Q4 2021 Primerica Inc Earnings Call
Right.
I would now like to turn the call over to Glenn Thank.
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 both the last year's fourth quarter and full year 2020 results diluted adjusted operating income per share increased 20% quarter over quarter and on a full year over year basis.
Fourth quarter investment product sales remained well above our prior year period levels, while sales in the term life business continued to normalize as expected.
And our senior health business results results from our first annual election period were weaker than expected.
A combination of lower sales volume and higher contract acquisition cost.
We incurred a preliminary noncash impairment charge of $76 million during the fourth quarter Kantar.
Continued elevated policy churn in the senior health market was a significant driver along with other factors such as <unk> recent financial performance and the decline in market values the publicly traded peers.
Alison will address this impairment and our financial outlook for senior health in her prepared remarks, and I will expand on our plans to address the telephone to operational challenges in a moment.
Taking a closer look at how the pandemic has impacted our distribution results on slide four.
After nearly two years of Covid disruptions, our Salesforce has adapted extremely well to new ways of conducting business.
Recruiting remains 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 remain 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.
Initially we were encouraged when restrictions begin to ease however, our progress was again delayed with the reemergence of newco the variant.
We believe it 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.
Despite licensing headwinds we ended the year with around 129500 life license Representatives versus 100 3500 at the start of the pandemic.
This is particularly noteworthy considering the numerous challenges we had to navigate during the pandemic.
We continue to see significant opportunities to increase the size of our sales force 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.
Our success in growing 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 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 affected these changes are within our control and remain the building blocks of success.
<unk> long term growth in the size of our salesforce to be in the low to mid single digit range, although it will not be linear from year to year in the near term, we anticipate growing the sales force around 2% in 2022.
Turning next to slide five as anticipated term life insurance sales volume continued to normalize following a period of heightened fear an urgency that was created by the pandemic. We continue to see strong sustained demand for protection products with 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 <unk>.
Nice amount in force, which represents a year over year increase of 5% and positions primary because one of the top issuers of individual term life insurance in North America.
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 with first half results trailing into 2021 period in the second half of the year increasing versus the prior year Pearce.
<unk>.
Slide six summarizes results from our investment and savings product segment.
We ended the year on strong footing with quarterly sales once again exceeding $3 billion.
And full year sales up 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 and a record setting $97 billion at year end.
Our opportunity in the ISP business remains very attractive with more than 26000 reps currently licensed to sell mutual funds.
Given current levels of market volatility and uncertain economic conditions, we are projecting a more modest single digit growth rate for investment product sales in 2022 versus 2020 one's record breaking year.
Included in this assumption are changes to the commission model in Canada that go into effect on June one, which will require us to discontinue the use of mutual funds with the deferred 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 field familiarize itself with a new series of funds that will be sold exclusively by primary mutual fund licensed agents and with the new compensation model.
Canadian mutual funds currently represent approximately 13% of total investment and savings products 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 license representatives continue to play an important role in keeping clients invested for the future.
Turning next to the senior health market and our recent acquisition of <unk> on slide seven.
So far our senior health has underperformed expectations. This has been driven by a number of factors impacting the sector generally and <unk> specifically.
Including increased policy churn, which has reduced expected lifetime revenues lower overall sales volume and contract acquisition costs above anticipated levels.
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 churn by carrier and it stopped selling carrier plans in certain geographies or altogether, if their levels of churn remain outliers to other carriers. We are also evaluating other approaches to improve policy retention such as client affinity campaigns and predictive laxation algorithms.
Next addressing sales volume.
Prior to the annual election period, or AEP CMS imposed a regulatory change in its marketing material review process, which led to a slower start to AEP.
Additionally, as I mentioned last quarter, we entered AEP below desired staffing levels historically, starting agent count remains largely intact to ADP as agents typically do not attrite voluntarily, giving 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 in Asia point, we've continued to see a falloff 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 formalized long term hybrid work arrangements compensation adjustments and other strategies.
Finally, with respect to contract acquisition costs. The labor issues I, just described contributed to contract acquisition costs being higher than expected. Additionally.
Additionally, while we actively manage lead sources and mix some sources provided less approved less attractive than anticipated.
We are adjusting our senior health business going forward to address the challenges that we 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 and.
In 2022, our focus will be on addressing the fundamental issues I've just outlined in growing the business responsibly.
As we tackle necessary changes, we will build our agent count and sales volume more slowly than originally planned.
The challenges are bigger than anticipated the strategic rationale for acquiring <unk> remains unchanged and the growth characteristics and the senior health market continues to exist.
Offerings Senior health products allows us to provide an important service to the growing middle market senior population that can further strengthen their relationship with prime Erica.
The additional product line expands the income opportunity for our sales force and can facilitate sales of our core products.
Over the long term, we expect the company and our stockholders to benefit from this acquisition.
Early indications are that lead source by primary care reps have an advantage due to the existing relationship between the rep. In the client. We believe this is a competitive advantage within the space, we remain committed to <unk> and the senior health market.
Now I'll turn it over to Allison thank.
Thank you Glenn and good morning, everyone.
On slide eight by continuing the discussion on can you help on recent financial result, the goodwill impairment charge and our outlook for the segment.
Will then review financial results.
Other segment, highlighting some key factors impacting our 2022 outlet I'll conclude with a discussion of operating expenses and capital and liquidity.
E Calix, along with other senior health, it's Anthony here.
Elevated policy carrying from carrier product paying debt and heightened competition and.
And combined with recent financial performance and the declining market values at publicly traded peers triggered the need to review goodwill for possible impairment.
The analysis and cascading, new financial protection and updating cash.
The business as well as.
A peer company market indicators.
Thank you Ryan fair market value when compared to the carrying value of the senior housing segment, which included a $515 million purchase consideration at the time of acquisition.
Cost of operations.
Note that the $550 million reflect 100% E calix cloud, including the 2008.
Not currently owned by Primerica as value you can explain the right price and the purchase contract.
As a result of our analysis.
We recorded a goodwill impairment charge of $76 million in the fourth quarter. This is preliminary and subject to change and Kelly file our Form 10-K and in the form <unk> furnished.
The company includes the goodwill impairment and operating result, as it represents a nonrecurring item that causes incompatibility of the company's core without comparison period.
A critical component of our cash flow projections and approach to revenue recognition, our senior health Aetna expected persistency curves per policy category.
Since the closing of the <unk> acquisition on July one 2021, we have been building a new algorithmic model that you think real time trend in cash collection on the in force book of policy to predict Lifetime Commission newly approved policy and update expected collections and renewable connections for policies.
In previous periods.
The motto incorporate our accounting policies for calculating renewal commissions under the expected value of plant.
In some cases get back on that was historically used by E Calix cloud.
Foreign <unk> accounting policy to ours.
The preliminary allocation of the purchase consideration by allowing the renewal Commission receivable as of July one 2021 six.
$6 million to reflect persistency experienced as at the acquisition date.
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.
Allocation continues to be preliminary and subject to change until the end of the measurement period on July one 2020 Tam.
The goodwill balance as of year end of $179 million with the $255 million net of the $76 million impairment we get.
The new revenue recognition model with you to determine the expected lifetime value commissions our LTV.
$1069 per policies approved during the fourth quarter.
He was also used to update expectations for renewal commissions receivable on policy as approved in previous period based on changes in persistency estimate the acquisition date.
The result was a $5 million negative pallet estimate from continued shortfalls in cash collections in recent periods.
So either you or Glenn earlier remark, we plan to thoughtfully manage growth in senior health, while we assess how the business has managed to address the challenges that we and the 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 that can aggregate historical trend in 2022.
The negative cash flow for this segment has been greatly reduced and is expected to be about 10% to $15 million for 2022, including the cash tax benefit of NOL carryforwards that were acquired with the business.
And our current plans, we may which may change based on our success in addressing challenges in the business. We expect negative cash flow from the senior housing segment less than $75 million in the aggregate before turning positive likely in 2027.
While near term risks for nominal we continue to believe there is a real opportunity for senior health to be a strong contributor to earnings in future years.
Turning now to slide nine showing our term life segment operating revenues of $409 million grew 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 and better policy persistency driven by Covid.
Combined these added $13 million to pre tax income compared to $7 million in last year's fourth quarter.
The operating pretax margin, which is generally lower in the fourth quarter due to nominal seasonal pattern nor.
Normal seasonal pattern with 18, 6% up slightly from last year's $18.
Covid continues to adversely impact benefits and claims.
The fourth quarter of 2021 included an estimated $17 million in Covid related net net death claims up from $14 million in last year's fourth quarter.
Aveda Covid mortality and uninsured population remain in line with the rate observed during the third quarter at around $14 million or 100, 100000 deaths in the U S and Canada.
Current period results also included around $2 million in excess net death claims that were not specifically identified as COVID-19 that may be indirectly linked to the delay of medical care are the increased incidents of behavioral health issues.
We expect this level of quarterly excess excess death claims to continue in 2022.
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 assumption for new business, which typically takes place during the fourth quarter.
This year's practice 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, resulting in a $5 5 million increase in benefit reserve.
Persistency remained strong with aggregate lapses around 20% below the pre pandemic baseline early duration lapses around 10% below the baseline.
Quarterly pre tax income continues to benefit from elevated persistency with DAC amortization and lower by $11 million and was there a higher by $7 million for a net positive $4 million impact versus the pre COVID-19 baseline.
The corresponding net benefit was $10 million in the prior year period when lapses.
Unsustainable record load.
As we look ahead to 2022, we expect modest growth in term life sales as Glenn discussed earlier, and lastly to normalize at an aggregate level approximately 10% better than the pre pandemic baseline.
During these factors, we expect year over year adjusted direct premium growth slowed in 2021 from 16% in Q1 to 12 in Q4 to be around 9% on a full year basis in 2020.
Based on published projections for Covid deaths in the anticipation of no new deadly strains 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-19 claims to continue at around $2 million per quarter throughout 2022.
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 <unk>, which goes into effect next year.
The new guidance changes the way in which both benefit reserve changes and DAC amortization are recognized through earnings at.
It required the remeasurement of reserves no less than annually and modifies the way experienced variances and changes in assumptions or the entire imports are recognized through earnings.
It also requires back to the amortize on a constant level basis.
The term of the related contract versus the level percentage premium approach used today.
We plan to adopt the new guidance on a modified retrospective basis.
European gas adjusted Prospectively, beginning January one 2021.
Finalizing our accounting policies under LPTA, and developing and testing and many actuarial assumptions and models needed for implementation.
We expect to provide quantitative information on the impact to perspective, earning when we report second quarter results.
The guidance also required that the discount rate for measuring reserves the update of that at each reporting period, using an upper medium grade fixed instrument yield with 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 on invested assets that support the reserve.
Given the given the weighted average age of our reserve liabilities.
Average locked in discount rate is about five 5%.
The magazine reserve using the discount rate methodology required under LTE Lv Ti 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 OCI as investment yield environments change over time.
We plan to remove the impact on OCI from operating results, where applicable and plan to provide climate quantitative details when we announce second quarter results.
As a reminder, this new standard modifies the timing of profit Americans under cap. It does not impact the economics of the business nor does it change the company's cash flow or statutory capital requirement at.
It will not change our ability to distribute capital from capital from Primerica life or our ability to deploy capital at the holding company level.
Turning now to our investment and savings products segment on slide 10.
Operating revenues of $247 million increased 28% of pretax income of $71 million increased 25%.
Sales and asset based revenues increased in line with growth in revenue generating product sales and average client asset values respectively.
Sales based commission expenses increased faster than sales based revenues as we recorded a $4 million true up of field bonuses during the quarter to reflect the outstanding performance during 2021.
Asset based commission expenses grew in line with the related revenue.
As Glenn noted we are assuming that <unk>.
<unk> sales and market appreciation will return to more traditional levels both levels in the mid single digits for 2022.
Operating margins for this segment are expected to remain stable.
And our corporate and other distributed products segment, our adjusted operating loss of $22 3 million increased $4 $2 million year over year.
Increase is largely due to $3 6 million lower allocated net investment income from lower portfolio yields and a higher allocation of NII to the term life segment.
Port of the growing block of business.
We also incurred higher interest expense from approximately one month of overlap and senior notes prior to the extinguishment of our 2012 notes.
Offsetting these items was $2 9 million lower benefit and claims due to a reserve adjustment on a closed block of business in the prior year period.
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 house 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 and other business metrics.
Increased staffing costs and 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 convention from 2021 to 2022, we are incurring the cost of two field leadership track.
And the convention this year when in a typical year only two of the three would be incurred.
Finally on slide 12 liquidity at the holding company remains very strong with invested assets in cash of $295 million.
America 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 continued to drive strong levels of deployable capital 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 with that I will turn the call over to the operator for questions.
Absolutely if you would like to ask a question. Please press star followed by one on your telephone keypad.
If for any reason for any reason excuse me would like to remove that question. Please press star followed by two again to ask a question. Please press star one if you will.
Streaming today's call peaked out.
Strong one as a reminder, if youre using a speakerphone. Please remember to pick up your handset before asking a question, we'll pause briefly questions are registered.
Our first question goes to Andrew <unk> with Credit Suisse. Andrew Your line is open you can go ahead.
Hey, good morning, Tom.
Good morning.
Glen could you remind me again of what you expect recruiting to.
Be up this year, you had mentioned a bunch of numbers I wanted to make sure I got that.
Yes, we expect recruiting to be up slightly this year, Andrew we have used a lot. Some special incentives over the last couple of years and we're trying to wean ourselves off of those that puts a little pressure on it but you do get a little less committed recruit when generally they've been enticed with a special incentive.
There is a protocol to each approach, but we do believe we're going to be up slightly this year overall over 2021 full year.
I see.
I guess.
As I think about the recruiting.
You've had periods of great effectiveness.
Is there any change anything.
From going on that maybe we could think out to 2020.
You will get a move a big move and recruit.
Yes.
That's potentially going to change.
Matt.
Strategy that might get us really excited about growth.
Maybe intermediate term there.
Well I think I think you got to look beyond just the top line and recruiting number Andrew because thats a number thats as I said easily influenced by the things that we do but it's only a piece of us growing our sales force. 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 industry equal on the move between careers are often interested in taking a look and maybe even taking a try building primarily for business.
We said throughout the pandemic. The challenge is what's happened in the change in the 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 is.
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've got the benefit of more recruit signing up and beginning the process, but you've got some negative to manage fewer people completing in the reasonably complete they fail to complete.
Theres not as much accountability, not as much discipline and not as much visibility when you see people come into class you know where they are you know how to encourage them you don't have to hold them accountable.
<unk> and 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 world I believe the answer to your question is more in that how successful are we improving the pull through on our licensing process, but it is simply driving topline Ricky.
And as we look out a couple of years.
That's very helpful. And then just maybe just shifting over to senior house.
Allison cited I think was $75 million in negative cash flow in 2022, and then turning slightly positive.
In 2003 so.
I guess.
Anything else for you Andrew.
I do need to correct you the $75 million was actually the aggregate negative cash flow that we expect prior to turning positive and quite likely around 2027.
Negative cash flow for 2022, specifically, it's probably in the $10 million to $15 million range.
Alright, great.
Thank you Okay. That's good to hear.
So.
We look out to 'twenty three.
What gives you confidence that you can get earnings back on track.
Cash flow to a positive number what are.
The potential signs that are giving you any confidence that this business is.
As attractive.
We like the opportunity Andrew in the space and particularly the alignment. It has was primarily 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 talked about the partnership and then the acquisition and the senior health space and we continue to believe that the growth in that space the need for the product.
Once again, some similarities to the life insurance business, where maybe the middle market is not getting all the attention that could.
Kind of the things that are in our sweet spot within our other businesses. We also true in this business is clearly a business that has gone through significant transition in the last year or so and Thats what were adapting too, but we do believe that we're a company thats good at the blocking and tackling the business and we believe we can adjust to those.
In the middle 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 with with a couple of years of hard work, we're going to get this to the right place.
Okay. Thank you.
Thank you Andrew.
Our next question goes to Ryan Krueger with <unk>.
Ryan Your line is open go ahead.
Good morning, Ryan Hi, Thanks, Good morning.
I guess, the the amount of <unk>.
Free cash flow drag from senior housing.
Projections.
<unk> quite a bit.
I was hoping to understand the key drivers a little bit more I guess, there's a lot of it that year.
Your growth expectations have declined so that will consume less of.
Cash or could you just provide a little bit more detail on some of the changes.
Sure.
You definitely hit the main one.
And I've mentioned this before Jeff like life insurance.
If you look at life insurance on a statutory basis, putting a new piece of business on neglected very negative from a cash flow perspective, there is a lot of upfront costs and the money comes in overtime. 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 in the revenues come in as you work.
<unk> expense by deferring them.
So a big piece of that was really saying and again I don't want to say it was purely driven by cash flow. It was driven by a confluence of items, which is really that we wanted to make sure that we are putting business on the books that it has a healthy return that will focus on the LTV.
The conference contract acquisition cost ratio and things along those lines. 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 driving real value forget about GAAP book, the GAAP value, but no economic value.
For the business. So that's really why we're slowing that down and that will give us the air cover and the time to address things like Len already mentioned like the labor market and get the various changes that are going on in the marketplace and see quite frankly, where churn settles out because some of that is really outside of our control we can do things.
The limit yet, but it will continue to be an obstacle. So we do want to make sure. We're only putting quantity large quantities of business on the book once we feel that we are in a solid economic footing with how the business is being managed well.
One <unk>.
One other change I was going to mention is that.
When we originally reported our cash flow.
<unk> 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'd be able to.
Realize value from that we have completed that and now the numbers are net.
Of those types of items, which.
I think the federal one is 22 ish million range to state one thing David $7 million range give or take and then you've also got the net operating losses going forward on the business that we're able we will be able to absorb and reduce our cash taxes at the PRA level.
Got it that's really helpful. And then I guess related to cash flow generation. When you think about the $325 million buyback.
Authorization.
The common dividend.
Can you help us think about sort of been this would consume some level of excess capital versus the ongoing free cash flow generated by the businesses in 2022.
Yes.
I think I understand your question I think the best way I can answer it is to say that all of the share buyback that we plan to do during 2022 will come out.
Capital that is generated and becomes deployable in 2022.
So.
Right now I think I said, we had I am going to skip the number what it was $2 95 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 from our key businesses from ISP and life insurance.
With your question.
Yes, no that was and then if I could just sneak in one real quick.
The number of Covid deaths that you assume when you when you were talking about $20 million of Covid claims.
I think it was somewhere in the 100.
100 and.
It's $4 million for a 100000.
140 ish thousand give or take I think is the number we use but put us where we based it on the $14 million per $100000 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 are sourced that we've currently been using that's what they've indicated.
Again, I will very highly caveat that that assumes that there's no new deadly strains that emerge and the like.
And that's what we're basing it on but on the flip of that we're also facing sales and persistency on that same thought process.
Got it very helpful. Thank you.
Okay.
Thank you Ryan.
Our next question goes to Mike Zarinsky Reese.
Research Mike Carroll.
Line is open you can go ahead.
Good morning, Mike Hey, good morning.
Thanks for taking my question, maybe first question sticking on the health operations.
So we will be I believe theres a $50 million.
Turn out.
Is that still relevant given the miss targets so far.
The related the remaining 20% stake.
South America does not own is that price pre determined or is it negotiable.
Yes.
Based on currently trade.
Trailing performance and future performance.
So I'll take both of those the earn out and I'll remind you that when we originally recorded that purchase consideration we put nothing in the purchase consideration no value was ascribed to the earn out.
That continues to be the case there is no value currently ascribed to the earn out we do not believe based on our current projections that anything would be.
Become doable under excuse me payable under that.
<unk>.
With regard to the remaining 20% in my prepared remarks.
Very confusing because it's a very it's a lot of accounting.
I'll talk more about accounting and this call than I think I ever have but the $515 million.
Original purchase price is the full enterprise value. So that include 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 pre determined formula that is based on performance at <unk> as well as a discount to performance of the peers and so based on all of those factor as we ascribed a value to it with.
In the $515 million.
Already mentioned earlier.
Does that answer your question.
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.
<unk>.
Yes that makes sense, we do not we do not own it.
Adding to the formulaic value right now and we have to.
The fair market value of each quarter based on market assessment and alike.
Current actual value would be zero.
Okay, Yes that makes sense. Thank you.
I guess I'm moving to.
The Canadian.
I think I believe it is a new mutual fund commissions schedule. Maybe you can just kind of offer more color or is this just eliminating kind of a trail commission.
And I guess ultimately the New commission structure will is this industry wide.
Will the sales.
Your sales colleagues be able to earn the same amount of compensation all else equal under the new structure.
Yeah, Mike that's a great question. This is something thats 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 is it has kind of come closer to fruition, it's not actually elimination of trail commissions to elimination of one of the methods for upfront commissions and so trail commissions.
Can continue and we 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.
Provider or the fund manufacturer that is not reflected in an upfront charge to the consumer.
It's financed by the ongoing expenses 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.
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. The 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. So it's not entirely unique to us doesn't have to be entirely unique to us although as far as we know that they are 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.
<unk> could impact your cash flows and their businesses and so forth and.
And actually it's been a long term process 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 in a product change like this in the months surrounding at mid year and so we just wanted to make everyone aware that if we see some noise.
Around our Canadian numbers, just before and just after the June 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.
Got it and then just as a follow up and so is there a way to apples and apples and oranges are.
Yourselves colleagues sold the same amount of of this new series of funds versus the existing is the compensation.
Amount similar or a little lower a little higher or is there is not comparable.
Yes, it's <unk>.
The timing is what happens.
Previous model the BSC model provided upfront compensation that was that was financed over a long period of time through the mechanisms I described earlier.
And we will be looking at ways to create advanced commissions, but basically it's a similar condition overall commission model, but there could be some timing 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 U S as more and more of the compensation to distribution has been asset based rather than sales base. It's a similar direction and so that gives us a little bit of some inside into how the change might take place because we have experienced some of that.
Shift in the U S and the <unk>.
This years.
Very helpful. Thank you.
Certainly.
Thank you Mike.
Our next question goes to Mark Hughes with Truest Mark. Your line is open you can go ahead.
Good morning, Mark good morning.
Good morning.
Allison did I hear you say that the earnings from senior health this year ought to be negligible.
If that's the case could you give us some sense of the.
Quarterly trajectory of earnings that in Q1.
It was kind of.
Not the seasonally strongest.
Do you expect it to be profitable.
And then anything on approved policy counts would be helpful as well.
And 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 of our call I should say is a lot of the improvement in areas of focus that Glenn had mentioned are things. We're looking to tackle early on in the year with the hope that by the time, we get to AEP.
We've taken some of them off the table and convert these 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 in the middle two are.
The third quarter is normally something thats, a little negative as we ramp up.
Sales volume sales agents.
The thing I would caution on is I test.
We're trying new things because it 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 each quarter per say net net we do expect I'd say most of the earnings come in the fourth quarter like they were typically and to see some losses, our mutual numbers earlier on in the year.
Yes.
For the full year is kind of negligible.
Yes.
Taylor adjustments of $5 million.
That flowed through the senior health and <unk> I assume.
But for that earnings would have been $5 million higher.
One way to think about it.
That is correct talent Jesmond do get reflected any time, we see that current persistence your collections trend indeed.
Indicate that theres been a deterioration from what we assumed in our current renewal receivable.
We have to adjust that up or down for that matter, but there was a downward adjustment in this case.
How much impact did your sales force.
Hello.
I think you said that.
Do you have reason to believe.
Churn is.
Better.
Longevity of those policies is better.
Did your sales force make much of a contribution in terms of sales this quarter.
Yes.
The primary sales force.
Yes, absolutely.
Referral program.
Is it is unique to the model and one of the things that we are feeling excited about.
Thinking about this this venture yes, our salesforce first of all of a sudden 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.
When they do their piece of the process, which is a referral.
And not a sale of course.
And we actually kind of rushed to market because we recognize that the AEP period.
As 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 challenge is you can't annualize the AEP to know what your pull through rates and your activity rates youre going to be for the non AEP part of the year. So it's a little difficult for us to take what we learned and apply it to the other three quarters.
It certainly would be helpful. For the next AEP period will be a good response good activity made a significant contribution and we feel like that has positioned us to take what we've learned from that and improve as we get throughout this year.
Yeah Allison your.
Lifetime Commission.
<unk> thousand 59, Thats not down much from your prior expectations am I thinking about that properly.
Yes, the expectation we gave for the fourth quarter is probably about 10% down I think we had more like 11 70 or something along those lines.
And then Europe pointed out the <unk>.
525% discount rate I think is 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 the.
Two numbers.
No actually that's backwards at 525 is indicative of our portfolio's market rate.
That is excellent.
I can say that.
Take that back not the current proposed the current liabilities, though remember we we set we set the discount rate and the lockett and whenever the business is issued we sell very long tail business, obviously, a lot of our businesses, but on the book for many many years ago and those are where the liabilities are actually larger than on the newer business, which hasn't built up reserves yet.
So the weighted average rate discount rate on our reserve liability currently at five 5%. If you use what the literature would require us to use youre talking about a discount rate today at significantly lower than that.
Tim given the.
Sure.
Or not.
Yes.
Given the age of your portfolio.
Leeway in the.
Rules for that or did you have to change the discount rate to reflect.
Current new business.
You have to use if not even new business because we have the whole concept of looking at new business versus imports sort of goes out the window with elevate Ti re measurement if you will of the entire liability.
And no. The literature requires that you use current rates, it's got to be a medium upper grade. Yes. What are you going with an a rated fixed income security and yield curve on that.
And then obviously, where we're waiting the shorter duration liabilities with the shorter end of the curve and so forth.
So no there is actually no ability to adjust that that's one of the very interesting changes that theyre, making I think one of the.
Appropriate things that they've done and I won't go into right or wrong, but definitely appropriate is that change is that change does not go through earnings that goes through.
So while the balance sheet will be re measured using the then current rate the P&L and benefit reserve the loss ratios will all be recognized using the locked in rate and the reserve consistently with how we do it today. So all the variability will show up in OCI.
Thank you.
Well.
Thank you Mark as a reminder to ask a question star one on your telephone keypad. Our next question goes to Dan Bergman with Jefferies. Your line is open you can go ahead.
Good morning, Dan Thanks, Doug Good morning.
So just to start investment and savings product sales were up pretty nicely across nearly every product not just in our retail mutual funds, which I tend to think of as the most linked to the equity market sentiment.
Could you just give a little more color on what has driven the recent strength how much is due to that better sentiment given strong markets versus other factors.
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 in volatility we've seen so far this year I.
I guess 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 do you see in terms of a drop off in ISP sales.
Yes, it's a great question, Dan I appreciate those.
And we just got a lot of unknowns after a pretty extended period of extraordinary growth.
So we don't want to just straight line that growth and assume it can continue with so many uncertainties in the marketplace. You are correct that we've seen.
The increase very broadly across all products in both countries has been.
Very systemwide within primary liquor.
And so it is not focused on a single product or a single view of the future thats driving certain product 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 and then he's back.
Our ISP business.
Just barely positive during.
The first year during 2020, and then that flipped and we saw just the opposite is largely it was normalized in 2021 still above pre pandemic levels, but below the previous year and the ISP business took off my personal view is that it's just different timing in the prioritization that.
And then it created.
Well protecting against premature death early on and then we're taking a little longer view of how do I get my finances in order for the longer term in case, something unexpected or when something unexpected happens in the future.
I think we've got 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. 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 a very good January and our business, including our ISP business in salt of 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 see something in the mid single digits is kind of the way we're viewing it right now that could change if there is more disruption and are very disrupted world.
It could be a little better than that if things stay calm, but thats, just where we want to.
Place, our guess at this point and kind of perceived demand.
Got it.
That's really helpful color. Thanks, and then I guess just one more.
On the expense side, it looks like the 12% core increase in insurance and other operating expenses and I think you mentioned in the press.
Prepared remarks seem somewhat elevated.
Should we think about 2022 expense level as a baseline on which you would expect to grow going forward or some of the drivers of that expense increase this year more onetime in nature, whether related to some of the investments are mentioned I mentioned time, and then you mentioned that we might expect to drop off next year. So any color on that would be great.
Yes.
Excellent question. The convention piece that is a big component of an increased R&D, excluding senior holiday is a big chunk of whats gone up year over year, we get typically do not do the level of activity, we're having with our field related meetings and the like.
Any one given year its Jeff.
Pandemic, we moved the convention is something.
We cherish we want to do is it optimal to do it and everything else. It's a lot of work and a lot of.
Time on everybody's part that we felt it was the right decision to make it. So that is one piece of the elevation that will not continue we will not stay on that pattern will go back to our normal sort of two out of three events in any given year. The other thing I would look at technology I think we will continue to be an area 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 are seeing some unusual increases this year that should not look like increased I think the level of expenses right, but you shouldnt see this level of growth off of 2022 is really staffing related.
I said it went through all of 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 field facing especially on the road much for two years and we do need to get them back out on the road.
Big part of their job and how they can help grow the business. So that's a piece of it.
Other thing Glenn was talking about about the in person classes for licensing, but online we do pay the instructor salaries is to put that in staffing. So we do anticipate closing a lot more in person classes and we think that's beneficial to our licensing pull through.
And then some little things that we've seen and.
I assume other business have and while we're seeing very high end of 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 this year, but then from this year forward should grow at a more typical way.
And I think the typical rate, we would put around probably around 5% for general items.
Other expenses that we'll grow differently than sort of that core rate, obviously or anything associated with premium their assets under management and the like those will grow dollar for dollar with Delek related revenue you are talking about the general operating expenses for me somewhere in the mid single digit say five <unk>.
And as far as our baseline and then you make some decisions above and beyond there.
That helps.
Yes, that's really helpful. Thank you.
That concludes todays primary <unk> Q4, 2021 earnings results and conference Conference call and webcast. Thank you for your participation you may now disconnect your lines.