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0:02 Welcome to today’s Primerica Q4 Earnings Results Conference Call and Webcast. My name is Nate (ph) and I'll be the moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
0:17 I’d like to now pass the conference over to Nicole Russell with Primerica. Nicole, your line is open. You can go ahead.
0:25 Thank you, Nate, and good morning, everyone. Welcome to Primerica's fourth quarter earnings call. A copy of our earnings press release along with materials that are relevant to today's call are posted on the Investor Relations section of our website.
0:41 Joining our call today are our Chief Executive Officer, Glenn Williams; and our Chief Financial Officer, Alison Rand. Glenn and Alison will deliver prepared remarks and then we will open the call up for questions.
0:55 During our call some of our comments may contain forward-looking statements in accordance with the Safe Harbor Provisions of the Securities Litigation Reform Act. The company assumes no obligation to update these statements to reflect new information. We refer you to our most recent Form 10-K as modified by subsequent Forms 10-Q and the press release filed with our Form 8-K dated July 1, 2021, for a list of risks and uncertainties that could impact actual results. We will also reference certain non-GAAP measures, which we believe will provide additional insight into the company's operations. Reconciliations of non-GAAP measures to their respective GAAP numbers are included at the end of our press release and are available on our Investor Relations website.
1:56 I would now like to turn the call over to Glenn.
2:00 Thank you Nicole, and thanks everyone for joining us today. Fourth quarter and full year results continue to reflect the strong demand for our financial solutions and the resilience of our business model despite the uncertainties caused by the pandemic. Adjusted operating revenues increased 22% compared to the both the last year’s fourth quarter and full year 2020 results. Diluted adjusted operating income per share increased 20% quarter-over-quarter and now a full year-over-year basis.
2:29 Fourth quarter investment product sales remain well-above our prior year period levels, while sales in the Term Life business continued to normalize as expected. In our Senior Health business results from our first Annual Election Period were weaker than expected, due to a combination of lower sales volume and higher contract acquisition cost. We incurred a preliminary non-cash impairment charge of $76 million during the fourth quarter. Continued elevated policy churn in the Senior Health market was a significant driver, along with other factors such as e-TeleQuote’s recent financial performance and the decline in market values of publicly traded peers. Alison will address this impairment in our financial outlook for Senior Health in her prepared remarks and I will expand on our plans to address e-TeleQuote’s operational challenges in a moment.
3:22 Taking a closer look at how the pandemic has impacted our distribution results on slide 4, after nearly two years of COVID disruptions, our sales force has adapted extremely well to new ways of conducting business. Recruiting remained strong, built by greater utilization of web conferencing technology, and more recently, the great resignation that has created a record number of individuals looking for alternative career paths. The licensing process remained constrained by many of the challenges we discussed in the past, including various limitations from state and provincial social distancing measures, and individual comfort level when it comes to congregating in larger groups.
4:02 Initially, we were encouraged when restrictions began to ease. However, our progress was again delayed with the re-emergence of a new COVID variant. We believe that could take several more quarters before the licensing process returns to its pre-pandemic levels and suspect that our licensing results will remain under pressure through the first half of 2022, before gradually improving later in the year.
4:26 Despite licensing headwinds, we ended the year with around 129,500 life license representatives versus 130,500 at the start of the pandemic. This is particularly noteworthy considering the numerous challenges we had to navigate during the pandemic. We continue to seek significant opportunities to increase the size of our sales forces as demand for our products and services continues to outpace our reach, and competition for middle income consumers remains relatively low. In addition, our entrepreneurial opportunity is very attractive in the current environment as demonstrated by strong recruiting numbers.
5:03 Our success and goal in the sales force from here will depend on continued strong recruiting and adjusted licensing efforts through increased focus leadership, more effective communication, and licensing incentives. Beyond the licensing process challenges posed by the pandemic, some improvements are needed to make test preparation more convenient and effective. While the process requires constant adjustment to remain effective, these changes are within our control and remain the building blocks of success. We expect long-term growth in the size of our sales force to be in the low-to-mid single digit range, although will not be linear from year-to-year. In the near term, we anticipate going to sales force around 2% in 2022.
5:47 Turning next to slide 5, as anticipated Term Life Insurance sales volume continued to normalize following a period of heightened fear and urgency that was created by the pandemic. We continue to see strong sustained demand for protection products and sales volumes in each quarter of 2021, above the pre-pandemic baseline level for their respective periods. We ended the year with over $900 billion of face amount in force, which represents a year-over-year increase of 5% in positions Primerica is one of the top issuers of individual Term Life Insurance in North America.
6:24 Looking forward to the future, we believe we can continue to build on the momentum that started mid-year 2019. Based on our current outlook, we expect full-year 2022 Term Life sales to increase slightly over 2021 near-record levels. The first half results trailing the 2021 period and the second half of the year increasing versus the prior year period.
6:48 Slide 6 summarizes results from our investment and savings products segment. We ended the year on strong footing with quarterly sales once again exceeding $3 billion in full year sales at nearly 50% versus last year's record setting pace. Net flows remained at record levels throughout the year and when combined with favorable equity market appreciation led ending client asset values to a nearly 20% increase in a record setting $97 billion a year end.
7:18 Our opportunity in the ISP business remains very attractive with more than 26,000 reps currently licensed to sell mutual funds. Given current levels of market volatility and uncertain economic conditions, we're projecting a more modest single-digit growth rate for investment product sales in 2022 versus 2021’s record breaking year. Included in this assumption, our changes to the Commission Model in Canada that go into effect on June 1, which will require us to discontinue the use of mutual funds with a diverted sales charge compensation model, which is the primary model we currently use in Canada. We have plans to address this change, but it could create short-term disruptions in Canada as the single familiarizes itself with a new series of funds that will be sold exclusively by Primerica mutual fund licensed agents and with the new compensation model.
8:10 Canadian mutual funds currently represent approximately 13% of total investment and saving product sales. While there are many unknown factors that could derail investor confidence, our education based approach helps focus investors on their long-term goals. Our licensed representatives continue to play an important role in keeping clients invested for the future.
8:31 Turning next to the Senior Health market and our recent acquisition of e-TeleQuote slide 7. So far, Senior Health has underperformed expectations, this has been driven by a number of factors impacting the sector generally and e-TeleQuote specifically, including increased policy churn which has reduced expected lifetime revenues, lower overall sales volume, and contract acquisition costs above-anticipated levels.
8:59 Starting with churn, while the reasons for churn are challenging to pinpoint, we believe this trend is driven in part by increased consumer awareness of the advantages of shopping for plans regularly and broader competition within the space. We monitor turned by carrier and it stopped selling carrier plans in certain geographies or altogether if their levels of turn remain outliers to other carriers. We are also evaluating other approaches to improve policy retention, such as client affinity campaigns and predictive lactation algorithms.
9:33 Next addressing sales volume, just prior to the Annual Election Period or ADP. CMS imposed a regulatory change and its marketing material review process, which led to a slower start to ADP. Additionally, as I mentioned last quarter, we entered ADP below desired staffing levels. Historically, starting agent account remains largely intact through ADP as agents typically do not try voluntarily getting the selling opportunity. However, Agent attrition in the fourth quarter was substantially higher than in past years. We believe this is a result of tight labor markets and employees for many sectors stepping away from traditional work. On a related labor and agent point, we've continued to see it fall off in productivity with our agents operating in a work from home environment. We continue to work to address ways to improve productivity, including a revised recruiting approach for the last long-term hybrid work arrangements, compensation adjustments and other strategies.
10:33 Finally, with respect to contract acquisition cost, the labor issues I just described contributed to contract acquisition cost being higher than expected. Additionally, while we actively manage lead sources and mix some sources provided less – approved less attractive than anticipated.
10:50 We are adjusting our Senior Health business going forward to address the challenges that [Indiscernible] and the industry as a whole are facing. Areas of investment include the continued build out of the management team and growing a robust data science practice to better identify the best leads and route them to agents with the highest probability of closing.
11:11 In 2022, our focus will be on addressing the fundamental issues I've just outlined and growing the business responsibly. As we tackle necessary changes, we will build our agent count and sales volume more slowly than originally planned. Our challenges are bigger than anticipated, the strategic rationale for acquiring the e-TeleQuote remains unchanged and the growth characteristics in the Senior Health market continue to exist.
11:35 Offering Senior Health products allows us to provide an important service to the growing middle market senior population that can further strengthen their relationship with Primerica. The additional product line expands the income opportunity for our sales force and can facilitate sales of our core products.
11:52 Over the long-term, we expect the company and our stockholders to benefit from this acquisition. Early indications are that lead source by Primerica reps have an advantage due to the existing relationship between the rep and the client. We believe this is a competitive advantage within the space. We remain committed to each e-TeleQuote and the Senior Health market.
12:13 Now I'll turn it over to Alison.
12:14 Thank you, Glenn and good morning, everyone. I will start on slide 8 by continuing the discussion on Senior Health, focusing on recent financial results, the goodwill impairment charge and our outlook for the segment. I will then review financial results for our other segments highlighting some key factors impacting our 2022 outlook. I'll conclude with a discussion of operating expenses in capital and liquidity.
12:42 E-TeleQuote along with other Senior Health distributors has experienced elevated policy churn from carrier product changes and heightened competition, which when combined with recent financial performance, and the declining market values of publicly traded peers, triggered the need to review goodwill for possible impairments. The analysis entailed creating new financial projections and updating cash flows for the business as well as an assessment of peer company market-based indicators.
13:10 The derived fair market value was compared to the carrying value of the Senior Health segment, which includes the $515 million purchase consideration at the time of acquisition plus results of operations there [Indiscernible].
13:24 Note that the $515 million reflects 100% of each e-TeleQuote including the 20% stake not currently owned by Primerica as value using the scoring the right price in the purchase contract. As a result of our analysis, we recorded a goodwill impairment charge of $76 million in the fourth quarter, which is preliminary and subject to change until we file our form-10K on before March 1. The company excludes the goodwill impairment from operating results, as it represents a non-recurring item that causes incomparability of the company's core results from period-to-period.
14:04 The critical component of our cash flow projections and approach to revenue recognition for our Senior Health business is the expected persistency curve for policy cohorts. Since the closing of the e-TeleQuote acquisition on July 1, 2021, we have been building a new algorithmic model that uses real time trends in cash collections on the enforced book of policy to predict lifetime commissions for newly approved policies and update expected collections or renewal commissions for policies approved in previous periods.
14:36 The model incorporates our accounting policies for calculating renewal commissions under the expected value approach, which in some cases differ from those historically used by e-TeleQuote. To conform e-TeleQuote’s accounting policies to ours, we adjusted their preliminary allocation of the purchase consideration by lowering the renewal commission receivable as of July 1, 2021, by $46 million to reflect persistency experience as of the acquisition date.
15:07 We made other changes to the purchase consideration allocation during the quarter that resulted in a revised goodwill balance of $255 million as of the date of acquisition. The allocation continues to be preliminary and subject to change until the end of the measurement period on July 1, 2022.
15:26 Goodwill values as of year-end of $179 million is the $255 million net of the $76 million impairment we just discussed. The new revenue recognition model was used to determine the expected lifetime value of Commission's or LTV of $1,069 for policies approved during the fourth quarter. It was also used to update expectations for renewal commissions receivable on policies approved in previous periods based on changes in persistency estimate since the acquisition date. The result was a $5 million negative tail adjustment some continued shortfalls in cash collections in recent periods.
16:10 Closer to Glenn's earlier remarks, we plan to thoughtfully manage growth in Senior Health while we adjust how the businesses manage to address the challenges that we [Indiscernible] industry as a whole are facing. We expect operating income before income taxes for the segment to be negligible, including some continued deterioration in cash collection versus aggregate historical trends in 2022.
16:34 The negative cash flow for the segment has been greatly reduced and is expected to be about $10 million to $15 million for 2022, including the cash tax benefit of NOL carryforward that were acquired with the business. And our current plans, we may change – which may change based on our success and addressing challenges in the business. We expect negative cash flow from the Senior Health segment to be less than $75 million in the aggregate before turning positive, likely in 2027. While near term risks are nominal, we continue to believe there is real opportunity for Senior Health to be a strong contributor to earnings in future years.
17:15 Turning now to slide 9, showing our Term Life Segment, operating revenues of $409 million to 11% year-over-year, driven by a 12% increase in adjusted direct premiums. Growth in premiums continues to benefit from the compounding of nearly two years of strong sales better policy for persistency driven by COVID. Combined, these added $13 million to pre-tax income, compared to $7 million in last year fourth quarter. The operating pre-tax margin, which is generally lower in the fourth quarter due to nominal seasonal patterns – normal seasonal patterns was 18.6%, up slightly from last year to 18.2.
17:56 COVID continues to adversely impact benefits and claims. The fourth quarter of 2021 included an estimated 17 million COVID related net death claims up to 14 million in last year's fourth quarter. The rate of COVID mortality and uninsured population remained in line with the rate observed during the third quarter at around $14 million for 100,000 deaths in the US and Canada.
18:25 Current period results also included around $2 million in excess net death claims that were not specifically identified as COVID that may be indirectly linked due to the delay of medical care or the increased incidence of behavioral health issues. We expect this level of quarterly excess death claims to continue in 2022.
18:47 Although total excess net death claims increased 5 million over the prior year quarter, the benefits and claims ratio declined by 130 basis points. The primary reason is the annual locking in of assumptions for new business, which typically takes place during the fourth quarter. This year process had a negligible impact on current period results whereas in the prior year period, a reduction to the long-term interest rate for new business resulted in a 5.5 million increase in benefit reserve.
19:18 Persistency remains strong with aggregate lapses around 20% below the pre-pandemic baseline and early duration lapses around 10% below the baseline. Quarterly pre-tax income continues to benefit from elevated persistency DAC amortization lower by $11 million and reserved higher by $7 million for a net positive $4 million impact versus the pre COVID baseline. The corresponding net benefit was $10 million in the prior year period when lapses were at unsustainable record lows.
19:53 As we look ahead to 2022, we expect nice growth in Term Life sales, as Glenn discussed earlier, and last year to normalize at an aggregate level approximately 10% better than the pre-pandemic baseline. Considering these factors, we expect year-over-year adjusted direct premium growth to float in 2021 from 16% in Q1 to 12% and Q4, to be around 9% on a full-year basis in 2022.
20:20 Based on published projections for COVID desks and the anticipation of no new debt restraints emerging, we expect COVID related net death claims to be around 20 million in 2022, largely occurring in the first half of the year. We anticipate the recent trend of excess non-COVID claims to continue at around 2 million per quarter throughout 2022.
20:43 Considering these combined factors, we expect the full year 2022 pre-tax operating margin to be largely consistent with that experienced in 2021. We continue to work through the intricacies of implementing targeted improvements to the accounting for long duration contracts for LDTI (ph), which goes into effect next year. The new guidance changes the way in which both benefit reserve changes in DAC amortization are recognized through earnings. It requires the remeasurement of reserves no less than annually and modifies the way experienced variances and changes in assumptions to the entire imports are recognized through earnings. It also requires DAC to the amortize on a constant level basis or respective terms of the related contracts versus the level percentage premium approach used today.
21:36 We plan to adopt the new guidance on a modified retrospective basis with reserved and DAC adjusted prospectively beginning January 1, 2021. We are finalizing our accounting policies under LDTI in developing and testing the many actuarial assumptions and models needed for implementation. We expect to provide quantitative information on the impact of perspective earning when we report second quarter results.
22:04 The guidance also requires that the discount rate for measuring reserve the updated at each reporting period using an upper medium grade six instrument yield with the resulting reserve changes reflected through equity in accumulated other comprehensive income. Under the current guidance, the discount rate is locked in at issue and is based on the expected yield of the invested assets that support the reserve. Given the weighted average age of borrowers of liability, the average loss and discount rate is about 5.25%. [Indiscernible] reserve using the discount rate methodology required under LDTI in today's rate environment will result in a significant change to accumulated other comprehensive income as of the date of adoption. It will also introduce volatility in AOCI as investment yield environments change over time. We plan to remove the impact on AOCI from operating results where applicable and plan to provide quantitative details when we announce second quarter results.
23:10 As a reminder, this new standard modifies the timing a profit emerges under cap, but does not impact the economics of the business, learn to change the company's cash flow or statutory capital requirements. It will not change our ability to distribute capital from Primerica life or our ability to deploy capital at the holding company level.
23:32 Turning now to our investment savings product segment on slide 10. Operating revenues of $247 million, increase 28%, while pre-tax income of $71 million, increase 25%. Sales and asset base revenues increased in line with growth in revenue generating product sales, and average client asset values, respectively.
23:54 Sales base commissioned expenses increased faster than sales base revenues as we recorded a $4 million true up a field bonuses during the quarter to reflect the outstanding performance during 2021. Asset base commissioned expenses grew in line with the related revenue. As Glenn noted, we are assuming that ISP sales and market appreciation will return to more traditional level – both levels in the mid-single digit for 2022. Operating margins for the segment are expected to remain stable. In our corporate and other distributed product segments, our adjusted operating loss of $22.3 million, increase $4.2 million year-over-year. The increase is largely due to $3.6 million lower allocated net investment income from lower portfolio yields an entire allocation of NII to the Term Life segment in support of the growing block of business.
24:51 We also incurred higher interest expense from approximately one month of overlap in senior notes prior to the extinguishment of our 2012 notes. Offsetting these items with $2.9 million lower benefits and claims due to a reserve adjustment on a closed block of business in the prior year period.
25:12 On slide 11, consolidated insurance and operating expenses for the fourth quarter were largely in line with our expectations. Looking ahead to 2022, we expect insurance and other operating expenses to increase by about $80 million or 16%. About a quarter of the increase or $20 million reflects a full year of Senior Health segment expenses versus six months in 2021. Of the remaining $60 million, we expect approximately 50% to be incurred in Term Life with the remainder split about evenly between ISP and corporate and other. The 12% year-over-year growth in our core business is driven by various factors including growth in premiums, average client asset values in other business metrics. increased staffing costs from annual employee benefits and merit increases, service level improvements and higher instructor salaries for more in person licensing classes and continued investment in technology to modernize platform, enhance initiatives, such as the mortgage program and our CRM system and accelerate our speed to market. Also note that the delay in the convention from 2021 to 2022 – with the delay in the conventions from 2021 to 2022, we are incurring the cost of two-field leadership trips, and the convention this year when in a typical year only two or three would be incurred.
26:39 Finally on slide 12, liquidity at the holding company remains very strong, invested assets in cash of $295 million. Primerica Life Statutory Risk based capital ratio is estimated to be 440% at year end, and we anticipate maintaining the RBC ratio at around 420% in 2022. The performance of our Term Life and ISP businesses continue to drive strong levels of deployable capital and as a result, the board of directors has increased the previously announced share repurchase authorization of $275 million by $50 million. Approximately $20 million was completed in 2021 and the remaining $305 million is expected to be completed this year.
27:25 With that, I will turn the call over to the operator for questions.
27:33 Absolutely [Operator Instructions] Our first question goes to Andrew Kligerman with Credit Suisse. Andrew, your line is open. You can go ahead.
28:14 Hey, good morning. Can you remind me again of what you expect recruiting to be up this year? You mentioned a bunch of numbers and I wanted to make sure I got that.
28:30 Yeah, we expect recruiting to be up slightly this year. Andrew, we have used a lot of special incentives over the last couple of years and we're trying to wean ourselves off of those, that’s a little pressure on it, but you do get a little less committed recruit when generally they've been enticed with a special incentive. So there's a pro and a con to each approach. But we do believe we're going to be up slightly this year overall, over 2021 full year.
28:58 I see. And I guess, as I think about the recruiting and you've had periods of great effectiveness, but is there any change anything different going on that may – maybe we could think out to 2023 that you'll get a move – a big move and recruits like what – what potentially going to change in that strategy that might get us really excited about growth? Maybe intermediate term?
29:32 Yes, well, I think you've got to look beyond just the top line recruiting number Andrew, because that's a number, that's, as I said, easily influenced by the things that we do. But it's only a piece of growing our sales a little worse. So we're very pleased with the level of recruiting. We do think we're getting a tailwind from the great resignation as I mentioned in my opening remarks, and the people on the moon between careers are often interested in taking a look and maybe even taking a try building a Primerica business.
30:04 As we've said, throughout the pandemic, the challenge is what's happened in the change in the pull through with licensing, because those recruits have got to simultaneously be field trained and be licensed, among other things. And as we move to a remote licensing process during the pandemic, which was the only option during the pandemic, we immediately recognize that it's – it's a great study of effectiveness versus efficiency, it's more convenient to do an online program, it's more flexible, more people sign up. But we find that fewer people complete and so you get the benefit of more recruits signing up and beginning the process, but you've got a negative to manage of fewer people completing and the reason they complete, they fail to complete is because there's not as much accountability, not as much discipline, and not as much visibility. When you see people coming to class, where they are, how to encourage them. You don't have to hold them accountable. So that's what we're working through now, as the states and provinces kind of normalize our ability to be able to do either of those programs. What's the best of both worlds? I believe the answer to your question is more in that how successful are we at improving the pull through on our licensing process that is simply driving top line recruiting as we look out a couple of years?
31:20 I see, that – that's very helpful. And then just maybe just shifting over to Senior Health, Alison cited I think it was $75 million in negative cash flow in 2022 and then turning slightly positive in ’23. So, I guess, moving out…
31:39 Andrew, before you keep going, I do need to correct you, the $75 million was actually the aggregate negative cash flow that we expect prior to turning positive in ’20 – likely around 2027. The negative cash flow for 2022 specifically, it's probably in the $10 million to $15 million range.
32:00 Okay. Great, [Indiscernible] Thank you. Okay, that's good to hear. So, as we look out to ’23, what gives you confidence that you can get earnings back on track? Cash flow to a positive number what, what are the potential signs that that are giving you any confidence that this businesses is attractive?
32:31We like the opportunity Andrew, in the space and particularly the alignment it has with Primerica, that was our whole strategic analysis over multiple years and looking at all types of potential additional products to use the strength of our distribution to get into the marketplace. And of course, we chose to the mortgage business that we thought about, that's a partnership and then the acquisition in the Senior Health space and we continue to believe that the growth in that space, the need for the product, once again, have some similarities to the life insurance business where maybe the middle market is not getting all the attention, it could, kind of the things that are in our sweet spot within our other businesses, we all see true in this business, it's clearly a business that's gone through significant transition in the last year or so. And that's what we're adapting into, but we do believe that we're a company that's good at the blocking and tackling your business. And we believe we can adjust to those fundamental changes and then we can apply the synergies of our two organizations to give us an edge in the marketplace over the similar models. And so we believe what with a couple of years of hard work, will get this to the right place.
33:45 Okay. Thank you.
33:51 Thank you, Andrew. Our next question goes to Ryan Krueger with KBW. Ryan, your line is open. You can go ahead.
33:58 Good morning Ryan.
33:59 Hi, thanks, good morning. I think the amount of free cash flow drag from senior house in your projection has changed quite a bit. I was hoping to understand the key drivers a little bit more, I guess is a lot of it that your growth expectations have declined. And so that will consume less of cash, or could you just provide a little bit more detail on some of the key changes?
34:28 Sure, you definitely hit the main one and I mentioned this before just like life insurance. If you look at life insurance on a statutory basis, putting a new piece of business on the books is very negative from a cash flow perspective, there's a lot of upfront costs and the money comes in over time, the unique thing about this business is you get to recognize all those revenues under the accounting rules, unlike insurance where it's more matched, and the revenues come in, as you recognize the expense by defying them. So a big piece of this was really saying and again, I don't want to say it was purely driven by capital, it was driven by a confluence of items, which is really that, we want to make sure that we are putting business on the books that it has a healthy return. So we'll focus on the LTV to contract acquisition cost ratio and things along those lines.
35:25 So we're very focused – so we don't want to plow through and put lots of business on the books and burn a lot of cash that we don't believe ultimately drive the real value. Forget about gap books, the gaps value, but economic value for the business. So that's really why we're slowing this down and that will give us the [Indiscernible] covering the time to address things that Glenn already mentioned, like the labor markets and just various changes that are going on with the marketplace and see quite frankly, we're insurance settled out because some of that is really outside of our control. We can do things to limit it, but it will continue to be an obstacle. So we do want to make sure we're only putting, quantities, large quantities of business on the books, once we feel that we are in a solid economic footing with how the business is being managed.
36:17 One other change I was going to mention is that when we originally reported our cash flows, we did not include the cash benefit of net operating losses that were acquired as part of the business, and we specifically did not because we have not continued – completed our analysis on whether we be able to realize value from those. We have completed that and now the numbers are net of those types of items, which are I think the federal one is 22ish million range to state ones and say the $7 million range, give or take. And then you've also got the net operating losses going forward on the basis that we'll able to absorb and reduce our cash taxes at the PRI level.
37:10 Got it. That's really helpful. And then I guess related to cash flow generation, how we, when you think about the $325 million buyback authorization and the common dividend, can you help us think about what extent this would consume some level of excess capital versus the ongoing free cash flow generated by the businesses in 2022?
37:38 That's, I think I understand your question. I think the best way I can answer it is to say that all of the share buybacks that we plan to do during 2022 will come out of capital that is generated and becomes deployable in 2022. So, right now, I think I said we had going to get the number, whether it was 295, sitting at the holding company, it’s not really coming out of that so much as the sources of capital that we expect to have from our key businesses, from ISP, and, and life insurance. I think that was your question.
38:18 Yeah, that – that was, and then if I could just make one really quick, what was the number of COVID deaths that you assumed when you were talking about 20 million of COVID claim?
38:31 I think it was somewhere in the 102 – 100 – 140,000 (ph) give or take, I think is the number we use, but put it we really based it on the 14 million per 100,000 rate that we experienced in both the third quarter and the fourth quarter. And we put that out there just based on what's currently – our source that we've currently been using, that's what they've indicated. Again, I will very highly caveat that assumes that there's no new business strains that emerge in the light and that's what we're basing it on. But on the flip of that we're also basing sales and persistency on that same thought process.
39:23 Got it? Very helpful. Thank you.
39:29 Thank you, Ryan. Our next question goes to Mike [Indiscernible] research. Mike, your line is open. You can go ahead.
39:37 Good morning, Mike.
39:38 Good morning. Thanks for taking my question. Maybe first questions taking on the health operations. So will the – I believe there's a $50 million earnouts? Is that still relevant, given the missed targets so far? And the related the remaining 20% stake that Primerica does not own is? Is that price predetermined? Or is it negotiable? Based on currently trailing performance and future performance?
40:15 So I'll take both of those the earn out and I'll remind you that when we originally recorded the purchase consideration, we put nothing in the purchase consideration, no value ascribed to the earnout. That continues to be the case, there is no value currently ascribed to the earnout. We do not believe based on our current projections that anything would be become doable under -- payable under that clause. With regard to the remaining 20%, in my prepared remarks, and it's very confusing, because it's a very, it's a lot of accounting. I talked more about accounting in this call than I think I ever have. But the $515 million original purchase price is the full enterprise value. So that includes not only what we acquired, but the fair market value at the time of the remaining 20% of the enterprise. That number, that amount is calculated based on a formulaic price that is in the purchase price, the purchase agreement itself. So it is a predetermined formula that is based on performance of e-TeleQuote as well as a discount to performance of the peers.
41:36 And so based on all of those factors, we ascribe the value to it, which was in the $515 million I already mentioned earlier. Does that answer your question?
41:50 I think so. And I appreciate the color, but I guess essentially trying to get at is, is there going to be additional cash flow outlays for the remaining 20%, you don't own or are you saying you do own it? Does that make sense?
42:07 We do not own, we do not own it. According to the formulaic value right now. And, we have to state the fair market value of it each quarter based on market assessment and the like. The current actual value would be zero.
42:25 Okay, yes, that makes sense. Thank you. Okay, and I guess moving to the Canadian, I think believe it's a new mutual fund commission schedule maybe you can just kind of offer more color as this is just eliminating kind of a trail commission and I guess ultimately the new commission structure will is this industry wide and will the sales, your sales colleagues be able to on the same amount of compensation all [Indiscernible] to the new structure?
43:00 Yeah, Mike, that's a great question. This is something that's been in the works in Canada for a number of years and so we've been aware of it and working with regulators and with providers as it's kind of come closer to fruition. It's not actually elimination trail commissions, its elimination of one of the methods for upfront commissions. And so trail commissions can continue and will continue. The deferred sales charge that is charged on this model actually provides the financing for an upfront commission payment that comes from the fund provider, the fund manufacturer, that is not reflected in an upfront charge to the consumer. It's financed by the ongoing expenses of the – of the product, or redemption fee if the client exits the account in the first number of years, usually around seven years. And so that's being eliminated as a product choice and so that's industry wide, not just for us. And so anyone that's been selling those products is going through a change. There are other models in the marketplace, that will continue and that's what we've kind of pursued as the replacement with a couple of our key providers in Canada market providers is to create a new product model. These will be products, as I said in my remarks that are unique to our company and our sales force, although there could be other companies that create similar products for their distribution.
44:31 So it's not entirely unique, this doesn't have to be entirely unique to us, although, as far as we know, they're there not a lot of other players as far along in this process as we are and we've been working with our sales force on this change and how it, how they could impact their cash flows and their businesses and so forth and actually, it's been a long term process that's that we've been working on for more than a year specifically. And we believe we have our sales force ready to make the change, although all of that is theory and we would expect some disruption and a product change like this in the month surrounding it mid-year and so we just wanted to make everyone aware of that, if we see some noise around our Canadian numbers just before and just after the gene change, it would be to be expected. But we feel good about our prospects. So we have a very strong ISP business in Canada. And we expect that to continue in the future.
45:24 Got it? And just as a follow up then so is there a way to apples? Is it apples and oranges? Or if yourself colleagues saw the same amount of this new series of funds, versus the existing is the compensation amount similar or a little lower, a little higher or not comparable?
45:45 Yeah, it's similar. The timing is what happens the previous model, the [Indiscernible] model, provided upfront compensation that was financed over a long period of time through the mechanisms I described earlier. And, and we will be looking at ways to pre advance commissions but basically, it's a similar commission – overall commission model, but there could be some time in differences, which by the way, is not terribly different from the evolution of products we've seen over the last decade or so in the US is more and more of the compensation to distribution has been asset based rather than sales based. It's a similar direction and so that gives us a little bit of some insight and how the change might take place, because we've experienced some of that shift in the US – in the previous years.
46:37 Very helpful. Thank you.
46:40 Certainly.
46:44 Thank you, Mike. Our next question goes to Mark Hughes with Truist. Mark, your line is open. You can go ahead.
46:52 Good morning, Mark.
46:52 Okay. Thanks. Good morning. Alison, that I hear you say that the earnings from Senior Health this year ought to be negligible and if that's the case, could you give us some sense of the kind of quarterly trajectory of earnings that in Q1 was kind of a not the seasonally strongest, but was expected to be profitable and then anything on approved policy counts would be helpful as well.
47:23 Yeah, at this point, we're not providing any forward information on approved policies and from a quarterly perspective, the way we're looking at this is we do think the beginning our goal I should say is a lot of the improvement and areas mentioned in areas of focus that Glenn had mentioned are things we're looking to tackle early on in the year with the hopes that by the time we get to ADP, we've at least taken some of them off the table and can produce sort of stronger results in the fourth quarter. So I would generally say the fourth quarter will be the highest, the second – the first quarter would theoretically be the next and the middle to our, the third quarter is normally something that's a little negative, as we ramp up sales volume – sales agents.
48:12 The thing I would caution on is I just because we're trying new things, because this is a new business for us. That where it would be typically where you ramp up agents at a specific time, we're going to use a very different approach this year. So it's a little harder to predict. The other thing that becomes unknown is when tail adjustments may or may not hit. And so it's going to be a little bit lumpy and so I can't give you the exact numbers for the for each quarter per se. Net-net, we do expect I say most of the earnings come in the fourth quarter like they would typically and to see some losses or neutral numbers earlier on in the year.
48:57 Yeah, so the full year is kind of flat, negligible, as you say?
49:02 Yes
49:04 The tail adjustment, the $5 million that flowed through the Senior Health in 4Q I assume, in buffer that earnings would have been $5 million higher, is that right way to think about that?
49:17 That is correct. So tail adjustments do get reflected. Anytime, we see that current persistency or collections trends indicate that there's been a deterioration from what we assumed in our current renewal receivable. We have to adjust it up or down for that matter, but it was a downward adjustment in this case.
49:41 Yeah, how much impact did your sales force make it, E-TeleQuote, I think you said that you have reason to believe the churn is better the longevity of those policies is better. Did your sales force make much of a contribution in terms of sales this quarter?
50:09 Yes.
50:07 In the [Indiscernible] legacy, primary, sales force?
50:11 Yeah, absolutely. With a referral program. That is, it is unique to the model and one of the things that we are feeling excited about in thinking about this, this venture, yes, our sales force, first of all, I would say we had a very good reception from the sales force, to the concept, understanding the need in the marketplace and the gap that this product sales and the income opportunity it creates, when they, do their piece of the process, which is a referral, and not a sale, of course and we actually kind of rushed it to market because we recognize that the ADP period is the prime period. The good news is we were able to get out there and generate some activity that we felt very good about the challenges, you can analyze the ADP to know what your pull through rates and your activity rates are going to be for the non ADP part of the year. So it's a little difficult to take what we learned and applied to the other three quarters, it certainly be helpful for the next ADP period. But we had good response, good activity, made a significant contribution and we feel like that's positioned us to take what we've learned from that and improve as we get throughout this year.
51:29 Yeah. Allison, your lifetime commission, the 1059, that's not down much from your prior expectations. And I think about that properly?
51:40 Yeah, the expectation we gave for the fourth quarter, it's probably about 10% down, I think we had more like 1170 or something along those lines.
51:51 Yeah. And then your point about the LDTI the 5.25% discount rate, I think what is suggested by the market indicators now, for your book of business, what is your discount rate? And what is the – what does that imply when we think about this two numbers?
52:11 No, actually that's backwards to 5.25% is indicative of power portfolios market rate, I say that is, let me take that back. Not the current profile is the current liabilities. So remember, we set the discount rate, we lock it in whenever the business is issued? We sell very long tail business. Obviously, a lot of business was put on the books for many, many years. ago. And those are where the liabilities are actually larger than on the newer business was having to build up reserves yet. So the weighted average rate – discount rate on our reserve liability currently is 5.25%. If you use what the literature would require us to use, you're talking about a discount rate today that's significantly lower than that.
53:02 And given the age of your portfolio, is there leeway in the rules for that? Or did you have to change the discount rate to reflect the current new business?
53:24 You have to use, it's not even new business, because remember, whole concept of looking at new business versus in sort, sort of goes out the window with LDTI of remeasurement if you will the entire liability. And the literature requires that you use current rates, it's got to be a medium upper grade. Yes, we're using like an A rated fixed income security and, a yield curve on that. So and then, obviously, we're waiting, the shorter duration liabilities with the shorter end of the curve, and so forth. So yeah, there's actually no ability to adjust that. That's one of the very interesting changes that they're making. I think one of the appropriate things that they've done, I won't go into right or wrong, but definitely appropriate is that changes, that change does not go through earnings, it goes to AOCI.
54:14 So while the balance sheet will be re measured using then current rate. The P&L and benefit reserve the loss ratios will all be recognized using the loss in rate – in the reserve consistently with how we do it today. So all the variability will show up in AOCI.
54:34 Thank you.
54:38 You are welcome.
54:40 Thank you, Mark. [Operator Instructions] Our next question goes to Dan Bergman with Jeffries. Dan, your line is open. You can go ahead.
54:53 Good morning, Dan.
54:54 Thanks, morning. So as to start investment and savings, product sales are up pretty nicely across nearly every product, not just in retail mutual funds, which I tend to think of as the most linked to equity market sentiment. So could you just get a little more color on what has driven the reason strength, how much is due to that better sentiment given strong markets versus other factors. And I believe you talked about an expectation for slight growth off the record 2021 sales levels in 2022. So just given the equity market declines and volatility we've seen so far this year and is there any data you can provide on how sales trends to date, and just generally, if market conditions remain choppy? How much of a risk the see in terms of a drop off an ISP, so?
55:38 Yeah, it's a great question, Dan, appreciate those. And, we just got a lot of unknowns after a pretty extended period of extraordinary growth and so we don't want to just straight line that growth and assume that can continue with so many uncertainties in the marketplace, you're correct, that we've seen, the increase very broadly across all products in both countries has been it's very system wide within Primerica and so it's not focused on a single product or a single view of the future that's driving certain products sales like can often happen. And so we're just seeing general interest in investing for the long-term, I believe, coming out of the pandemic early on. We saw the first year of the pandemic drive our life insurance business to extraordinary records in the needs back when our ISP business was just barely positive during the first year in 2020. And then that coin flipped, and we saw just the opposite as live sales normalized in 2021. Still above pre-pandemic levels, but below the previous year, and the ISP business took off and my personal view is that it's just different timing in the prioritization that the pandemic created, people were protecting against premature death early on and then taking a little longer view of how do I get my finances in order for the loan return in case something unexpected, or when something unexpected happens in the future? And that's why I think we get the breadth. It is, our business is very long-term retirement focused, generally balanced to equity oriented, that's true of all of our products, generally, not just mutual fund products. And so that's why we've seen it across the board.
57:28 The challenge is exactly what you described. We just don't know what's around the corner, and we won't be deliberate and somewhat conservative in our assumptions for the next year, we saw we had very good January, in our business including our ISP business [Indiscernible] good growth, but we just expect over the year, it's most likely that growth is going to slow. And for the full year, we'd say something in the mid-single digits is kind of the way we're viewing it right now, that could change if there's more disruption in our very disrupted world. And we it could be a little better than that things, stay calm. But that's just where we want to place our guests at this point and kind of proceed from there.
58:12 Got it. That's – that's really helpful color. Thanks. And then I guess just one more limit of the expense side, it looks like the 12% core increase in insurance and other operating expenses that I think you mentioned, in the prepared remarks seems somewhat elevated. Should we think of that 2022 expense level as a baseline on what you'd expect to grow going forward? Are some of the drivers of that expense increase this year more one time in nature, whether related to some of the IT investments or conventions, convention timing that you mentioned that we might expect to drop off next year? Is there any color on that would be great?
58:44 Yes, it's an excellent question. The convention piece, that is a big component of an increase for the excluding Senior Health, it is a big chunk of what's gone up year-over-year, we just typically do not do the level of activity we're having with our field related meetings and the like, in any one given year, it's just with the pandemic, we moved to the convention, it's something we cherish, we want to do is an optimal to do it. And everything else, it's a lot of work and a lot of, a time on everybody's parts that we felt it was the right decision to move it. So that is one piece of the elevation that will not continue, we will not stay on that pattern, we'll go back to our normal sort of two out of three events in any given year.
59:34 The other thing I would look at, I mean, technology, I think will continue to be an error, we focus on so I think that is one that, we should expect to continue to see increases if necessary in order to grow and mature the business. The place, we're seeing some unusual increases this year, that should not look like increases, I think the level of expenses, right? But you shouldn't see this level of growth off of 2022 is really staffing related. I said it, I went through all this pretty quickly. But a couple of things. One is and I'll call travel part of staffing, but we haven't had a lot of our people who are feel safe, and especially on the road much for two years, and we do need to get them back out on the road, that's a big part of their job and how they can help grow the business, so that's a piece of it.
60:25 The other thing, as Glenn was talking about, about the in person classes for licensing versus online, we do pay the instructor salaries, and we put that in staffing. So we do anticipate holding a lot more in person classes and we think that's beneficial to our licensing pull through. And then some little things that we see in them, and I assume other business as well, we're seeing very high into this year benefit costs – employee benefit costs, medical related, probably a lot of that has to do with things that didn't happen in years prior, or delayed care in general. So all of those are things that sort of elevated us this year, but then from this year forward should grow at a more typical rate and I think the typical rate, we would put around – probably around 5% for general items. The other expenses that will grow differently than sort of that core rate, obviously, or anything associated with premiums or assets under management and like those will grow dollar for dollar with those related revenue. So you're talking about the general operating expenses, for me somewhere in the mid-single digits, say 5% is sort of our baseline, and then you make some decisions above and beyond that. I hope that helps.
61:43 Yeah, it's really helpful. Thank you.
61:50 That concludes today's Primerica Q4 2021 earnings results and conference call and webcast. Thank you for your participation. You can now disconnect your line.