Kathryn Kieser - EVP, IR Rick Williams - Chairman & Co-CEO Glenn Williams - President & Incoming CEO John Addison - Chairman, Primerica Distribution & Co-CEO Alison Rand - CFO.
Steven Schwartz - Raymond James Mark Hughes - SunTrust Dan Bergman - UBS Sean Dargan - Macquarie Colin Devine - Jefferies.
Welcome to the Primerica Q4 Financial Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Kathryn Kieser, Executive Vice President of Investor Relations. Please go ahead, ma'am..
Thanks Dan. Good morning, everyone. Thank you for joining us today as we discuss Primerica's results for the fourth quarter of 2014. Yesterday afternoon we issued our press release reporting financial results for the quarter ended December 31, 2014.
A copy of the press release is available in the investor relations section of our website at investors.primerica.com. With us on the call this morning are Rick Williams, our Chairman and co-CEO; John Addison, Chairman of Primerica Distribution and co-CEO; Glenn Williams, President and Incoming Chief Executive Officer and Alison Rand, our CFO.
We reference certain non-GAAP financial measures in our press release and on this call. These non-GAAP measures are provided because management uses them in making financial, operating and planning decisions and in evaluating the company's performance.
We believe these measures will assist you in assessing the company's underlying performance for the periods being reported. These non-GAAP measures have limitations and reconciliations between non-GAAP and GAAP financial measures are attached to our press release.
In the fourth quarter of 2014, net operating income excludes the after-tax impact of both realized investment gains and losses and the $4.2 million expenses related to the co-CEO transition agreements described in our form 8-K dated January 2, 2015. You can see our GAAP results on page three of the presentation.
On today's call we will make forward-looking statements in accordance with the Safe Harbor Provision of the Securities Litigation Reform Act of 1995.
Forward-looking statements include any statements that may project, indicate or imply future results, events, performance or achievements and may contain words such as expect, intend, plan, anticipate, estimate and believe or similar words derived from those words.
They are not guarantees and such statements involve risks and uncertainties that could cause actual results to differ material from these statements. For a discussion of these risks please see the risk factors contained in our form 10-K for the year ended December 31, 2013. This morning's call is being recorded and webcast live on the Internet.
The webcast and corresponding slides will be available in the investor relations section of our website for at least 30 days after the presentation. After the prepared remarks, we will open the call to questions from our dial-in participants. Now, I'll turn the call over to Rick..
Thank you Kathryn and good morning everyone. Welcome to Primerica's fourth quarter 2014 earnings call. In January we announced the promotion of Glenn Williams, our current president, to Chief Executive Officer effective April 1, 2015.
For several years John and I have worked closely with the Board on succession plans and we both feel that the healthy state of the company makes this the right time for a leadership transition.
Our decision was solidified as we saw momentum building in the second half of 2014 with growth in the size of the sales force, solid core performance across business segments as well as EPS and return on equity expansion year-over-year. Glenn possesses a tremendous depth of understanding of our business. He joined Primerica in 1981.
For the last 15 years he has successfully overseen marketing for all of Primerica's product lines and has worked closely with us on strategic initiatives. Prior to this role, Glenn was the Chief Executive Officer of our Canadian operations.
His strong relationships with our sales force leaders and commitment to the business are well known throughout the organization. Glenn's deep enterprise-wide experience and exceptional leadership skills make him the ideal person to continue Primerica's growth trajectory. Glenn, please provide your perspective on the transition..
Thank you Rick and good morning everyone. Today I'm joining the call from Puerto Rico where I'll be joined by 1400 of our representatives who qualified for this incentive trip. As Rick said, we worked very closely together for years and I'm grateful for John and Rick's leadership during that time.
I'm honored to be selected as Primerica's next CEO and excited to lead our strong and experienced team of sales force leaders and corporate executives. In January we held our annual sales force leadership kickoff meeting in Atlanta followed by nine regional RVP events where I cast my vision for the future.
I talked about building on the successful strategy John and Rick have set in motion by launching strategic initiatives to accelerate success. Between now and our biannual convention in July we're working on new incentive programs, sales force support and cutting-edge technology to drive organic growth in 2015.
The feedback from our sales force and employees on both the CEO transition and our plans for 2015 has been very positive. I look forward to speaking with you again in more detail on our first quarter earnings call in May..
Thanks, Glenn. In 2014 we delivered shareholder value by focusing on initiatives to drive long-term sales and earnings growth while actively deploying capital.
Beginning on slide 4 you can see operating revenues for the full year 2014 increased 9% to $1.34 billion driven by 11% growth in Term Life adjusted direct premium and strong investment and savings products performance compared to 2013.
Positive market conditions as well as enhancements to our ISP product offerings led to a 9% increase in ISP sales and 8% increase in client asset values at the end of 2014 versus the year ago period.
Net operating income grew in-line with operating revenues, up 9% to $182.8 million driven by business growth and a modest 4% increase in insurance and other operating expenses of $11.8 million in 2014 versus 2013.
Higher employee related expenses, including $4.6 million of accelerated compensation expense for equity awards with retirement provisions in the third quarter of 2014 were largely offset by higher legal fees and expenses occurred in 2013.
The weakening of the Canadian dollar during 2014 also negatively impacted net operating income by approximately $4 million. In 2014 net investment income continued to experience downward pressure primarily due to lower yield on invested assets and capital deployment throughout the year.
The 14% increase in net operating earnings per diluted share to $3.31 for the year and a 60 basis point increase in return on equity to 15.3% compared with 2013 were driven by solid earnings growth and active capital deployment in 2014. Primerica's total shareholder return of 27.8% significantly outpaced the S&P in 2014.
We returned over 95% of operating earnings to shareholders in 2014 through $26.5 million of shareholder dividends and $147.9 million of common stock purchases. In 2014 5.5% of Primerica's common stock outstanding as of December 31, 2013 was retired. Turning to the fourth quarter results on page 5, net operating income increased 6% to $49 million.
Net operating income per diluted share increased 9% to $0.91 from the fourth quarter of 2013. Operating results were driven by growth in Term Life net premiums and strong investment in savings product sales and asset performance.
Net investment income was consistent with the prior year due to $3 million of income from called securities in the fourth quarter of 2014 which offset the impact of declining portfolio yields and capital deployment actions.
In the fourth quarter return on equity expanded to 16.4% demonstrating that ROE expansion is achievable when key drivers of our diverse business are strong or improving and capital deployment remains a focus. Now let me give you a brief overview of production results for the quarter.
In our Term Life business issued policies grew 8% compared with the prior-year quarter and increased 3% from third quarter of 2013 driven by strong recruiting and sales force initiatives in the fourth order.
Productivity of 0.19 times policies issued per life licensed representative per month increased from 0.18 in the year-ago quarter remain consistent with the third quarter of 2013. Our average annualized premium per issued policy of $825 was consistent with the year-ago period and increased 2% from $810 in the third quarter of 2014.
Our Investment and Savings product sales increased 14% driven by strong retail mutual funds, variable annuities, Canadian segregated funds and managed account sales in the fourth quarter versus the prior-year quarter. Retail mutual fund sales grew 18% driven by market performance.
Variable annuity sales increased 20% year-over-year to $445 million making the fourth quarter one of the largest variable annuity sales quarters in the history of the company. Sales growth continues to be driven by recent variable annuity product editions.
Year-over-year sales of Canadian segregated funds increased 24% reflecting a new product edition as well as Canadian clients returning to products with guarantees that tend to do well when there is increased market volatility and managed account sales increased 19%. And average client assets grew 36% to $1.4 billion from fourth quarter of 2013.
During the fourth quarter net flows were positive $295 million and average client asset values were $48.24 million up 10% from the fourth quarter a year ago. A positive trend that emerged in 2014 was growth in the average size of client initial investments.
The average size of our initial mutual fund investment increased 7% to $5000 in 2014 up from $4700 a year ago and the average size of our initial variable annuity investment increased 16% to $89,000 up from $77,000 in 2013. On a sequential quarterly basis Investment and Savings product sales increased 6% from the third quarter.
Average client assets were consistent with the third quarter. Now John will discuss distribution results..
Thanks Rick and good morning everybody. We're pleased with the continued growth in the size of our sales force, the increase in Term Life policies issued and the growth in ISP sales achieved in the fourth quarter. As you can see on slide 6 the size of our Life Insurance licensed sales force in the fourth quarter increased to 98,358.
Recruiting of new representatives increased 13% versus the fourth quarter a year ago due to improved incentive programs and message. New Life Insurance licenses were in-line with the prior-year period as Life Insurance licenses growth typically lags recruiting.
On a sequential quarter basis recruiting declined 12% and new Life Insurance licenses were down 3% from the third quarter reflecting seasonally lower recruiting and licensing levels during the holidays.
The percentage of non-renewals and termination in relation to the size of the sales force slightly increased from the third quarter of 2014 and the fourth quarter of 2013.
In the first quarter of 2015 we expect the size of our Life Insurance sales force to remain relatively flat with the fourth quarter of 2014 due to the seasonally lower new Life Insurance licenses following the lower recruiting levels typical for the fourth quarter.
Successful incentive programs and business enhancements in 2014 drove 3% growth in both the size of our Life Insurance license sales force and issued Life Insurance policies versus 2013. The number of regional vice presidents which represent new distribution outlets across North America also increased year-over-year.
During 2014 we ran short term incentive programs as well as two longer term contest trip competitions designed to increase recruiting levels in order to feed the licensing pipeline and grow the size of the sales force.
Incremental enhancements were also made across the business including expanding the functionality of our client web portal, launching new mobile sales tools and representative training.
In 2014 our investment in savings products business hit all-time records in both sales and client asset values and the size of our mutual fund licensed sales force increased 4% to 22,607 representatives at year end.
During the year we expanded our Investment and Savings products offering the addition of four new managed account portfolios, new variable annuity providers AXA and AIG, as well as a new fixed index annuity underwritten by Lincoln.
We also acquired more robust illustration software for the ISP business and we're proud to learn that Primerica was awarded Dalbar's Mutual Fund Service Award for Leadership in Customer Service in 2014, marking the 12th year in a row we have received this esteemed recognition. Alison will now discuss the financial results..
Thank you, John. Good morning, everyone. My remarks today will cover fourth quarter segment operating results followed by a review of company-wide insurance and operating expenses, investment portfolio metrics and our capital deployment outlook for 2015.
Starting with slide 7, in the fourth quarter Term Life operating revenues increased 10% driven by an 11% increase in adjusted direct premiums. Primary direct premiums grew 20% while legacy direct premiums declined 4%. We expect primary direct premiums to continue to experience strong growth as we layer on new business.
Legacy direct premiums as well as premiums ceded to Citi should decline approximately 3% to 4% on a year-over-year basis as this closed block runs off.
Allocated net investment income was positively impacted by $3 million of income on called securities as well as growth in assets required to support the segment, partially offset by a lower average portfolio yield versus fourth quarter a year ago.
Term life operating income before income taxes was 22.7% of adjusted direct premiums and increased 6% over the prior-year period. In the fourth quarter total incurred claims return to historical levels while persistency experienced improve modestly over the quarter a year ago.
Benefits and claims were slightly elevated in the fourth quarter at 59.7% of adjusted direct premiums due to improved persistency year-over-year and a $1.9 million reserve adjustment on certain supplemental policy benefits that waived premiums for disabled policyholders.
DAC amortization contrasted on adjusted direct premiums due to more commissions being deferred in recent years, partially offset by improved persistency. DAC amortization and insurance commissions as a percentage of adjusted direct premiums of 15% was consistent with the prior-year period.
Term Life insurance expenses increased with normal business growth and the runoff of Citi allowances. The ratio of insurance expenses to adjusted direct premiums was 8% and in-line with recent trends.
On a sequential quarter basis operating income before income taxes increased 15% outpacing 2% growth in operating revenues compared with the third quarter, reflecting higher net investment income from called securities and lower incurred claims in the quarter.
P Sequential trends also benefited from the recognition of accelerated compensation expense due to a change in the retirement provisions in the third quarter, partially offset by seasonally worse consistency and the adjustment to supplemental benefit reserves in the fourth quarter.
Looking at the Term Life sub-segment, new term pretax operating income as a percentage of direct premiums increased versus the prior-year period from 15% to 19.1% due to the higher allocation of net investment income, favorable incurred claims, improved persistency and insurance expenses growing at a slower rate than net premiums.
In legacy, pretax operating income as a percentage of direct premiums declined year-over-year to 5.7% reflecting the adjustment to supplemental benefit reserves and downward pressure on allocated net investment income due to the low rate environment.
As a reminder, we will discontinue reporting new term and legacy sub-segment results in our financial supplement next quarter. On slide 8 you'll see our Investment and Savings products operating revenues increased 9% and operating income before income taxes grew 10% year-over-year.
Our 13% growth in revenue-generating sales in the quarter, driven by growth in retail mutual funds and variable annuities, led to a 13% increase in sales based revenue. Asset-based revenue and income dynamics are driven by the underlying performance in both the U.S. and Canadian market as well as specific product performance.
During the quarter asset-based revenues increased 7%, slightly less than the 10% growth in average client asset values compared with fourth quarter 2013.
Year-over-year lower Canadian segregated fund client asset values created mild pressure on product revenue mix due to their higher relative rate of revenue generation than other sources of asset-based revenue.
As we've noted in the past, we recognize asset-based revenues on Canadian segregated funds, but commission expenses associated with this product are recognized over time as amortization of DAC and insurance commissions.
Asset-based revenues and asset-based commission expense growth are most closely aligned if Canadian segregated funds are removed from asset-based revenues in the comparison. Account-based revenue increased 5% over the prior-year period reflecting a 3% growth in our fee-generating accounts driven by growth in retail mutual funds and managed accounts.
ISP fourth quarter results also reflect lower legal fees and expenses offset by an increase in general operating expenses compared with the year-ago quarter.
Although segregated fund DAC amortization remained consistent year-over-year, it was lower than historical levels this quarter as the revised redemption assumption is based on emerging experience and made minor product changes.
We expect DAC amortization to return to a more normalized level going forward of approximately $2.5 million to $3 million per quarter with quarterly fluctuations due to the actual fund performance and redemption experience.
On a sequential quarter basis, ISP operating revenues increased 2% reflecting 5% growth in sales-based revenue partially offset by a 3% decline in asset-based revenue.
Operating income before income taxes increased 6% outpacing operating revenue growth, primarily due to the accelerated recognition of compensation expense for equity awards with retirement provisions in the third quarter. Results also benefited from lower DAC amortization due to segregated fund reserve revisions I just discussed.
On slide 9 you can see that Corporate and Other Distributed Products operating revenues were consistent year-over-year and the operating loss for income tax increased $2.8 million from the prior-year period.
Net investment income allocated to Corporate & Other declined $0.9 million primarily due to growth in Term Life acquired assets, lower yield on invested assets and continued capital optimization through share repurchases.
Net investment income in this segment will continue to decline, both as Term Life required assets increase and as capital is deployed to enhance shareholder value. The increase in other operating expenses in the fourth quarter was primarily related to a $1.3 million write-off of developed software as new sales force technology is phased in.
In our New York subsidiary benefits and claims increased $1.6 million primarily reflecting favorable claims experience in the year-ago quarter.
Now turning to a company-wide review of our fourth quarter insurance and other operating expenses on slide 10, you see insurance and other operating expenses were $69.1 million, up $2.5 million or 4%, from the prior-year period, partially reflecting growth-related expenses in Term Life and ISC and the write-off of developed software as new sales force technology is phased in.
Year-over-year, trends were also impacted by prior period items including a premium tax refund and other adjustments and higher legal fees and expenses in the fourth quarter of 2013.
On a sequential quarter basis insurance and operating expenses were down $7.7 million primarily due to the accelerated equity compensation expense reported in the third quarter.
The sequential decline also reflects other expenses that was specific to the third quarter partially offset by the previously mentioned software write-off in the fourth quarter. As we look towards the first quarter of 2015 we expect expenses to rise to the $80 million to $82 million range.
In the quarter we will incur nearly $9 million of expenses related to employee equity award, $6 million higher than the first quarter a year ago, due to the changes to award retirement provisions we made in 2014. This increase represents the employee equity award expense that was historically recorded over a three-year vesting period.
Accordingly, equity compensation expense for the rest of the year will be approximately $3 million lower than it has been historically. Other items contributing to the expected increase in the first quarter are annual merit increases and the resetting of payroll taxes for 2015 and privacy and tax-related mailing schedules for the first quarter.
The co-CEO transition agreement will not materially impact first quarter expenses. Their equity bonuses for services rendered in 2014 will be expensed when granted in the first quarter in the normal course consistent with the retirement provisions added for all employee equity and Board recipients.
Given the elevated expense level anticipated for the first quarter of 2015 we expect ROI to decline to the 13% range in the first quarter of 2015. ROI should rebound as expenses return to a more normalized run-rate in the second quarter.
On a quarterly basis ROI will fluctuate with income and timing of capital deployment and should continue to be in the 60% range on an annualized basis near term, despite the elevated expenses in the first quarter. On slide 11 you can see investments and cash totaled $2.26 billion as of December 31, 2014 up from $2.23 billion at September 30.
Our net unrealized gain was $101 million, down from $112 million at September 30, generally reflecting wider credit spreads at year end. The average book yield of investments at quarter end excluding cash and the held-to-maturity asset held as part of the 2014 redundant reserve financing transaction was 4.61% consistent with September 30.
The average yield on purchases was around 3% for the quarter, up from the third quarter due to a higher proportion of purchases in our [inaudible] companies during the quarter.
As was mentioned in the past, while not immune to the impact of low interest rates, we're unlike most life insurers in that our reliance on investment returns is relatively low with a ratio of invested assets and cash to stockholders' equity at a low 1.9 times and net investment income representing only 6% of our operating revenues in 2014.
Over the next 12 months approximately 10% or $172 million of our portfolio will mature with an expected yield of around 3.3% which is relatively low compared to recent years.
This low yield on maturities which is a result of shorter duration purchases over the past few years should mitigate the pressure on the portfolio in the near term as we should be able to replace the yield at current market rate.
However if rates continue to remain at these historically low levels, pressures on investment income will reemerge in 2016 as maturities began to carry higher yields again. While we're looking at 2015 one headwind we see is the Canadian exchange rate. The Canadian dollar dropped nearly 9% versus the U.S. dollar during the month of January.
To help you think about the potential exposure going forward, in 2014 the Canadian dollar declined 7% on average throughout the year versus the U.S. dollar and negatively impacted our net operating income by approximately $4 million for the full year.
During the fourth quarter the Canadian dollar declined on average 4% from the third quarter impacting pretax earnings approximately $800,000. As a general rule of thumb a 10% decline in the Canadian exchange rate would reduce net operating income by approximately $5 million for the year.
As I wrap up let me say that we remain committed to returning capital to enhance share stockholder value. Earlier this month we raised our quarterly stockholder dividend 33% or $0.04 per quarter. We expect to maintain this quarterly rate throughout 2015.
The successful completion of the reserve financing transaction in 2014 positions us to continue deploying capital with a plan to deploy $150 million in both 2015 and 2016.
While our general expectation is to return capital to stockholder ratably throughout the year, the pace at which we will move capital from Primerica Life to the holding company will be governed by our ordinary dividend capacity pursuant to Massachusetts statute.
Following a $167 million ordinary dividend payment from Primerica Life Insurance company to Primerica, Inc in the fourth quarter, our invested assets and cash at the holding company increased to $194.5 million at year end and Primerica Life Insurance Company's estimated RBC ratio has declined as expected to about 400% from about 540% at September 30.
We expect our RBC ratio to remain above 400% while paying ordinary dividends of $100 million to $150 million during 2015. With that, I'll turn it back over to Rick..
Thanks, Alison. Before we open up the call for questions let me just say that John and I have been honored to serve this great company for 30-plus years. We love Primerica and truly believe this is the right time for a leadership transition. We're proud of the last five years.
The growth and success we've seen in the organization, the returns we've delivered to our stockholders, the opening of our new home office and the enthusiasm among our employees and most recently the handling of the baton to Glenn who our board recognized was the right successor for us.
We look forward to continuing to serve on the Board of Directors in a non-executive capacity and we're confident that Glenn will continue to execute the initiatives to grow distribution capabilities, increase earnings and deploy capital to drive long-term shareholder value. Now let's open it up for questions..
[Operator Instructions]. And our first question will come from Steven Schwartz of Raymond James. Please go ahead..
I want to stick with just on Canada for a second. Alison, just so I've got this right.
The $4 million that you were citing, that was pre or post-tax?.
Post..
That was post.
And if the Canadian dollar was about 125 where it is now, we're talking about $7.5 million post? Could you maybe detail which segments that would -- which segments is it mostly in, I guess?.
Sure. I'm trying to make sure I agree with the $7.5 million. I think that sounds a tad bit high, but give or take you're talking somewhere in that general range, maybe $5 million or $6 million.
But anyway, probably the largest place you will see it will actually be in ISP because a significant portion of our mutual fund and segregated fund type business actually does come from Canada. You will see it to some degree in Term Life, but again there it is really just a function of the premiums. And relatively speaking the U.S.
premiums really do outweigh the Canadian premiums pretty substantially. When I talk about expenses, you'll actually see somewhat of a benefit for their operating expenses. The other places you might see it, specifically in some of the production counts.
You will see it in AUMs, you'll see it in sales volumes for Canada and to a much lesser degree you'll see it in Term Life in force..
And then one more on Canada, is there anything new on the testing issue there?.
No. Not at this point in time. The issues we've raised in our lawsuit have gotten attention in the industry and we're hopeful that regulators will focus on it. But there's nothing tangible at this point..
Rick, is there some sense of timing or anything life that?.
Unfortunately not. These things run in due course and it's hard to tell..
Our next question comes from Mark Hughes of SunTrust. Please go ahead..
In looking at the sales force can you give us some sense on the recruiting momentum here in the first quarter? You did quite well in 4Q.
Is that being sustained early in 2015?.
We had clearly, particularly in the second half of last year, I believe a very -- there were a lot of things done that really drove successful results in the business.
As we say in there of a lot of it -- some of it was messaging focus, but some of it was very tangible and this contest where Glenn is in Puerto Rico and the rest of us will be joining him later was a very successful contest. And we did make some adjustments to like bring more newer people and stuff. So really successful things.
The good news is that momentum has continued into the first quarter. It's not like we had a great fourth quarter and then the spigot turned off. Momentum has continued, been doing this a long time. All of us have, Glenn being a partner with Rick and I in it. I've learned one thing is that, as Winston Churchill said, success is never final.
And spiking the ball in the end zone will get you a 15-yard penalty. But we feel good about the momentum that has continued into the first quarter of this year..
Do you think your sort of the yield in terms of licensing will it be similar to what we've seen or is the -- are these recruits, I'll just say, are they going to be comparable in terms of their success in getting licensed?.
Yes we do believe that. On the longer term basis we still feel good about the 18% to 20% of recruits getting licensed and the recruits that came in the fourth quarter were every bit as good as any other recruit that we've had. So we still feel good about that.
Again, there is seasonality with the mismatch between when a recruit comes in and when they actually get licensed. Over the long term we do think 18%-plus is still good..
Alison, could you talk about the benefits in claims expense in the legacy block? Where should that be trending? I think you talked about claims frequency maybe normalizing. I know you had a reserve adjustment, but is that -- throughout most of the year has been elevated certainly compared to the prior year.
Where should that trend going forward?.
I will remind you again that come next quarter we won't be reporting legacy. So most of my comments really are focused on the block in the aggregate. So I'll talk to that but all address quickly what I think you're talking about with legacy.
Specifically with legacy this quarter, the rate and the volume and the amount of claims, as I said, really did normalize. So the anomalies we saw last quarter really did not repeat [Technical Difficulty]. We had a little bit of something. Anyway and so you have that point correct.
We did have that about $2 million adjustment this quarter and that really almost completely hit legacy, given what those policies are. Also just in general, legacy claims experience as a percentage of premium would be going up because you do obviously have much older policies there.
You have policies that are heading end of term and so you look at what their mortality experience may or may be. The increasing trend on legacy is in fact something that we would expect. That said, if you look at the company in the aggregate we were at 59.7% of adjusted direct premiums.
Again, that's a little bit at the high end of our range and we do expect that number to come back closer to 59% going forward..
And just to be clear, on the expenses you say $80 million to $82 million is sort of a one-timer with a $6 million equity award. And then going forward it would be $3 million lower.
Is that to say $70 million or $77 million to $79 million in subsequent quarters?.
No. The way we've been doing is obviously giving you the update one quarter out. Specifically for the equity awards what you will see is that it will be theoretically $1 million lower than it would have been last year each quarter. That said, that's got a whole bunch of nuance because each year is obviously different with things that are happening.
But just in the aggregate we wanted to make sure you were aware that that $6 million pop, if you will, partially comes back throughout the year. And again by 2017 you won't be seeing these year-over-year kind of nuances because we will have saved into all of our years the new vesting for retirement.
The other things, though, that are in the first quarter that won't repeat in next quarter or second quarter, excuse me will be things like merit increases. So you'll see that pop from a year-over-year perspective. But then it will be in there forever.
And then you have some other things that are just really one time in the first quarter on privacy and specifically tax mailings and things for our investment business. So there are some nuances. We generally see if you go back over time that the first quarter is our highest expense quarter.
So it probably will come down lower than what you are describing. The other thing to consider is what happens with the Canadian exchange rate, because obviously as I mentioned earlier, the exchange rate will directly impact the Canadian expenses..
Our next question comes from Dan Bergman of UBS. Please go ahead..
So first just wanted to ask a question on the sales force. It looked like the year-over-year change in the ending sales rep count remained solid but fell a little bit from about 5% in the first half of last year to about 3% in the quarter.
So I just wanted to see if you had any additional thoughts on how this annual rate of growth should trend ahead? Are you still looking for that mid-single-digit growth rate over time and any thought on kind of what's required to achieve and sustain that level of growth?.
I mean, going back to the core, we're looking for the mid-single-digit growth over time in the sales force. We were in the 3% to 4% range on a quarterly basis in 2014.
You do get sort of the seasonality dynamics, as John mentioned, the first quarter because of the low recruiting in the fourth quarter has relatively low licensing in the first quarter and therefore the first quarter sales force remaining flat is actually pretty good.
The dynamic that you did see in the fourth quarter was the non-renewal jumped up to 8.3% and as we've been guiding at around 8%, 8.5% but it's been 8% in the prior quarters and 7.7% in the third quarter.
So there was a little headwind in the fourth quarter on non-renewal, but we still give the same guidance as we had in the past on the non-renewal rate..
And let me, I guess, shifting gears to Investment and Savings Products. Sales growth there was again quite strong in the quarter and it sounded like some of that strength was due to the recent product introductions.
I wanted to see if you could give a little more color on how much of the fourth quarter growth came from these new products and whether we should view kind of the quarterly result as a run-rate or whether some of those sales was a more of a one-time pop that should dissipate over time?.
Talk a little bit about the new products first. And just to give you a feel for the mix, we talked about the variable annuity business growth. And we have had introduced the AXA product about seven months ago and that now accounts for about 20% of our variable annuity sales.
So you can sort of see that all of that's not incremental, but a piece of that is incremental in the business. Seg funds had a change momentum in the fourth quarter. Again, there was a good product introduction both on the variable annuity and the seg funds side. Those new products should help with continued momentum in 2015..
And just two cents, number one, clearly the market being good. I mean, is the greatest thing we can have. But again to the messaging and focus and driven by our marketing team, there has been a significant focus in our sales force on the Investment and Savings business.
One of the successful events last year was our contest we ran for our Investment and Savings producers to the Greenbrier.
And with improvements in their illustration software, improvements in products but more importantly a real focus of the organization on the business along with the market, it significantly improved the business and the plan is to continue to do all those things. I can't speak for the market, that's you guys' job.
But our focus is to continue to deliver Main Street families the right investment platform. And we believe Primerica is that answer..
Our next question comes from Sean Dargan of Macquarie..
Just following up on John's commentary on ISP. As ISP has contributed more to overall earnings, I think that's been reflecting favorably in your valuation.
Can you just tell us about any initiatives you have to convert more of the licensed reps to securities reps?.
To answer the question you didn't ask and I'll come back to the question you did ask. John talked about the focus on the securities business. And I've mentioned about the product introductions, but there has been quite of other additional focus on that business beyond that, that relates to the automation.
About 70% of our securities business now comes in on sort of a handheld, a phone or an iPad. That's made life a lot easier for the reps to submit the business. What that also does is it makes it easier to train new people coming into the business to become productive in the business.
We're also working on new illustration software that should help sales as well. As it relates to just initiatives to get agents licensed, there's a whole variety of training programs that we do have. You did see last year a 12% increase in the number of new securities licensed reps. The sales force itself, the security licensed sales force did grow 4%.
Sort of working on trying to make it easier to get licensed has shown some benefit and are hopeful that that will continue..
And again, I'll talk focus in a very significant way. Nothing sells at Primerica like success. Our representatives as you well know, are independent contractors and they make decisions. We provide the environment, we provide the products, we provide the training, we provide the support, we provide motivation, but they provide the effort.
They've got to build their business. And what people are seeing now is people having tremendous success in the investments business. And it's no longer viewed as a boutique business; it is viewed as a cornerstone of the company and they're seeing that reflected in the cash flows of the leaders that are succeeding at it.
So besides the initiatives, the improvements, all of those things focus and continuing success and highlighting that Glenn and team will do will continue to drive this business..
And do you see more willingness in the middle market in putting money to work in the markets now that we've had a couple of good back-to-back years in the equity markets? Has that changed the behavior of the clients at all?.
What we see in the middle market right now is more confidence, that people actually feel that things are getting better. And for years, for several years people were saying things were getting better but the middle market was like I don't see things getting better.
From the results, the biggest indicator that I would say is you saw the increase in the average size of both our variable annuity and our mutual fund sales. So yes, there is more confidence in the middle market right now..
And we have a follow-up question from Steven Schwartz of Raymond James. Please go ahead..
VA business, I'm trying to get something straight in my head here. I tend to think of the typical Primerica client contract holder as lower middle, middle income type of person, probably younger than normal, maybe for the industry as a whole and then you say your VA, your initial VA deposit is $89,000.
That's lower, I think, than Raymond James' initial VA deposit, but that's still a lot of money.
Is there a difference between who's in ISP and who's in term?.
Yes. Look one of, Steven, one of the things -- Primerica, if you look at our average client -- okay. You're right. I would say we're true -- if you look, average client we're middle market. But there is a pretty big standard deviation in that between who our people are and if you look at our ISP business.
In our ISP sales force, they're seeing a lot of the clients that an Edward Jones sees or whatever. So some of these people have -- they have money and they're older. They're not as young as the typical life insurance person coming in.
So when you look at our business, too much generality you can be too general with it and so in our ISP market, our guys that are out there very focused on that. They see people with a little more money. I don't know if you want to add to that..
You're right, John. Our business does run the spectrum and the variable annuity products that we have do fit an income orientation for people who are looking towards retirement.
And so when you get into that demographic of people looking for retirement, they do have a little -- it's not huge amounts of money, but it is some money generating the $89,000..
And our next question comes from Colin Devine of Jefferies. Please go ahead..
Actually I remember when I learned a few years ago that the average VA tickets in Smith Barney was the same size as the average ticket you guys are seeing. It doesn't surprise me that they're that big. A couple questions for you.
What new products do you have sort of in the pipeline? Are there any more VA additions or anything like that coming down? Second question is, I was quite impressed with the growth in the size of the mutual fund force, up 5%.
Where do those people come from? Are they new additions to the Primerica family or are they conversions of just former life agents and how does that compare relative to the past? So that's the second question for you. And then if we can talk a little bit more on persistency.
I appreciate references to it, but can we get a little more granularity on how persistency trends are in your term business?.
Yes, we're looking at adding another variable annuity provider in the next couple of months. We're not at liberty to say who that is and what product it is, but we're looking for additional expansion there. As it relates to the agents that are getting securities license, yes it is almost exclusively agents that have come into the business.
They've gotten their district or division leader promotion; therefore they've built a team and begun to develop a client base. And as they start to focus on going to full-time, they go ahead and get their securities license. So it's rarely sort of people coming into the business initially.
It is typically people who come into the business, have had some success and are looking to make this a full-time profession..
How does that 5% increase compare to the past? Because it just seems to me the bulk of your earnings are coming from the registered reps. And this is really what's setting the sort of forward earnings momentum of your ability to get these people their securities license.
So how is that trending?.
That was a significant improvement over the last couple of years. It had been flat for the couple of years prior to that..
And the question on persistency, and I appreciate -- we don't provide a tremendous amount of granularity with regard to persistency. But to try to speak in some general terms, we have been seeing improvement in persistency over the course of the last several years after the downturn that we saw in the 2008 through say, 2010 period.
Our first and second year persistency, which is what we really focus on because it actually has the most dramatic impact on our financials, again has been where we see most of this improvement.
And that's a combination of not just the market -- excuse me, when I say the market, the overall economy and people just holding onto their policies, that we see across all durations.
But specifically on the early parts of the years or early durations we've made a substantial push over the last few years with regard to programs with our sales force in order to really encourage and bolster our persistency results. With that said, our business in the first year -- we look at things on a 13th month basis.
Our 13th month persistency is generally going to be lower than you would see for other term writers who are selling much larger policies to a different marketplace. But once we get past, really, the first and second duration we normalize. And then I'd say our persistency rates are very consistent with what you'd see in any other term writer..
One final one for you so you don't feel too left out, with what's happened on the Canadian dollar and the fact it obviously it does meaningful impact your earnings, does that give you cause to think of starting to hedge some of the currency risk or not?.
Yes and it's interesting. We talk about that quite a bit. You can look at it from a couple of different perspectives. One is from the balance sheet perspective and then the earnings perspective. We really haven't needed to look at -- let me -- hold on for a second. Let me go back to the balance sheet.
Most of the balance sheet is net -- of the Canadian balance sheet is really matched with Canadian liabilities. So the denominations are the same. So there is sort of internal hedging happening there. So it's really just their equity and really don't feel the need to hedge that given how much money we move from Canada to the U.S. anyway.
On the earnings, it's something that we have done a long, long time ago in the past. The rates have been really very stable until quite frankly the last let's say 12 to 18 months. So actually most importantly the last 12 months. So it is definitely something we will consider, definitely something we will consider.
That said, I would not want to jump into it because every hedging strategy has so many potential gotcha's to it that given the level of -- so you describe it as material.
It is certainly a number we're focused on, but I do think we can tolerate a $5 million; let's say $8 million impact, $5 million impact on net income and I'm not sure that's worth the risk associated with a hedging strategy. That said, it's an excellent point.
We definitely are talking about it and keeping an eye on it to see if it's something we need to look into..
Okay. The final ones, you mentioned where the RBC ended the year.
Where did your MCCSR come in?.
RBC what? Excuse me?.
Where did your MCCSR come in?.
MCCSR. I actually don't have that number off the top of my head. We have not finished the filings. Those are doing the end of this month. Even the RBC that I quoted is actually an estimate. So we don't normally go through an estimation process on MCCSR. I will tell you that I'd know, because it always has been, much higher than what is required.
We have a -- similar to what we have in the U.S., we have a strong capital business in Canada. But I'm happy to provide that number once it's a public number, once we've calculated it, quite frankly, fully finalized it..
Thank you everybody. Have a nice day..
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