentage of the life business comes from those agents. Again, I don't have a number to give you other than to say if it's 23% of our life-licensed agents, it's certainly substantially more than that, the life business comes from them. Less than half, but larger than proportionate share. Profits would follow. Yeah, it is more profitable business because their persistency is better, you're absolutely correct on that. Not in a degree that it changes the overall economics of the life business.
Okay, thank you.
Thank you. We have a follow-up question from Sean Dargan with Macquarie.
Hey, Sean.
Hi. Another company that some of us cover, CNO Financial, has a unit called Bankers Life. That company said that they had a challenging recruitment quarter in the third quarter, which they hypothesized might have been related to an improving employment picture. I know on the way down, you said that didn't necessarily drive recruitment for Primerica, now that if you believe the official statistics, the employment picture is getting better, do you anticipate that having any impact?
Yeah, I can't relate it to what they do because I'm not even sure what their methodology is for recruiting. From our perspective, an improving economy and better employment is better for us.
Okay. Again, understand, we're recruiting people to part-time income, not full-time jobs. Okay? As I said before, when things were horrible, clearly we're always saying people have more eyes for opportunity and stuff. Our business is the power of positive thinking attached to compensation and financial services, and when people feel good and feel optimistic about the future, they're more opportunity-looking. The comparison for this quarter to last year was purely convention. I said in the earnings call the previous quarter that we were going to be going against a difficult comparison because we had significant recruiting incentives, and we had 30,000 people in the Georgia Dome and sent them ripping out the door to recruit people. We didn't have that this year. That's what drove the comparison this year. It had nothing to do with changing employment and all those kind of things.
All right. Thanks. Just one last follow-up. Just thinking about your return of capital, you have pretty wide dispersion of share ownership among employees and reps. I'm sure they wouldn't mind a higher dividend. Your dividend yield, even in a low dividend yield sector, is on the low side. How should we think about where that payout ratio is going to go?
I'll take this one. Clearly, decisions on the dividend are ultimately made by the board. I can't give you any forward-looking view towards that, as it is their decision. That said, we are very much aware of where we are vis-a-vis the peer group, as well as what our expectations are as to different forms of capital return to shareholders. It's definitely a topic we discuss with our board, and ultimately, it's up to the board to take action on how they want that positioned.
Okay, thank you.
Thank you. We have a follow-up question from Steven Schwartz with Raymond James & Associates.
Couple more. Rick, my understanding of the acceleration of the employee benefits is kind of maybe make room for a next generation at Primerica. Is any sense it is having an effect, or is it too early?
I think it's too early. This is something that our compensation committee had been considering for years. There's no anticipated exodus of anybody, any individuals associated with the change, but there was just a clear understanding that people did very much focus on it. Quite frankly, part of that focus was what we adopted was really what the old Citi program was pre-IPO, because we had made a change at the time of the IPO, the management team had been focused on that change, it did, I believe, over time, stymie people from looking at retirement. We don't anticipate any quick changes, but over time, I think it'll make a difference as to when people do choose to retire and when we can give our younger employees new opportunities. You're correct. That's exactly the reason that we did it.
Okay. One for Alison. Alison, the benefit ratio for those of us who have already moved to the new presentation, the benefit ratio for the Term Life business on a adjusted direct premium, that should still be in the 58, 59 range?
Yes.
Okay.
Probably closer to 59 in the near term, definitely we look to that going back to our original guidance on what that factor should be.
Okay. Thank you.
Thank you. We also have [Paul Devine] with Jefferies.
Yeah, just coming back then, Rick, or maybe for both you and John, is it fair to say then, again, for all the attention on growing the total number of agents, isn't the real issue to growing your earnings, growing the size of the registered rep force? Perhaps you can sort of lay out your goals or targets for that, because that, to me, seems to be the key driver for you.
Rick, you give yours, then I'll give my color. At the end of the day, you got to walk and chew gum at Primerica. Okay?
At the same time.
At the same time. Which, by the way, sometimes we do better than others. You have to grow. If you want to build this for the long term, which is what our goal has been since we took the company public, our focus is where is this company going to be the next five, 10, 15 years? You have to grow those new people on the front end of the business. While you may go, "Well, boy, that's a horror of activity for these are the people." Give you an example of one time I was at a securities big incentive trip where we had all of our top securities producers. Most of them are not the people recruiting a lot of people.
As Rick said, some of them do a good mix of life insurance and securities, then probably about half of them just do a lot of securities, okay? A lot of times they go, "Why are you all focusing so much incentive on recruiting and not on us? We're clearly the most profitable people." It's not like you never get that question from one of them. The question I always ask them is, "Were you recruited by somebody just like you, or were you recruited by a recruiter?" The reality is they were recruited by a recruiter. Okay? To get them, you've got to do the front end piece of the business.
It really is trying to row a boat and make sure both oars are hitting the water at the same time, and you're not just sitting and spinning in a circle in the middle of the lake. Recruiting and licensing on the front end is bigger than the immediate profits we get from them. It is what's going to build those people that do what you're talking about for five, 10 years from now. Does that make
Can we look at your ability to convert those new agents, or discuss that a bit more into registered reps, because you've got the biggest registered rep force in the entire country. Probably the only one that really, truly targets middle America. I get the point. You've got to get them in raw and then convert them. I think it'd be helpful to understand how you're doing that.
Good. Let me just talk a little bit about that, because I actually think that is a very good question relative to understanding the productivity dynamics there. When people come into the sales force, they come in as life licensed reps. We don't try to get them securities licensed until they begin to have some success in the life business itself. As you look at the progression up the ladder, they come in as rep, promoted to district, division, regional leader, then RVP, in the dynamic. Sometime in between, at probably the division leader area, we begin to focus them on getting their securities licensed, because you need to be securities licensed to be an RVP. To answer your specific question as to where does the focus occur, the focus doesn't occur until they are in the organization, building a team and beginning to have some success.
I do think, just to follow on to John's question answer for a moment, if you look at overall productivity of the sales force, growing the life side of the business really does mean growing the life license to size of the sales force. Even though the securities people are more productive on the life side, as I mentioned, what begins to happen is as they become successful in the securities business, they begin to migrate more towards the securities business and less of the life business. What we've seen over the history of the company, is that life productivity is very much a function of the size of the sales force. On the securities side, we believe that there is substantial room for improvement. Even without growing the securities license reps, we can grow securities sales substantially from a productivity standpoint.
You had asked the question, what is our target growth rate for the registered reps? I'll go back to our target growth rate for both sides of the life sales force, and by definition, the registered reps, is mid-single digits. We are at, what, 4% this quarter, so not achieving what we really want to achieve. We do believe there's room and growth for both the life reps and the securities reps.
Very helpful. Thank you.
Thank you.
Thank you, everyone. Have a great day.
Thank you. This does conclude today's teleconference. You may now disconnect your lines. Thank you.