Primerica Inc (PRI) 2022 Q2 法說會逐字稿

Hello, everyone, and welcome to Primerica's Second Quarter 2022 Earnings Webcast. My name is Charlie, and I'll be coordinating the call today. (Operator Instructions)

I'll now hand over to your host, Nicole Russell, Head of Investor Relations, to begin. Nicole, please go ahead.

Thank you, Charlie, and good morning, everyone. Welcome to Primerica's Second 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. Joining our call today are Chief Executive Officer, Glenn Williams; and our Chief Financial Officer, Alison Rand. Glenn and Alison will deliver prepared remarks, and then we'll open the call up for questions.

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 filings as well as modified by subsequent Form 10-Q for a list of risks and uncertainties that could result in actual results to materially differ from those expressed or implied.

We also reference certain non-GAAP measures, which we believe 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 available on our Investor Relations website.

I would now like to turn the call over to Glenn.

Thank you, Nicole, and thanks, everyone, for joining us today. The second quarter reinforced that we're moving beyond the influence of the pandemic, and we see the fundamental strength of our business in action. The complementary nature of our Term Life and ISP businesses continues to deliver important financial solutions to middle-income families.

Starting on Slide 3, adjusted operating revenues of $672 million increased 3% year-over-year, while diluted adjusted operating income per share of $2.86 declined 12%. ROAE was 22.5% for the quarter. To assess the underlying strength of the second quarter results, we have to look through a number of distortions that make year-over-year comparisons difficult. First, last year's Term Life results were heavily impacted by COVID with sales and persistency benefits exceeding the higher debt claims incurred. Second, the equity market has completely reversed its momentum. The S&P 500 Index was up 8% in the second quarter of 2021 versus down 16% in the current period. Finally, the e-TeleQuote acquisition wasn't completed until July 1 of last year, which means financial results in the current period have been no comparable offset in the prior year period.

It's important to look beyond these factors to understand and assess the health of our core business. As such, I will focus my prepared remarks today on the clear growth path we see taking shape in the second half of this year. Term Life, our largest segment, continues to provide a reliable source of earnings. Since the start of the pandemic, our in-force book has increased at a compounded annual growth rate of 5% versus our historical 3.5% growth rate, and we reached a total of $914 billion of face amount in force by the end of June.

The accelerated growth was fueled by a combination of higher sales and higher face amount for policy issued, a trend that continues today. We believe the in-force block will continue to grow as we steadily layer on new insurance policies every year, creating a predictable source of recurring premiums. Our practice of reinsuring approximately 90% of our mortality risk further insulates our business from volatility and allows us to largely lock in profitability.

Focusing on the Term Life segment on Slide 4, we issued approximately 77,000 new Term Life policies during the quarter. We believe third and fourth quarter sales will outpace our pre-pandemic results while also exceeding their prior period comparisons. We project second half sales will increase around 4% to 5% year-over-year. We expect our Term Life business to remain the primary source of deployable capital, which we plan to use to fund our growth, while also providing an attractive return to investors through quarterly dividends and share buybacks. While earnings in the Term Life segment are steady and predictable, our Investment Savings business is highly correlated to the equity markets, and the second quarter certainly demonstrated how quickly momentum can shift.

Looking past the market noise to focus on the core of this business, you'll find a model built on strong fundamentals and rooted in our long-term systematic approach to investing. Every day, our licensed reps interact with clients to help them meet their financial goals, which most often include planning for retirement. Approximately 70% of our total client asset values are invested in retirement accounts and almost 20% of all mutual fund sales are funded through automatic monthly investments. This focus on the future also results in lower redemption rates as clients stay invested, despite market volatility, leading to a stickier asset base for Primerica.

Looking at our second quarter ISP results on Slide 5, high inflation, low consumer confidence and fears of a recession dominated the headlines during the quarter, creating significant headwinds for our ISP business. While sales had remained fairly strong earlier this year, the continued volatility and sharp decline in equity markets has impacted second quarter sales. Today, second quarter sales were lower than expected -- sorry, total second quarter sales were lower than expected at $2.7 billion, although net flows of nearly $900 million continued to reflect our clients buy and hold long-term approach to investing.

Assuming this uncertainty and volatility continues, our best estimate for third quarter ISP sales is a decline in the mid-20% range with some upside if markets improve. While we expect full year sales to decline compared to last year's record results, it's worth noting that 2022 results are still expected to exceed pre-pandemic levels.

Turning next to more recent business ventures. Our U.S. mortgage business is experiencing growth challenges along with the broader industry due to the rapid rise in interest rates and slowing economy. In the second quarter, sales volumes were down nearly 50% compared to the second quarter of 2021, resulting in a cumulative year-to-date decline of about 30%. This has not altered our views on the long-term prospects of this business or deterred us from actively working to expand the number of states in which we are licensed to offer mortgages as well as the number of mortgage licensed reps at Primerica. We're also working to educate mortgage licensed reps on how to identify opportunities to consolidate variable interest rate consumer debt, build households with cash flow and capitalize on purchase money mortgage opportunities.

On Slide 6, we recognize that our newly acquired senior health business has not performed as we originally expected. We remain committed to driving a turnaround by carefully managing sales volume as we work toward a sustainable ratio of revenue to acquisition costs. We have deliberately limited licensed health agent growth and made tough decisions with respect to certain of these agents who are not profitable based on reduced levels of LTV. We are focused on ensuring unit economics are headed in the right direction before we grow our licensed health agent sales force at e-TeleQuote.

Acquisition costs, while seasonably high, relative to the LTV in the second and third quarters of every year, continue to trend down on a net basis as we make progress on increasing our sales conversion. And as a result, reducing both lead and labor cost per sale. We anticipate instituting a new health agent compensation model in the third quarter that is intended to drive agent productivity and profitable unit economics.

Using Primerica's strength in distribution provides a real advantage that our senior health competitors cannot duplicate. While it's still early, referrals from Primerica reps are outperforming leads from traditional sources, and we've already seen higher conversion rates from these leads. We believe the warm relationship with our reps will also lead to longer retention and higher LTVs based on early indications of the quality of business referred from Primerica to e-TeleQuote.

The number of senior health certified reps entering AEP this fall will be significantly higher than last year, and we are optimistic about the volume and quality of leads Primerica's team can generate during the upcoming Medicare annual enrollment period. We made the decision to exercise our call option in early July to acquire the remaining 20% of e-TeleQuote. Given the results of the trailing 12-month period, the contractual formulaic price defined in the shareholders' agreement for the exercise of the call option was $0 and the remaining stake in the shares were acquired at no cost.

Turning to Slide 7. Recruiting remains strong compared to historical averages. Recall that we made liberal use of recruiting incentives through most of last year, which increased recruiting. In the first half of 2022, we returned to a more fundamental approach with fewer incentives and have seen sustained strength in recruiting with levels comparable to pre-pandemic results. The steady improvement in recruiting of the multiple recent quarters confirms the overall strength of our message and affirms that potential new recruits are attracted to our business model.

The recent changes in labor markets and the desire for more independence and flexibility further reinforces the attractiveness of building the Primerica business. We believe we have the infrastructure and processes in place to pull new recruits through the licensing, and we leveraged the power of our convention in July to launch a new incentive to drive recruiting to new heights. We're already experiencing a strong response to these incentives and believe third quarter recruiting will be extraordinarily strong.

Turning next to Licensing. A total of 11,529 new life licenses were issued during the current quarter as momentum accelerates. To put this figure in proper context, licensing grew 14% compared to the second quarter of 2021, a period which included more than 2,000 COVID temporary licenses, the majority of which never converted to a permanent license. Compared to the pre-pandemic second quarter of 2019, licensing grew by nearly 6%.

As I mentioned earlier, we're seeing a clear benefit from our collective efforts over the last few years to improve our licensing process in the introduction of new progress tracking tools that allow our field to keep new recruits accountable in real time. New recruits are also more comfortable with in-person classes as we continue to move further away from the COVID-related shutdowns and restrictions. To maintain our momentum, we are actively adding pre-licensing coaches and classroom sites to accommodate this increase in attendance.

Our message to the field over the last 12 months has emphasized the power in the combination of recruiting and licensing and our most recent quarter clearly demonstrated their buying. The ongoing strength in recruiting, along with a more robust licensing process, has led to a 2% increase in the size of our sales force year-to-date, and helped propel the Primerica sales force to over 132 life licensed reps at the end of June. Based on current trends, we expect the size of the sales force can approach 134,000 by year-end.

Now let's review the impact of our convention, which took place at the Mercedes-Benz Stadium in Atlanta between June 29 and July 2. As you know, we leveraged the power of this event to deliver a focused, consistent message simultaneously to a large number of people and to cast a vision for the future. The convention can also act as a momentum accelerator by reenergizing our sales force. We are pleased with the attendance of nearly 35,000 people at the event, although attendance was down from 2019 due to lingering COVID concerns, travel restrictions and flight chaos that's currently overwhelming the airlines.

What is most important is that we delivered on our goal to put the pandemic behind us and to shift our focus to the future. Preparation for this event begins by identifying the desired outcomes and defining appropriate messages. This year's message was focused on our unique ability to serve the middle market, the attractiveness of our business model and the importance of growing our licensed sales force through both recruiting and licensing.

The convention also featured an exhibit hall where participants were able to engage with our business partners and home office staff to hear about the most recent initiatives, obtain new product information and training and participate in demonstrations of our latest technology and tools. Convention attendees could also register for upcoming training and sign up for various portals and newsletters. Over the 4 days of the convention, many participants also took advantage of on-site senior health certification at Senior Health booth.

As we look to the future, we do so with more confidence than ever, knowing that we have the right systems in place and support needed for our reps to succeed. The recruiting incentives that were announced July 2nd have filled the licensing pipeline, and these new recruits will continue to fuel growth and sales momentum. We're excited to see results emerge over the next few quarters and into 2023.

With that, I'll now turn it over to Alison.

Thank you, Glenn, and good morning, everyone. Let me start by walking you through the key earnings drivers by segment, highlighting how each business has responded to the changing dynamics around COVID, market conditions and the economy. Starting with Term Life on Slide 8, operating revenues of $411 million increased 7% year-over-year, driven by an 8% increase in adjusted direct premiums. Pretax income growth was compressed to 3% due largely to insurance expenses that have been temporarily elevated in the first half of the year.

While the changing dynamics around COVID has shifted to DAC and benefit and claims ratios considerably year-over-year, the resulting Term Life operating margin was strong at 21% for the quarter. Looking a little more closely at persistency, we continue to see policy retention normalize as COVID fear subside. The lapse rate for policies issued during 2020 and 2021 are about 15% and 5% higher, respectively, than our pre-pandemic experience by duration. This is not surprising as these policies were issued during the height of the pandemic fear.

By contrast, we continue to see strong persistency on policies issued prior to pandemic with lapses around 10% lower than pre-pandemic levels. Lapses across all durations have picked up modestly from the prior quarter, which may indicate that inflation is emerging as a headwind. However, we have not seen a reduction in average policy size or average premiums, which supports the notion that our market continues to prioritize financial protection when allocating the wallet share. We will monitor these trends as time progresses. But as of now, our current lapses remain modestly favorable to pr-epandemic levels. The DAC amortization ratio, which is seasonally low in the second quarter, was 14.6%, which is consistent with pre-pandemic second quarter levels.

Shifting to mortality, COVID claims continue to subside and were $2 million net of reinsurance for the quarter. Barring any unusual changes in COVID status, we expect this level of COVID claims to continue in the third quarter. We also saw non-COVID claims of about $5 million below historical trend. Much of this is likely regular claims with volatility, but we will monitor trends to see if a post-COVID improvement in mortality is emerging. Overall, the benefits in claims ratio was 58.5% during the quarter.

Insurance expenses were higher than normal in the second quarter as we added the biennial convention, which was postponed from last year due to COVID, to our normal schedule of sales force leadership event. Even so, the insurance expense ratio of 8% was in line with pre-COVID second quarter levels, and we expect the ratio to come down in the second half of the year.

As we look to the third quarter, we expect persistency trends to put some pressure on adjusted direct premiums with growth of approximately 7% year-over-year. Any favorable impact on adjusted direct premiums from rising sales levels, as Glenn discussed, will take some time to build. The benefits in claims ratio is expected to be in the low 59% range, and the DAC ratio should continue to trend in line with pre-pandemic third quarter levels. All in, we expect the Term Life margin to be around 20% for the third quarter.

Turning next to our Investment & Savings Products segment on Slide 9. Our Investment business is highly correlated to the equity markets. The rapid pace of market depreciation in the current period versus significant market appreciation in last year's second quarter had a major impact on our year-over-year results. Operating revenues of $222 million decreased 7% year-over-year. This combined with higher Canadian segregated fund DAC amortization, elevated operating expenses due to sales force leadership events and a normalization of operating leverage from the very strong levels last year led to a 17% decline in pretax income to $59 million for the quarter.

Sales-based revenues and sales-based commissions declined 15% and 14%, respectively, in line with the change in revenue-generating sales. Asset-based revenues remained largely unchanged compared to the prior year period as average client asset value declined 2% to $88 million. A drop in asset value supporting our Canadian segregated funds accelerated DAC amortization during the period creating roughly a $4 million disparity in the year-over-year result. Market volatility may continue to create noise in the year-over-year comparisons on DAC amortization. As we look to third quarter, if markets remain where they are now, we expect asset-based net revenue to decline about $3 million and sales-based net revenue to decline about $10 million year-over-year.

Turning to the Senior Health segment on Slide 10. We continue to refine our approach for estimating lifetime revenues and believe the LTVs determined by our algorithm this quarter reasonably reflect current persistency. The refinements were applied to projections for policies sold during the most recent AEP and OEP, which accounts for much of the $5.4 million negative tail revenue adjustment this quarter. We do not expect significant negative tail adjustments in the third quarter.

As Glenn noted, we are taking steps to improve LTVs and reduce contract acquisition costs, and we believe that business sourced through Primerica agent can be a key differentiator for our business. Our pretax loss estimate for the full year remains unchanged at around $35 million with a loss expected in the third quarter and a small profit in the fourth quarter during AEP. Funding required to support the business should be less than $10 million for the year, including the tax benefit recognized at the PRI level.

In our Corporate and Other Distributed Products segment, a $5 million year-over-year increase in pretax operating losses was driven by higher insurance and other operating expenses as well as lower segment net investment income as the allocation to Term Life increased to support growth in that business. Lower sales commissions from third-party providers, the most notable of which was mortgages, also contributed to the year-over-year increase in pretax losses.

Consolidated insurance and other operating expenses on Slide 11 increased $25.6 million or 23% year-over-year. Roughly 7.5% or $8.5 million of the increase comes from the Senior Health segment, which did not exist in the prior year period. Another 7% or $8 million is due to higher cost associated with in-person sales force leadership event that we schedule biennial convention, which added an event to our regular calendar and higher travel in general. The remainder of the increase is generally driven by growth in the business, employee compensation and technology.

Looking ahead, we expect insurance and other operating expenses to grow at more normalized levels as the temporary increase in expenses associated with the leadership event is behind us, and Senior Health expenses will be reflected in the comparable period. On a year-over-year basis, third and fourth quarter insurance and other operating expenses are expected to increase by about 8% and 6%, respectively.

Turning next to Slide 12. Our Invested Assets Portfolio remains well diversified with an average rating of A and a duration of 4.8 years. The significant increase in interest rates over the past few months has pressured fixed income prices. Our portfolio ended the period with an unrealized loss of $223 million compared to an unrealized loss of $84 million at the end of March. We believe these valuations are significantly tied to interest rates and not credit concerns. We continue to have the ability and intent to hold these investments until maturity.

On the plus side, rising interest rates have provided the opportunity to higher reinvestment than we have seen in several years, which will benefit net investment income over time. Liquidity at the holding company remains strong with invested assets in cash of $232 million. Primerica Life's statutory risk-based capital ratio is estimated to be about 450% at June 30, 2022. We repurchased $128 million of our common stock during the quarter, which when combined with our purchases in prior period, needs around $80 million remaining of our $325 million program.

Let me wrap up with an update on LDTI, which becomes effective next year. As a reminder, we are electing a modified retrospective transition approach and will apply the standard prospectively as of January 1, 2021. Starting with the year-end 2020 balances for benefit reserves and debt. One minor exception is that if LDTI assumptions increase the net premium ratio above 100% for a specific policy cohort, the ratio is capped at 100%. This may impact an isolated group of cohorts, but will not significantly impact opening reserve balances.

We expect Term Life earnings to emerge more quickly under LDTI due to lower DAC amortization. While deferrable expenses do not change under the standard, capitalized costs will be amortized straight line based on current face amounts. We have a popular rider that allows face amounts to increase annually by 10% for a period of 10 years. Under current GAAP, the level commissions on these riders are capitalized and amortized in the same period, whereas under LDTI, they will be amortized straight lines like other acquisition costs.

We expect our DAC amortization ratio to be reduced by 250 to 350 basis points going forward compared to historically normal ranges that exclude recent pandemic-related volatility. We also expect earnings to emerge faster from benefit reserves has historically locked assumptions that include provision for adverse deviation are replaced with current best estimate.

COVID claim variances that occurred since 2020 will be somewhat of an offset since under LDTI, the impact of experienced variances is partially spread over future reporting periods. The impact of any assumption changes will also be partially spread to future periods under the modified retrospective adoption method. The portion spread to future periods is highest at the transition date and reduces over time as cohorts duration progress. Given the homogenous and predictable nature of our business and our significant use of reinsurance, we do not expect large or frequent assumption changes to occur.

Turning to the impact on equity. The standard requires the benefit reserves be remeasured each reporting period under market observable rates based on an A rating with the difference between reserves using these rates and locked-in rates reflected in AOCI. Given the weighted average of our reserve liabilities -- weighted average age of our reserve liabilities, the average locked-in valuation rate is approximately 5.25%. This is significantly higher than the year-end 2020 market observable rates, but much closer to current rates, given the dramatic rise seen in 2022.

If we apply the market observable rates in effect at June 30, 2022, the opening reserve balance at the date of transition, we estimate the after-tax reduction to AOCI would be less than $100 million. As a reminder, LDTI changes the timing of earnings, but it does not impact the true economics of the business, the underlying cash flows or statutory capital requirements. We will continue to provide updates on LDTI as assumptions, processes and control are finalized.

With that, I will turn the call over to the operator for questions.

(Operator Instructions) Our first question comes from Mark Hughes of Truist Securities.

Alison, you gave some good specific numbers on the DAC impact of 250 to 350 bps, talked a number of other impacts. But when you think about the P&L effect, is that 250 to 350 bps, is that principally what we're going to see and should factor in? Or are there other specific line items and ranges you'd care to share? And then when is that? Is that all kicking immediately? Do you get the full benefit at implementation?

There were a few questions, and I'll try my best to answer all of them. The DAC amortization obviously will be prospective. So from that point -- or from data transition forward, we will see the pattern emerge along the lines of what I was discussing 250 to 350 basis points lower than -- and just to be clear, we've obviously seen a lot of volatility in our DAC ratio because of the impact of COVID. So what my comparisons are, are 2 pre-COVID levels, so sort of normalized levels.

The other -- and that's a very straightforward, I'd say, right, in comparison to some of the other things with LDTI, the DAC calculation is a little more straightforward because it is very formulaic. On reserves, there are more anomalies because you hinge your results, as you know, based on day 1. What we do believe is that, one, as I said in my comments, we won't have a lot of large assumption changes, given the nature of our business, and our extensive use of reinsurance. So that's one thing that should safeguard us from a lot of heavy volatility there.

We do also believe in general that the benefit ratio will be lower under LDTI because of the fact that you get to sort of open up or unlock all these historical assumptions that, one, has -- there's been mortality improvements since these were set. And initially, they were also set with PADs, provision for adverse deviation. So both of those will also mean that benefit ratio should be lower than we've seen typically under current GAAP.

The one caveat, and we, quite frankly, aren't finished with the full work around it is just to see how COVID, which, again, because of the way LDTI treats experience variances, some of what we've already recognized in our GAAP P&L for COVID will actually be spread into future periods under LDTI. So that will be somewhat of an offset. But all in, we do expect benefit reserves to also emerge much lower than it currently did. I just at this point can't quantify that.

I want to add just couple other nuances. If I -- just one more thing on DAC amortization, I'd say one other thing, and this is actually not in Term Life. This is in our ISP segment. The DAC amortization on the seg fund, you saw it this quarter, had a $4 million year-over-year. It's very sensitive to market. It's not a FAS 60, I'm sorry old school, different level of FAS 97 type of accounting. And so one nice thing about it is that DAC amortization will also go to a straight line type of method, so a lot of the volatility or the unexpected variances associated with that DAC amortization will dissipate.

So we say benefit ratio lower, it sounds like that's material. I mean, is that hundreds of basis points potentially, is that the magnitude?

Yes. So again, at this point, and we're being very aware of where we are with regard to our controls, our stock documentation and the like to make sure that we don't give out numbers ahead of where we've gotten everything nailed down. So I can't quantify it at this point, although I think if you just want to think about things along the lines of all the mortality improvements that are in our book of business, those should really start to flush back out through earnings much quicker than they would have under the current GAAP. The other thing to remember, though, is we do cede 90% of our mortality risk. So this is only the volatility on the exposure that we retained. I don't want to say nothing changes because of the pieces that are reinsurers, but those costs, if you will, are pretty locked in.

Okay. And then, Glenn, did you give an outlook for the sales headcount? Would you expect either Q3 or through the balance of the year, you clearly think -- you say that the recruiting is extraordinarily strong, which sounds pretty good. But how does that flow through, through the overall sales force headcount?

Sales force headcount, I'm sorry, Mark, just to clarify. Is that the question?

Yes, exactly.

Got it. Sales force. Yes, we are seeing -- as you know, from previous quarters, we've been a little more optimistic each quarter in the size of the sales force, as we've seen the positive results of our efforts to drive both recruiting and the licensing pull through. So we're continuing to see some success there. So we are anticipating now our year-end sales force count is going to be in the range of 134 -- I'm sorry, yes, 134,000 licensed reps. So that's a little more optimistic than we gave last quarter.

Very good. And then one other question. The senior health policies in the quarter, what proportion of those were from Primerica reps?

Yes. If you look at that all the way down to approved policies and you're looking right now, we're running in about the 4% range of total.

Okay. So it's still pretty small.

Our next question comes from Andrew Kligerman of Crédit Suisse.

I was wondering on Senior Health. How many dedicated Senior Health agents are there right now? You talked about a new model, a new comp model to improve productivity, maybe a little color on that. And then lastly, with regard to that segment, when do you think you could probably get to profitability? I know you're predicting $35 million loss this year. Where might you see some light at the end of the tunnel for this?

Andrew, I'll take sort of the latter part of this. It's interesting, right now, in the second and third quarters, we knew just from a seasonal standpoint, we're tending to be negative quarters from an earnings perspective because there's not a whole lot of volume. In the third quarter, there's also the ramping up to make sure your agents are in their seats for AEP.

We do, as I said during my prepared remarks, expect there to be a loss this year. I just will reiterate, we're going to have that loss with almost no -- if possibly no, I said less than $10 million need for funding. So we're staying very aware of how much money we're putting into this business as it tries to rebuild and work through the dynamics of the industry itself. So I will say our focus has been very much on how much capital we put in, and it's one of the reasons why we're actually keeping the number of agents very low, which Glenn will get to in a moment.

But with that said, we do expect our key periods of profit to be AEP and OEP. Our goal is to get to a point where we can make a profit this year during AEP and then look to next year for OEP in the first quarter to really be a continued driver of that profit. We're not -- again, because we're being very cautious about this and very focused on how much cash we want to put into this business, we are not going to take our foot completely off the break until we really know that we're comfortable with the operating model. So I do think it will still take us several quarters to assess how we're doing.

The main thing will be, and you're seeing various dynamics in the industry, if you will, a little bit less marketing activity, all of that should help our dynamics, but we obviously have to let that play out. And once we see that mature and prove out according to what we say will happen, then we can really take the foot off the break in 2023 to continue to ramp up the business as the year goes by.

And Andrew, if I could pick up on your question about agent count at ETQ, we're at about 325 employed sales center agents at this point.

And the productivity model change, anything you would call out on that?

Well, we're working through all the levers of trying to make sure -- that's down from about 400 at the beginning of the year. So we are working toward our most productive agents reducing force of those that are not productive and not profitable. And so that's part of our process right now as we're finding our productivity dynamics and focusing on the most productive, most profitable reps, as well as working with carriers. Sometimes if we see carriers who have friends and low persistency, it could be a product flow and so we work with characters on changing or improving the products. So we're pulling all of those levers and watching the productivity dynamics change. And things are moving in a positive direction, but we've got significantly more work to do.

I see. And if I could just sneak one quick one on Investment and Savings Products sales. You're guiding to about a 20% decrease in sales in the third quarter. The market seems to have improved a little bit in the third quarter. Any sense of why you're -- give a little color on why you're projecting such a kind of a significant drop-off in the third quarter?

Yes, Andrew. As we've talked about in many of our discussions over the years, our client base tends to react a little more slowly to market events than maybe a higher income client base would. And so generally, when things start turning down, we have some resistance to that for a period of time. And then when things start normalizing, it takes us a little longer to recover. So we're trying to take a conservative approach based on what we're seeing early in this quarter.

And we do hope -- and that's why I mentioned there was a potential for some upside. If we do get ongoing stability and even improvement, then hopefully we'll see that turnaround start to take place. Just not sure if what's left in the third quarter if we can see it by then, so we're trying to take a reasonable approach to that.

Our next question comes from Ryan Krueger of KBW.

I have a bit of a different question, maybe for Alison. Could you talk a little bit about how much the rough amount of annual dividends you'd expect to normally take out of your U.S. Life stubs? I know it probably around a fair amount over the last few years, but just any color you could give on kind of a more normalized expectation at this point?

Yes. I'm giving that a little bit of thought. That's not necessarily something we've shared in the past, but -- so we'll see. And you can actually see it if you look at the blue book. But that number is rising. We had a little bit -- I'll give you color on the dynamics rather than actually pinpoint a number. We did have some anomalies going on a few years ago with regard to how the XXX transactions, how the economic reserves were playing out. Just it was a normal expected process where we went positive on the economic reserves. That's behind us.

There were some strain in the past from COVID. That's behind us. We actually have seen -- we are increasing -- I'll give some color. We are increasing our expectations by about $50 million for next year from what we had been thinking maybe. So all in, the signs are pretty strong. We also ended up with -- that's one of the things because we ended up with a 450% RBC, that is, in our opinion, more than we need to have as a life insurance company. So part of that $50 million is bringing that back down closer to, let's say, the 420% level with obviously our target being not going below 400%. So we monitor that.

We obviously want to make sure we keep enough capital in the company to -- for 2 reasons -- many reasons, but 2 that I'll throw out for you; one is to make sure we support any kind of growth initiatives we have at the life insurance company; and two, to maintain our ratings. One of the key drivers of the strong range that we have is our robust capital position. So with all that said, I see the numbers coming out of the life insurance companies, the operating unit very stable. I think there'll be improvement annually. And again, we're looking towards maybe another $50 million next year from what we had originally anticipated.

That's helpful. And then separately, I mean, I think it's varied some in the past, but could you give a little more context in -- when you've had and there have been past recession. To what extent you have seen much of an impact within your Term Life book in terms of changes in lapse rates?

Yes, I'll start and you can talk about sales, Glenn. In the 2008 period, again, very similar to what going when we're talking about ISP. Our market doesn't necessarily react to anything immediately. It's a little insulated. But once it reacts, it reacts probably for a longer period of time than the rest of the market. So we sort of had our worst impact on persistency, not in 2009, actually it was more so '10 and '11 to '12, really when the economy -- the market may have come back, but the economy stayed very stagnant, so really middle-income consumers.

So we see it across the board and back then, we did see it not just on any one duration, we saw it across the board, that's where we see the impact happening from sort of what's going on in the market. I will tell you, I haven't seen the up or down notably because of the economy since then. COVID, you could argue, it was somewhat from the economy, but I think more so it was driven by use towards mortality.

Again, we are seeing a little bit of deterioration across the board. But I think the most positive thing that both Glenn and I pointed out was that our average face amounts aren't going down on the ISP side, we're not seeing higher redemptions. So all the drivers are staying very positive and intact with regard to what we would expect to see if the economy was really deteriorating our business.

Yes, I would echo Alison's comments. As we look at sales, we realized that middle-market wallets are tightening. And normally, we would expect to see that in fewer sales and smaller sales. We're not seeing it in smaller sales, the sales size is staying very consistent, continuing to grow. And it's -- we don't identify anything specific in the number of sales and that could be a balance in the positive tailwinds we continue to get from the COVID sentiment, the importance of protecting family, the realization of our human mortality and so forth.

We expected a lot -- I'll tell you, we've talked about that in previous quarters that we'd expect to get some positive benefit from that for some period of time. And it could be that, that is just kind of been a stalemate against the downward inflationary pressure on sales, and it's kind of holding in place. So it's a lot of conjecture there, a lot of supposition but at the same time, the net results is we're pleased with where we are in this environment, kind of regardless of what's causing it exactly. We feel good about where we are.

And to the previous question, if we can hang on until things turn around, and sometimes we skate across some of the difficult periods without a lot of impact on our business. So hopefully, if things turn around, inflation gets under control, markets start to return to a positive footing, then we think we can accelerate our growth from here.

I guess if I'm remembering correctly in prior recession, in the early 2000s, for example, I don't believe you saw much of an impact on persistency in that period.

Not in that period. As Alison said, it's just only been in the most severe kind of recessionary times where we've seen a real impact on persistency, and it's both severe and extended, I would say.

(Operator Instructions) Our next question comes from Jeff Schmitt of William Blair.

On the non-COVID claims trends, I think Alison said they're about $5 million favorable versus historical levels. Is there potential for that trend to continue for separate users from kind of a change in mix? I mean, do you think you could have pulled some mortality forward and maybe it will be light for the next few years?

It's definitely a possibility, I will tell you. One quarter in, I'm reluctant to say there's a trend or a change in the feature. I will say, I obviously have listened to what others in the space have said, specifically some of the reinsurers like RGA, we've spoken to some of our other reinsurers. And there has definitely been an improvement that they've all seen which knowing that they're seeing it broader gives me some feel that this could actually be something that's positive for us.

Again, we're keeping an eye on it. We're not going to automatically assume it's going to stay with us. But we are seeing these indicators, especially given what other people in the space have been saying publicly as well. The one thing I'll point out is sort of an unusual amount of it was in Canada. So that piece of it, I do speculate it may be more of what we would call regular volatility, but that only makes up about half of what we saw. So there is definitely some upside there. We are just waiting to see what the DLA before we say, in fact, yes, we believe mortality improvement is here.

Okay. And then in the ISP business, net flows were close to 4% in the quarter. I think the industry was more like minus 3% and net flows trended really well in 2020 and now again after one of the toughest first half in the stock market in a long time. Could you maybe talk to why those result pulled up so well relative to the industry?

Yes. I think as I mentioned in my prepared remarks, Jeff, we do see a stickier set of assets we believed in the industry. It's a little hard to draw a beat on it because the comparisons are imperfect. The reporting on the data is a little hard to get. But we do believe that our advice and our clients' behavior around long-term systematic investing, taking an approach that's not impacted by time to time the market and so forth serves us well, serves our clients well.

And so we believe that approach, the advice that we give the clients' long-term view because retirement is generally long term for most clients, all plays in our favor and reduces our redemption rates compared to the industry. And so that's probably the major advantage that drives that difference. And it's certainly something that you can see coming through in the numbers this quarter.

Okay. Great. On mortgage business, is there a cost structure there that's up the track. I am trying to understand, the 50% decline in mortgage volume, is that driving losses in that business now?

No. Our infrastructure around our mortgage business is not huge at this point. And we do believe that there's a better day out there ahead of us, which is why I made the comments. We're continuing to pursue licenses in additional states and also licensing additional people when this turns around so that we're in position for fast growth. But we don't have a tremendous amount of infrastructure built around that. So there's not a significant challenge there expense-wise.

Next question is from Daniel Bergman of Jefferies.

So thank you for the detail in the prepared remarks on persistency. I just wanted to see if there's any more color you could give on how persistency compared to your prior expectations and kind of what you saw in the first quarter there? I think the DAC amortization ratio came in a little bit above the guidance you have previously given. And just given this trend, coupled with potential pressure from inflation or recession, just how are you thinking about the risk that persistency could continue to worsen ahead instead of stabilizing your current levels? Any additional thoughts on that would be great.

Yes. And again, it's interesting to watch. As I said in my prepared remarks, we did a modest deterioration from first quarter expectations to second. And obviously, there's a lot of seasonality in the persistency number, so putting that aside. And our questions to ourselves is, obviously, is it the economy? We've had such an odd disruption in the business because of COVID that it's hard to actually isolate what's causing any trend or how quickly or steadily, if you will, something will normalize.

I think the first 2 durations, we never had any doubt that some of the business we were selling during the COVID, the height of the pandemic was fear driven. I mean that was just a given. And so we're not at all surprised that those particular blocks are not performing as well as perhaps pre-pandemic blocks.

But I do think the fact that we're seeing everything else still come in favorable is a positive notion about where it will land and stabilize. Again, we're not necessarily saying we need to see any improvement from what it looks like pre-pandemic because we actually think where we were pre-pandemic was very strong. So we're putting everything in the context of can we get back to that level of consistency, profitability, et cetera. And as of now, we believe we still are on that path.

That's very helpful. And then maybe switching gears, just to follow up on your prepared remarks about the convention and the message you delivered there. I just wanted to see if there's any additional color you could provide on the event and whether there are any specific incentives or initiatives you rolled out? I think you might have mentioned the recruiting incentives. Is there any way to help us think about how the conference could affect near-term trends or third quarter results in terms of recruiting our product sales would be great.

Sure. It was a very successful event, Dan. We -- of course, we're in a bit of uncharted waters, the first big event post COVID. And as we said, we did see some challenge with the crowd size. Also, we're very pleased with almost 35,000 in attendance. It was down a little bit from 2019 for the obvious reasons, there was no surprise there.

I think if we were surprised, it was on the positive side that the desire for our team to come back together, as we said, kind of let's look to the future and sort of looking back on the rough path, we've all been down as a society for the last few years. It was very refreshing. It was very healthy. We talked about the importance of our goals, of growing the size of our sales force because that enables us to both impact more families positively and create more success for our sales leaders themselves.

And so that was the focus of the event, is that we need to be bigger to reach a larger market and to create more success for all constituencies of Primerica. And that message was not only received well, it was jointly carried by the sales force speakers, the majority of speakers of that event are leaders to the sales force, in addition to Peter and me and Julie and other home office leaders. And we were all on the same page. So that was very positive that we do believe that the focus we believe is important, is shared with the sales force.

As we do, we did -- as normally, we did introduce some incentives and some recruiting discounts toward the cost of the IBA licensing fee. Also some leadership events, as we call our contest these days, additional credit and restarts of our contest, give people a fresh start. Those were very well received. And thus far, we're seeing a lot of positive activity since the convention.

And so as I said, we're expecting extraordinarily strong quarter in recruiting in the third quarter and beyond. And the most exciting part is that leads directly into filling the licensing pipeline and giving us even more momentum in addition to the increased optimism we have on growing the size of the sales force. So we count it as a very successful event.

At this time, we currently have no further questions. Therefore, this concludes today's call. You may now disconnect your lines, and have a lovely rest of your day.