Primerica Inc

NYSE:PRI

Earnings Call Transcript 2019-Q2

[Operator]

Good morning. My name is Jack and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Primerica, Inc. Q2 Earnings Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]

I will now turn the call over to Nicole Russell, Head of Investor Relations. Ms. Russell, you may begin your conference.

[Nicole Russell, Head-Investor Relations]

Thank you, Jack, and good morning, everyone. Welcome to Primerica’s Second Quarter Earnings Call. A copy of our earnings press release along with materials relevant to today’s call are posted on our Investor Relations website at investors.primerica.com.

Joining our call today are Chief Executive Officer, Glenn Williams; and our Chief Financial Officer, Alison Rand. Glenn and Alison will deliver prepared remarks and then we will open the call for questions.

During our call, some of our comments may contain forward-looking statements in accordance with the Safe Harbor provision of the Securities Litigation Reform Act. The Company does not assume any duty to update or revise these statements to reflect new information. We reference you to our most recent Form 10-K filing as modified by subsequent Form 10-Q filings for a list of risk and uncertainties that could cause actual results to materially differ from those expressed or implied.

We will also reference certain non-GAAP measures, which we believe provide additional insight into our Company’s operations. Reconciliations of non-GAAP measures to their respective GAAP numbers are included at the end of our earnings press release and are available on our Investor Relations website.

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

[Glenn Williams, Chief Executive Officer]

Thank you, Nicole, and thanks, everyone, for joining us today. I will focus my prepared remarks today on the highlights from our most recent quarter and then offer some early observations about our biennial convention and Alison will review our financial results.

Turning to Slide 3 in our presentation deck, as you can see we reported another quarter with strong financial results. Adjusted operating revenues increased 7% to $501 million, adjusted net operating income and diluted adjusted operating EPS were up 10% and 14% year-over-year respectively and adjusted operating ROAE was 25.1%.

These are exceptional results with all-time highs and adjusted operating revenues, adjusted operating earnings per share and adjusted operating ROAE, just to name a few. We also set new records in our ISP business with record sales and client asset levels.

In addition, we continue to execute our capital deployment plan by repurchasing $57 million of common stock in the second quarter for a year-to-date total of $111 million. We expect this pace of repurchases to continue through the second half of the year.

The second quarter’s distribution results can be seen on Slide 4. Recruiting was up 13% during the quarter, reflecting the impact of a series of incentives announced at the convention, including a reduction of our licensing fee, which brought a heightened level of excitement to the final 10 days of June.

The positive impact on recruiting occurred too late in the quarter to be reflected in the second quarter’ is new life licenses, which were down 19% year-over-year due to weakness earlier in the year. The size of our sales force was slightly lower than June 30 last year.

The discounted licensing fee remained available through the first 15 days of July and continues to positively impact momentum after the program ended. While we’re still very early, we are encouraged by the rate at which these new recruits are progressing through our system. Licensing class attendance is particularly strong as is the use of our online study tools. We’re optimistic about listening trends, which suggest solid year-over-year growth between 8% and 9% in the second half of the year.

Although we recognized it will be difficult to overcome weakness earlier this year. Based on these results we now expect 2019 full recruiting to be flat, new life licenses to be lower about 3% and the size of the sales force to be comparable to December 2018. As we turn to our Term Life business on Slide 5, we expect positive momentum in recruiting to impact reduction later this year. However, second quarter results still reflected softer trends from prior periods.

During the quarter, we issued nearly 79,000 new Term Life insurance policies, down 6% compared to last year’s second quarter. Productivity was within our historical range at 0.20 policies per life insurance license representatives per month.

With productivity retuning to the historical range in distribution momentum building, we expect to see our sales results strengthened during the remainder of the year and believe the second half can grow about 2%. However, weakness in the first half of this year will be difficult to overcome and as a result, year-over-year results for issued life policies is currently projected to be down approximately 3%.

On Slide 6, we show results from our investment and savings products. This segment continues to break records. Client asset values at a new high-water mark in June at $65.9 billion propelled by record sales during the quarter of nearly $2 billion and favorable equity markets.

Net new client flows of $305 million during the quarter were also very strong. As I’ve noted in the past, our Term Life and investment product lines are complementary in nature. The strength and solid performance in our ISP business provide forward momentum as we work to rebuild strength in distribution growth in life sales. Combined, our businesses offer greater breadth of product offering to clients, complementary income streams to our sales force and more diverse financial results to the company.

Now let’s review the impact of our convention. As I’ve discussed previously, we deliberately lay a foundation for this event months in advance. Last quarter, I outlined our three-pronged approach to change which include short-term incentives, incremental improvements and longer term higher impact initiatives. The convention gives us the opportunity to leverage these improvements across a large number of people and add some excitement through incentives announced at the event.

Confident that we could create recruiting momentum after the event, we worked in advance to have a strong infrastructure and field leadership focus on licensing and field training of new recruits. We believe we are seeing some early positives from this approach. While an influx of new recruits puts downward pressure on pull through ratios, we have not seen significant erosion in the early results.

As mentioned earlier, licensing classes are full and online tools are getting heavy usage. Keep in mind that the convention itself is a massive endeavor with multiple facets. The event spent four days and included nine workshops with attendance per workshop ranging between 1,600 to 10,000 people covering a wide range of topics. The four general sessions provided vision for the future as well as recognition of important milestones and achievements. And an exhibitor area with 48 exhibit booths, staffed by 800 home office and strategic partner representatives provided attendees with an opportunity to interact with our business partners, share knowledge and ideas and network with their peers.

This year’s event drew over 45,000 attendees, up 7% compared to 2017, with an estimated 12% increase in workshop attendance. Our efforts in the first half of the year to drive distribution growth combined with the impact of the convention are showing positive results in the short-term. Our goal now is to extend that momentum into new licenses, growing sales force and improve productivity, while continuing to support the natural momentum in our ISP business.

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

[Alison Rand, Chief Financial Officer]

Thank you, Glenn, and good morning, everyone. Starting on Slide 7, Term Life operating revenues increased 9% versus the prior year period. Adjusted direct premiums, which increased 10.5% year-over-year, continue to drive the segment’s top line growth. Incurred claims for the quarter were in line with historical trends. The benefits and claims ratio at 58.2% was within the expected range for 2019 that was higher than the prior year period, which benefited from lower incurred claims. Full year expectations for the benefits and claims ratio remain at 58% to 58.5% for 2019.

At 14.3%, the DAC amortization ratio this quarter was consistent with the prior year period and in line with our expectations. Persistency was consistent with the prior year as well. We typically see a lower DAC amortization ratio in the second quarter, but continue to expect the full year DAC amortization ratio to be around 16% for 2019. The net insurance expense ratio for the quarter was 8%, down slightly from the prior year ratio.

I will discuss companywide expenses later in the call, but we expect the Term Life insurance expense ratio to increase slightly to the low 8% range on a full year basis. Term Life pre-tax income for the quarter was $84 million, up 11% versus the prior year period. Term Life operating margin at 20.6% was consistent with the prior year and reflects the typically lower DAC amortization in the second quarter. We expect the full-year operating margin for 2019 to be between 18.5% and 19%.

Over the past few quarters, we’ve shared adjusted direct premium growth projections based on various production levels. We’ve updated these projections to reflect our current expectations for 2019 issued policies. As Glenn mentioned earlier, we expect issued policies to be up by 2% in the second half, but this will not overcome the shortfall experienced in the first half.

Our current projection is that on a full year basis, issued policies will be down around 3% year-over-year. This modestly reduces our adjusted direct premium growth rate projection for 2019 to around 10.5%. We expect the second half sales momentum will continue into next year, resulting in an adjusted direct premium growth rate at or above 9% in 2020.

Turning now to our Investment and Savings Products segment on Slide 8, in the second quarter, revenues increased 6% and income before income taxes increased nearly 10% year-over-year. As Glenn noted, we saw record product sales this quarter up 10% versus second quarter of 2018. Sales based revenues increased 11% accordingly.

Average client asset values during the quarter were $64.4 billion, increasing 5% and driving a 5% increase in asset-based revenue. Sales and asset-based commission expenses generally increased with the respective revenues. Account-based revenues declined 3% year-over-year due to the transition of client accounts from the Freedom Portfolios to our new Lifetime Investment Platform. As a reminder, the Freedom Portfolio client fee structure included recordkeeping and custodian fees, whereas the Lifetime Platform does not.

ISP operating expenses declined 3% versus the prior year period due to our ongoing efforts to reduce costs and realize operational efficiencies. Previously noted, last year we began seeing the benefit of our renegotiated recordkeeping fee arrangement, which in 2019 continue to generate year-over-year expense reduction. This year we negotiated a reduced cost structure with a managed account service provider to further drive down our costs.

On an operational standpoint, we continue to identify and implement changes to reduce account administration costs. These savings, which on a full-year basis are between $4 million and $5 million, more than offset expenses – expected increases from growth in the business and inflation.

Let’s continue the operating expense discussion by taking a look at companywide insurance and other operating expenses on Slide 9. For the second quarter, these expenses totaled $100 million and were 2% higher than the second quarter of 2018. We saw our typical year-over-year growth from employee-related costs and growth in the life insurance business, as well as sound technology investments.

Expense reductions achieved in the ISP segment partially offset these increases. Insurance and other operating expenses for the second quarter were about $4 million lower than we guided to on last quarter’s earning call, with the main driver being the pace at which we are executing on our technology investments.

At the start of the year, we indicated that technology-related expenses would increase by $10 million to $14 million in 2019. We had an aggressive hiring plan for the year, and while we’ve added some incredible talent, the pace has been slower than expected due to the highly specialized and independent nature of the resources.

We want to make sure that every dollar spent provide a real value to our organization. So we take – are taking our time to fully vet project on the front end. We have also focused on the elimination of redundant or eliminate used platforms to reduce our business as usual spend. We expect to see a year-over-year increase in technology expenses in the second half of the year of about $6 million. When combined with a $4 million increase in the first half, the total increase in technology-related expenses year-over-year is expected to be about $10 million, which is at the low end of the range provided at the beginning of the year.

Given this downward revision, we expect insurance and other operating expenses in the third quarter to be around $102 million, fourth quarter to be around $104 million and full year expenses to be about $416 million, which will reflect an annual increase of approximately $18 million or 4.5%. Approximately 70% of the net increase will be reflected in our Term Life segment and the remainder will hit C&O. ISP operating expenses are expected to remain relatively flat year-over-year given the cost savings, I discussed earlier.

Let’s move now to our review of adjusted net investment income in our invested asset portfolio on Slide 10. $2 million or 10% increase in adjusted net investment income year-over-year was predominantly due to growth in our invested asset portfolio, as well as higher book earnings versus the prior year on assets backing the reinsurance deposit asset. In the current low rate and flat yield curve environment, we are carefully looking for opportunities to replace maturing yield with new purchases, while remaining committed to maintaining a relatively conservative high quality portfolio, which currently has an average rating of A.

Finally on Slide 11, our tax rate of 23.5% during the quarter is consistent with our full year estimate of 23%. Our balance sheet and capital position are strong and we continue to have ample liquidity. As of June 30, Primerica Life Insurance Company’s statutory risk-based capital ratio is estimated to be at around 440% and holding company liquidity is approximately $230 million. We plan to continue to take ordinary dividends from Primerica Life to the extent available with the goal of maintaining our near-term RBC ratio in the low to mid 400 range.

Now, let’s open the line up for questions.

[Operator]

Certainly. [Operator Instructions] Ryan Krueger from KBW. Your line is open.

[Glenn Williams, Chief Executive Officer]

Good morning, Ryan.

[Ryan Krueger, KBW]

Thanks. Good morning. I have a question on the expenses, first, in terms of the reduced guidance on expenses for the year. So, I understand it correctly, now $4 million of the lower expenses is more due to the timing of technology spend. But I think it looks like there is some additional – you expect in addition to that lower expenses overall, is that mainly because of the savings initiatives and ISP, and should we think of that as kind of something that will continue beyond this year?

[Alison Rand, Chief Financial Officer]

Yes. The items I discussed on ISP are absolutely of a permanent mix. We do think that we have built into our negotiations with service providers and within our walls has really focused on cutting operational expenses out, things associated with maintaining the administration of especially our mutual fund client accounts. And so, those are things that are – will stick with our business structure, and again, we continue to strive to increase those savings over time to offset the natural growth we would otherwise see just from the growth in the book of business.

On the technology front, we are really carefully looking at what it is we’re going to do in making sure there is value to it. One of the things that we’ve really been focused on this year is taking a hard look, not just at what we want to spend that’s new, but also focusing on what we’re currently spending just to support our business as usual operation.

So I would say that part of the way that we’ll look to control the growth in technology spend, while still meeting the needs and the growing needs of the organization is to balance new things that we want to add, against curving or cutting back on things that we no longer get value of. So that’s just sort of a mindset we have been running with here to make sure that everything that we’re currently spending money on makes sense to continue to make spend money on and as well as anything new we want to add really drives the business value.

So I – while I expect to see IT costs continue to rise in the future because just from a share sake of staying current in the marketplace and protecting our client’s data, we know there are things that will continue to emerge. Our goal is to maintain that cost increase as much as possible by holistically looking at what we’re spending our money on. So again, just to highlight, I think expense management is a critical component of what we do. We will always look to spend money when we think it will drive results, but just as important is making sure that we’re trimming whatever we spend that doesn’t need to be spent in order to just maintain the business.

[Ryan Krueger, KBW]

Thanks. And then on Term Life sales, you’d originally thought there will be some increase this year and now you’re talking about a 3% decline. Is that more due to just what occurred in the first half of the year because it sounds like your momentum is building following the convention? So I’m just curious if the reaction to the convention is consistent with what you expected in your revise expectation is more just due to what transpired in the first half of the year?

[Glenn Williams, Chief Executive Officer]

Yes. Brian that’s exactly right. We were very pleased with the results of the commission. I would categorize it as one of our most successful events ever. But the unique dynamic this year as opposed to the last two conventions that comes to mind most quickly is that we had some weakness in our numbers in the first two quarters, the first half of the year prior to the convention and the convention is a momentum multiplier. So the momentum – more momentum you have when you arrive, the more noticeable results you’ll get for the full year of the convention here.

And so we are seeing very positive results. The challenge is, we just had so much weakness in the first half right now as we kind of project out, we’re probably not going to recover in every area from the weakness of the first half, even though we are seeing the positive results and seeing some growth in most of our key metrics coming out of the convention.

[Ryan Krueger, KBW]

Great. Thank you.

[Operator]

Andrew Kligerman with Credit Suisse. Your line is open.

[Glenn Williams, Chief Executive Officer]

Good morning, Andrew.

[Andrew Kligerman, Credit Suisse]

Thanks a lot. Good morning. Question so recruitment was boosted and you cited the discounting in the licensing fee. And I think you did something like that two years ago. And a little ways out, maybe a year or so out, there was a real lapse in the agents, there were number of departures. So what gives you confidence that you’ll be able retain these newly recruited producers, given that a fair amount of them may have come on because the licensing fee was discounted?

[Glenn Williams, Chief Executive Officer]

Yes. Andrew, it’s been a number of years since we’ve done – actually used a discounted fee. We always have an incentive that creates excitement and you should think in terms of the excitement is created is really more in the minds of our recruiters, a $50 discount is not life changing for somebody if they are deciding to pay $99 for a licensing fee or $49. It’s – but it is significant enough that it excites those that are delivering that message. However, when you do have a significant influx of recruits over a short period of time, we recognize that puts pressure on our pull-through ratios, but where you will see, it is not necessarily in terminations of licenses – most licenses last two years after people get them.

So you – it would be a long time before you say, oh my gosh, we’ve recruited a large number of people that are not committed, they were somehow committed enough to get the license by two years. Let it lapse rather than new and renewing it. Where you’ll see the erosion is in the number of those recruits that get the license up front.

And of course, part of our game plan in this is what we worked on the first half of the year was laying that foundation with significant effort on our focus and communication around licensing and field training and the effort there was to develop some muscle memory so that if we did get the anticipated influx of recruits after the convention, which we did, very pleased with that, then we would have a track for them to run on and get more of them license. That’s the – that’s where you’re going to see the difference if for some reason we have a less committed class of recruits coming in.

And as I said in my prepared comments, so far, we’re extremely pleased with the licensing classes or fold the online – the usage of our online tools is extremely high at record levels. And so it – the early – it’s very early, just here we are just a few weeks beyond that. It’s very early but we’re encouraged by what we’re seeing early. So if we can get that group of people license the first time, we don’t have any reason to expect that would be less likely to renew two years later. The key is making sure that we get the pull-through rate on the front end that we worked hard to prepare the road for prior to the convention.

[Andrew Kligerman, Credit Suisse]

I see. I see. That’s very helpful. And then with regard to issue policy, so down 6% in the quarter year-over-year so you – could you kind of come back to what you think in the second half of the year, year-over-year, so you think you could issue policies up in the low single digits? That shift feeling as we go through the second half of the year?

[Glenn Williams, Chief Executive Officer]

Yes. As we look from where we are right now and of course this perspective changes as forecast become actuals, but from what we see right now, we do expect that it will be up slightly in the second half and policies issued, but not enough to overcome the significant weakness in the first two quarters. So it looks like the net at the end of the year is going to be down a couple of percentage points. And so that’s the way we see it from today, and we’d shared the earlier discussion with you so with that, it was appropriate to update you on what we see from today.

[Andrew Kligerman, Credit Suisse]

So I’m just trying to – yes – I’m trying to understand the momentum element of it. I mean you’ve got everybody charged up from the conference. So why isn’t there a dramatic pick up? And maybe could we be surprised and see something dramatic in the second? Maybe you would be surprised by that but help me understand the momentum issue.

[Glenn Williams, Chief Executive Officer]

Yes. Well, when you – the formula that works is the size of the sales force times productivity and so what you’re talking about, I believe the question is around can we possibly impact productivity. The sales force growth comes when those recruits turn into new licenses and overcome the number of non-renewals that we might have in the quarter and grow the size of the sales force, which we’re clearly committed to, but the productivity has a number of which we’re clearly committed to, but the productivity has a number of factors that impacted, obviously, we would expect it to be positively impacted by an event like the convention and in fact as we saw you can’t get the convention all the credit for it because it happened in the last 10 days of the quarter.

But we did see productivity return to the historical range, and we continue to work on trying to move it to the upper end or even as we’ve seen historically outside the historical range on the topside. The convention could definitely help that, and of course, the announcements that we’ve made, we don’t make a lot of technical announcement at the convention, the crowd is just too big for a lot of detail to be communicated. So our method is we roll a lot of that out prior to the convention and then we highlight appropriate things at the convention. So it’s not like we rolled out a new product set or anything like that at the convention, it doesn’t work when you got 45,000 people in the room. It’s very hard to communicate details.

But at the same time, we did add productivity incentives as well as recruiting incentives and we are seeing some positive results from that. But before I declare us to be back on track for something we’ve done historically, I’d like to see some more results. It’s very early in the process and recruits – recruiting activity is helpful for like productivity because remember we’re field training those recruits in their warm markets, their family friends, neighbors and so forth and so the more of them we can put through the field training process, again, part of the foundation we laid in the first half, the more productivity increase we’ll get. But it’s just so early in the process that I’m not at this point going to make a commitment with a lot of those positive assumptions. But there is clearly the possibility that we can capitalize on some of that.

[Andrew Kligerman, Credit Suisse]

Got it. And just real quickly, any updates on the mortgage and debt consolidation pilot and the likely launch?

[Glenn Williams, Chief Executive Officer]

Sure. I can be glad to do that, very excited about how that’s progressing. It is a deliberate pilot and as we would remind you, since the years ago when we were in that business, the market and the regulations have changed significantly. And what we’re piloting is just to make sure we get the same dynamics. So there’s not a question of this. There are huge need in the marketplace. The debt load in the middle market is clearly greater than it’s ever been and clients want to talk about it more than anyone want to talk about any other financial issue. So those two things are very positive for a business.

The challenge is, under the current regulatory environment and lending environment, do we believe that we can take advantage of that, meeting that need in the current model and so that’s what we’re testing and so we’re out in two states right now, Colorado and Florida, we have only about 40 representatives that are actively involved in the pilot. So far, they’ve submitted about 85 applications and we closed about 25 of those. And the good news is that the process is working well. Our field force is responding well. The technology is working. This pilot also gives us a chance to work those bugs out, there’ve been a few of those and so forth.

And – so we feel very good about the deliberate start that we’ve had and now we’re asking the question based on the successes that we’ve had on a very small basis is when would we like to add other states of the pilot, there’s a regulatory dynamic we have to be approved in every state and get our people approved in every state. So I would think in terms of – first of all, very encouraged by the early results, but I would think in terms of this roll out being something that’s measured in many months and more than a year, we’ll probably be in pilot phase for a year plus.

And that is as we learn more about the kind of fundamentals that I’ve described then we start to ask the questions of how to leverage it over our large sales force. Do we have a focus on getting a larger number of people licenses, for example? That would impact our entire business if we’ve made that decision because that’s not an easy license to get. So before we make that decision and create a potential distraction even for a very positive reason, we want to make sure that we know this thing works for our clients and for our sales force and for our company. So we’re going to move very deliberately.

So I would summarize very encouraged by the early results, our sales force is very excited. The clients that we’ve been able to help have been helped significantly, so we probably validated the easy part and now we start to ask the question of how to leverage this over a larger number of people and to do that, we’ve got to add states and ad reps. And that’s the process that we’ll go into and it will be slow down, by the way have fast regulatory processes in each state, but we are marching forward in that pilot.

[Andrew Kligerman, Credit Suisse]

That’s great. Thanks so much.

[Operator]

Your next question comes from the line of Mark Hughes with SunTrust. Your line is open.

[Mark Hughes, SunTrust]

Alison, a question for you on the YRT ceded premium, if I’m looking at it the right way. It looks like it was up year-over-year. Relative to adjusted direct premiums, maybe 30.9% versus 30%. Is that just normal volatility in that measure? Is that reinsurance becoming a bit more expensive? And when I think about kind of the second half, is that likewise going to be up year-over-year when we look at it as a ratio of adjusted direct premiums?

[Alison Rand, Chief Financial Officer]

So the answer is none of the above. Because – sorry but the – and this is a little bit complicated, but let me try to walk through it. When we do all of our analyses, what we do in our ratio, it is we actually take the YRT premium and we apply it against the benefit’s ratio and then we do everything as a percentage of adjusted direct premium. So just to remind everybody what adjusted direct premiums are, those are direct premiums less the coinsured premiums that were part of the IPO coinsurance.

And the reason that’s an appropriate measure to use is sort of your denominator and allowing the analytics is with coinsurance, it’s a flat ratio that comes right off the top of every dollar of premium we collect, every claim we pay, every bit of our reserves and obviously on DAC, it’s not quite as straightforward, but they also share in the DAC.

So that’s very different than YRT. YRT has really none of those assets. So first of all, the reason YRT is growing at a very different pace than adjusted direct premiums or for that matter of direct premiums is the latter are collected on a monthly basis from clients. The YRT premiums are due to the reinsurers annually on the date the policy renews. And we happen to have a lot of renewals or a lot of high policy production happening in the second quarter historically.

So the second quarter tends to have a little bit of a pop and how YRT rates go up. But the really big driver on YRT rate is remember they matched the mortality curve of the underlying policies not the direct premium payments. So direct premium payments are level for the entire policy term whereas YRT premiums start as low as zero under some of the contracts and then grow over time to match the expected mortality of those policies.

So we – so the two will not grow in tandem and in fact we always have expected the YRT rates premiums to grow faster than adjusted direct premiums. It’s taken a little bit of time for that to happen as the block of business has grown, but that is absolutely a trend we expect into the future. But again, that is why we – for our analytic purposes and what we try to encourage others to do is to take that line and actually apply it against the benefit’s ratio

And when you look at it there, the growth in the ceded premiums, so the contra revenue was actually lower than the benefit we’ve been getting within our benefits and claims ratio. So net-net, we do believe it makes complete sense to do the YRT program. It is a little bit of an oddity in the way GAAP requires you to account for it, and analytically again, it should be looked at against mortality. So, does that answer your question?

[Mark Hughes, SunTrust]

Yes, it did. And just so I understand the relationship with benefits and claims to the extent that YRT is growing a little faster. Does that imply that benefits in claims grow a little more slowly? Or is that...

[Alison Rand, Chief Financial Officer]

So, I think the way to look at it is that the – if you broke it down, you look at the YRT premiums, and how they’ve grown, you can’t necessarily see it, but when you look at the net benefits in our financials, there is also a YRT benefit component, because you do have the offset there. And in fact the YRT benefit component, this is getting very technical, but the YRT benefit component actually grown a little faster than the YRT premium component.

So net-net, we believe it makes a lot of sense for us to do this. Obviously, as part of reinsurance, we are foregoing some future profits potentially, if there are mortality improvement, because we lock it in upfront, but it also does a great job of reducing period to period volatility, and from the standpoint of mine to look like a distributor and act like a distributor, we think this is an appropriate practice.

[Mark Hughes, SunTrust]

Understood. Sort of. Sort of. That’s helpful. Glenn in the annuities, there in the ISP business, you really had a lot of momentum on the annuities front. In the third quarter of last year, you had a pretty sharp jump in that category. How do you describe the momentum there? Can we still expect growth in the third quarter against what 59% growth in the third quarter of last year?

[Glenn Williams, Chief Executive Officer]

Yes. When you look kind of underneath the hood at our ISP business, we were very fortunate to see growth across-the-board, I mean growth in Canada, growth in the U.S. was roughly equivalent and among all of our product lines. But you raised a great question because the variable annuity business has grown so rapidly. It shares dynamics with our managed account basis. It grew so rapidly and now we’re seeing a flattening of the growth rate and it was actually in the quarter pretty flat with the second quarter last year managed accounts where we continue to see variable annuities grow with a significant strength above average among all of our products although they all grew.

And there is going to continue to be pressure to keep up those growth rates, but at the same time, the fundamentals of that business are very strong, interest in the product is very strong, volatility in the market probably plays into that product because it has some controls around the results of the volatility. So I would say there is still – the potential for that to continue to grow, but you’re right, I think you’re going to see some choppiness in that quarter-over-quarter if we have stellar quarters in the previous year, be a little harder to have the same thing happen the next quarter. And so I think you will see some normalizing of the growth rates, but I still feel good that there is good potential there and good fundamentals in that business.

[Mark Hughes, SunTrust]

And then a final question on the fee-generating account total, I think Alison you pointed out how there’s a kind of mixed shift that’s going on that’s leading to that may be attrition or slow low decline in those number of accounts. I think they’ve been down kind of mid-single digits lately year-over-year. Is that – would we expect that kind of pace going forward as you see that kind of mixed shift in your business?

[Alison Rand, Chief Financial Officer]

Yes. And so the biggest driver has really been something that now actually finally, complete and it was the fact that we closed out our freedom portfolio for managed accounts, and we launched obviously several years the lifetime platform and the fee structures on those two programs are very different. The old programs did have account-based fees, record keeping and custodian fees and the managed account program does not. So essentially what you’re seeing and we finally, close out I want to say the last of the freedom accounts in the first quarter of this year. So that’s just been what the gradual decline’s been. Obviously, offsetting that shift in the growth in the mutual fund business that continues to be on our platform.

So this is sort of the lagging and what you’re going to have year-over-year changes that are a bit obscured by that shift in our managed account program. By next year, you’ll be looking at basically four quarters with a program with 100% lifetime in both periods. So you should start to see that negate and you should start to see growth again as we continue to build our mutual fund platform account.

[Mark Hughes, SunTrust]

Okay. Thank you very much.

[Alison Rand, Chief Financial Officer]

You’re welcome.

[Operator]

Jeff Schmitt with William Blair. Your line is open.

[Jeff Schmitt, William Blair]

Hi, good morning. Good morning everyone. Just want to go back to the recruits and the number of licensed reps and I know you touched on this, but just thinking about that pull through that conversion. Second quarter is usually – I guess the fourth quarter seems to historically have the highest conversion, second quarter is the second highest, presumably from the convention. It seems that you said these incentives would bring in maybe some less serious agents and maybe that hurts that conversion rate, the pull-through rate. But there was a pretty significant drive – you I think that there would still be a net positive impact. I mean it was – licensed reps were down almost 20%. Is there anything else going on with that conversion in the quarter?

[Glenn Williams, Chief Executive Officer]

Jeff. Keep in mind the length of time all of this takes to develop. So we had the convention on the – roughly – left the convention around the 20th or 21st of June, so all the recruiting activity we created happened in the last 10 days of the quarter. On average, it takes somewhere between a month to – in some states or even provinces in Canada, nine or 12 months even for those recruits to convert into licenses.

So that’s why I said early – earlier that it’s very early in the process and as we start to project the pull-through rate and the productivity impact, it’s so early that we’re not driving a stake very deep in the ground on this yet. But the early signs, because we look at it on a daily basis, we know what kind of progress we should expect day by day. And we’re seeing good early signs. But the recruits that came in the last 10 days of June should start to see an impact just by the timing of it, third quarter on into the fourth quarter and probably even into the first quarter of next year.

And just anytime you get people in, more than the run rate you’re on, you must assume that some of those jointed and we’re just a little less committed than the person who might have come in without an incentive, we just assume that and we’re trying hard to prove ourselves wrong and pull-through at an equal to or even better rate that was the groundwork we laid before the convention was in anticipation of that. But it’s way too early to see any of that. Any of the second quarter results we’re discussing are as a result of the weakness and recruiting that occurred first quarter, fourth quarter of last year and even second – third quarter of last year. So that’s how long the pipeline is to be able to see these kinds of results.

[Jeff Schmitt, William Blair]

Got it, okay. That makes sense. And then just looking at the productivity, the issue Term Life policy is down 6%. I guess, the productivity is the same as it was in the same half last year for the remainder of the year. I know you’re saying it’s in the historical range, but it looks like it would be even below where it’s – anywhere that it’s been, maybe just closer at 13, 14 levels, but even below that. So it seems like it could be at the very bottom of in the historical range. And it’s been sliding – productivity has been sliding since 2016. Do you think is that just a product of you have 130,000 agents versus productivity is better when you have 90,000? Or is this where we are at in that cycle? Or what do you think maybe driving that?

[Glenn Williams, Chief Executive Officer]

Again, you’re right. You got to consider the math and clearly productivity is easier to control and move the smaller your sales force is, but that’s counterproductive in the long-term. It’s just like that influx of recruits, even if they are a little less committed, the net is going to be greater than if we haven’t done that even if the pull-through rate erodes a little bit. The same is true as we grow the sales force mathematically means you’re going to put negative pressure on productivity and perhaps pull the averages down.

We kind of predicted that theory for a couple of years there, but at the same time, there is a lot of things that impact productivity, a lot of the things you’d expect were fortunately – we believe the economic situation is probably neutral to positive so that’s probably not hurting productivity. The main street seems to have as much disposable income as they’ve ever had. But disruptions of all kinds, disruptions in the new cycle, gas prices there’s all kinds of things that can go against productivity. so you can’t assume that everything that happened in this quarter was identical to what happened in two previous quarters or two previous years in the same quarter.

All that said, you’re right, second quarter is normally a high quarter for productivity. We’re back in the range, but we’re not where we were last year or the year before and we’re certainly not where we want to be. And so that’s another line of attack that we’re always working on is it goes back to that three-pronged approach, can we adjust our short-term incentives, our incremental improvements and our bigger major changes in order to push productivity to a higher part of the range or even at the top of the range and that’s exactly the play we’re running right now. Some of those other incentives that we used at the convention were around productivity. There was a temporary bonus that we did for a period of time and you can’t artificially stimulate productivity permanently, any kind of artificial stimulus loses its effectiveness over time.

So, we do a short-term bonus that pulls people into the process. They enjoyed the process. They make money from being more productive and we hope that that makes a more permanent change overtime. We do the same thing with our incentives and trips. It is to make sure their productivity drivers. And so we have all of those levers in play, but you’re right, there – it becomes more difficult as you get bigger, but we believe there are compensating factors where we can continue to grow it in spite of the increasing difficulty.

[Jeff Schmitt, William Blair]

Okay, great. Thank you.

[Operator]

There are no further questions at this time. This concludes the Primerica Inc. Q2 earnings results conference call and webcast. We thank you for your participation. You may now disconnect.