Primerica Inc

NYSE:PRI

Earnings Call Transcript 2022-Q2

[Operator]

Hello everyone and welcome to Primerica’s Second Quarter 2022 Earnings Webcast. My name is Charlie. I'll be coordinating the call today. You'll have the opportunity to ask a question at the end of the presentation. [Operator instructions].

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

[Nicole Russell, IR]

Thank you, Charlie, and good morning, everyone. Welcome to Primerica's second quarter earnings call. A copy of our earnings press release, along with materials that are relevant to today's call, are posted on the Investor Relations section of our website. Joining our call today are Chief Executive Officer, Glenn Williams; and our Chief Financial Officer, Alison Rand. Glenn and Alison will deliver prepared remarks, and then we will open the call up for questions.

During our call, some of our comments may contain forward-looking statements in accordance with the Safe Harbor Provisions of the Securities Litigation Reform Act. The company assumes no obligation to update these statements to reflect new information. We refer you to our most recent Form 10-K filings as well as modified by subsequent for 10-Q for a list of risks and uncertainties that could result in 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 the company's operations. Reconciliations of non-GAAP measures to their respective GAAP numbers, are included at the end of our press release, and are available on our Investor Relations website.

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

[Glenn Williams, CEO]

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

Starting on Slide 3, adjusted operating revenues of $672 million increased 3% year-over-year, while diluted adjusted operating income per share of $2.86 declined 12%. ROAE was 22.5% for the quarter. To assess the underlying strength of the second quarter results, we have to look through a number of distortions that made year-over-year comparisons difficult. First, last year's Term Life results were heavily impacted by COVID with sales and persistency benefits exceeding the higher death claims incurred.

Second, the equity market has completely reversed its momentum. The S&P 500 Index was up 8% in the second quarter of 2021 versus down 16% in the current period. Finally, the e-Telequote acquisition wasn't completed until July 01 of last year, which means financial results in the current period have no comparable offset in the prior year period.

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

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

Focusing on the Term Life segment on Slide 4, we issued approximately 77,000 new Term Life policies during the quarter. We believe third and fourth quarter sales will outpace our pre-pandemic results while also exceeding their prior period comparisons. We project second half sales will increase around 4% to 5% year-over-year.

We expect our Term Life business to remain the primary source of deployable capital, which we plan to use to fund our growth, while also providing an attractive return to investors through quarterly dividends and share buybacks. While earnings in the Term Life segment are steady and predictable, our investment in savings business is highly correlated to the equity markets and the second quarter, certainly demonstrated how quickly momentum can shift.

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

Looking at our second quarter ISP results on Slide 5, high inflation, low consumer confidence and fears of a recession dominated the headlines during the quarter, creating significant headwinds for our ISP business. While sales had remained fairly strong earlier this year, the continued volatility and sharp decline in equity markets has impacted second quarter sales.

Today, second quarter sales were lower than expected; sorry; total second quarter sales were lower than expected at $2.7 billion, although net flows of nearly $900 million continue to reflect our client's buy and hold long term approach to investing. Assuming this uncertainty and volatility continues, our best estimate for third quarter ISP sales is a decline in the mid 20% range with some upside if markets improve.

While we expect full year sales to decline compared to last year's record results, it's worth noting that 2022 results are still expected to exceed pre-pandemic levels.

Turning next to more recent business ventures, our US mortgage business is experiencing growth challenges along with the broader industry due to the rapid rise in interest rates and slowing economy. In the second quarter, sales volume for about nearly 50% compared to the second quarter of 2021, resulting in a cumulative year-to-date decline of about 30%. This has not altered our views on the long-term prospects of this business or deterred us from actively working to expand the number of states in which we are licensed to offer mortgages as well as the number of mortgage license reps at Primerica.

We're also working to educate mortgage license reps on how to identify opportunities to consolidate variable interest rate consumer debt, build households with cash flow and capitalize on purchase money mortgage opportunities.

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

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

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

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

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

We believe we have the infrastructure and processes in place to pull new recruits through the licensing and we leveraged the power of our convention in July to launch new incentive, to drive recruiting to new heights. We're already experiencing a strong response to these incentives and believe third quarter recruiting will be extraordinarily strong.

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

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

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

Now let's review the impact of our convention, which took place at the Mercedes-Benz stadium in Atlanta, between June 29 and July 02. As you know, we leverage the power of this event to deliver a focused, consistent message simultaneously to a large number of people and to cast division for the future. The convention can also act as a momentum accelerator by re-energizing our sales force.

We are pleased with the attendance of nearly 35,000 people at the event; although attendance was down from 2019 due to lingering COVID concerns, travel restrictions and flight chaos that's currently overwhelming the airlines. What is most important is that we delivered on our goal to put the pandemic behind us and shift our focus to the future.

Preparation for this event begins by identifying the desired outcomes and defining appropriate messages. This year's message was focused on our unique ability to serve the middle market, the attractiveness of our business model and the importance of growing our license sales force through both recruiting and licensing.

The convention also featured an exhibit hall where participants were able to engage with our business partners and home office staff to hear about the most recent initiatives, obtain new product information training, and participate in demonstrations of our latest technology and tools. Convention attendees could also register for upcoming training and sign up for various portals and newsletters.

Over the four days of the convention, many participants also took advantage of onsite senior health certification at senior health booth.

As we look to the future, we do so with more confidence than ever knowing that we have the right systems in place and support needed for our reps to succeed. The recruiting incentives that were announced July 02, have filled the licensing pipeline and these new recruits will continue to fuel growth in sales momentum. We're excited to see results emerge over the next few quarters and into 2023.

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

[Alison Rand, EVP & CFO]

Thank you, Glenn and good morning, everyone. Let me start by walking you through the key earnings drivers by segment highlighting how each business has responded to the changing dynamics around COVID, market conditions and the economy. Starting with Term Life on Slide 8, operating revenues of $411 million increased 7% year-over-year driven by an 8% increase in adjusted direct premium.

Pre-check income growth was compressed to 3% due largely to insurance expenses that have been temporary elevated in the first half of the year. While the changing dynamics around COVID have shifted to benefits and claims ratios considerably year-over-year, the resulting Term Life operating margin was strong at 21% for the quarter.

Looking a little more closely at pre-licensing, we continue to see policy retention normalized as COVID fear subside. The last rate for policies issued during 2020 and 2021 are about 15% and 5% higher respectively than our pre-pandemic experience by duration. This is not surprising as these policies were issued during the height of the pandemic fear.

By contrast, we continue to see strong persistency on policies issued prior to the pandemic with lapses around 10% lower than pre-pandemic levels. Lapse is across all duration have picked up modestly from the prior quarter, which may indicate that inflation is emerging as a headwind.

However, we have not seen a reduction in average policy size or average premiums, which supports the notion that our market continues to prioritize financial protection when allocating the wallet share. We will monitor these trends as time progresses, but as of now, our current lapses remain modestly favorable to pre-pandemic levels. The DAC amortization ratio, which is seasonally low in the second quarter is 14.6%, which is consistent with pre-pandemic second quarter levels.

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

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

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

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

Sales-based revenues and sales-based commissions declined 15% and 14% respectively. in line with the change in revenue generating sales. Asset based revenues remain largely unchanged compared to the prior year period as average client asset values declined 2% to $88 billion. A drop in asset values supporting our Canadian segregated funds accelerated DAC amortization during the period, creating roughly a $4 million disparity in the year-over-year results. Market volatility may continue to create noise in year-over-year comparisons on DAC amortization.

As we look to third quarter, if markets remain where they are now, we expect asset-based net revenues to decline about $3 million and sales-based net revenues to decline about $10 million year-over-year.

Turning to the Senior Health segment on Slide 10, we've continued to refine our approach for estimating lifetime revenues and believe the LPDs determined by our algorithms this quarter, reasonably reflect current persistency. The refinement to apply to projections for policy sold during the most recent AEP and OEP, which accounts for much of the $5.4 million negative tail revenue adjustment this quarter. We do not expect significant negative tail adjustments in the third quarter.

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

In our corporate and other distributed product segment, the $5 million year-over-year increase in pre-tax operating losses was driven by higher insurance and other operating expenses, as well as lower segment net investment income as the allocation to Term Life increased to support growth in that business.

Lower sales commission from third party providers, the most notable of which was mortgages, also contributed to the year-over-year increase in pre-tax losses. Consolidated insurance and other operating expenses on Slide 11 increased $25.6 million or 23% year-over-year. Roughly 7.5% or $8.5 million of the increase comes from the senior health segment, which did not exist in the prior year period.

Another 7% or $8 million is be a higher cost associated with in-person salesforce leadership event that we scheduled by annual convention, which added an event to our regular calendar and higher travel in general. The remainder of the increase is generally driven by growth in the business, employee compensation and technology.

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

Turning next to Slide 12, our investment asset portfolio remains well diversified with an average rating of A and a duration of 4.8 years. The significant increase in interest rates over the past few months has pressured fixed income prices.

Our portfolio ended the period with an unrealized loss of $223 million compared to an unrealized loss of $84 million at the end of March. We believe these valuations are significantly tied to interest rates and not credit concerns. We continue to have the ability and intent to hold these investments until maturity. On the plus side, rising interest rates have provided the opportunity for higher reinvestment than we have seen in several years, which will benefit net investment income over time.

Liquidity at the holding company remains strong with invested assets in cash of $232 million. In Primerica Life Gramer light, statutory risk-based capital ratio, was estimated to be about 460% at June 30, 2022. We will purchase $128 million of our common stock during the quarter between combined with our purchases and pre-prior period leaves around $80 million remaining of our $325 million program.

Let me wrap up with an update on LDTI, which becomes effective next year. As a reminder, we are selecting and modified retrospective transition approach, and we'll apply the standard perspectively as of January 01, 2021. Starting with yearend 2020 balances for benefit reserves and DAC. One minor exception is that if LBTI assumptions increased the net premium ratio above a 100% for a specific policy cohort, the ratio is capped at a 100%. This may impact an isolated group of cohorts, but will not significantly impact opening reserve balances.

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

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

COVID claim variances that occurred since 2020 will be somewhat of an offset since under LDTI, the impact of experience variances is partially spread over future reporting period. The impact of any assumption changes will also be partially spread to future periods under the modified retrospective adoption method. The portion spread to future periods, it’s highest at the transition date and reduces over time as cohorts durations progress.

Given the homogenous and predictable nature of our business and our significant use of reinsurance, we do not expect large or frequent assumption changes to occur.

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

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

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

[Operator]

[Operator instructions] Our first question comes from Mark Hughes with Truist Securities. Mark. Your line is now open.

[Mark Hughes, Truist Securities]

Thank you. Good morning. Okay, great. Thank you. Good morning. Allison, you give us some good, excellent, excellent -- you give some good specific numbers on the DAC impact of 250 bps to 350 bps. Talk a number of other impacts, but when you think about the P&L effects; is that 250 bps to 350 bps, is that principally what we're going to see and should factor in, or are there other specific line items and ranges you you'd care to share? And then, when is that -- is that all kicking immediately? Do you get the full benefit at implementation?

[Alison Rand, EVP & CFO]

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

The other thing and that's a very straightforward, I say it. Very straightforward in comparison to some of the other things with LDTI, the DAC calculation's a little more straightforward, because it's very formulaic. On reserves, there are more anomalies because you hinge your results as you know, based on day one.

What we do believe is that one, as I said, in my comments, we won't have a lot of large assumption changes is given the nature of our business and our extensive use of reinsurance. So that's one thing that should safeguard us from a lot of heavy volatility there. We do also believe in general that the benefits ratio will be lower under LDTI because of the fact that you get these sort of open up or unlock all these historical assumptions that, one, have -- there's been mortality improvements since these were set.

And initially, they were also set with pads. that benefit ratio should be lower than we've seen typically under current GAAP. The one caveat, and we, quite frankly, aren't finished with the full work around it is just to see [Audio Gap] how COVID, which, again, because of the way LDTI treats experience variances, some of what we've already recognized in our GAAP P&L for COVID will actually be spread into future periods, some would have an offset. But all in, we do expect benefit reserves to also emerge much lower than it currently did.

I did -- just one more thing on DAC amortization, I'd say one other thing -- One other thing, and this is -- it's actually not in Term Line. This is in our ISP segment. The DAC amortization on the SEG fund, you saw it this quarter had a $4 million a different level of FAS97 type of accounting. And so one nice thing will also go to a straight line type of method. So a lot of the volatility...

[Mark Hughes, Truist Securities]

We say benefit ratio lower, it sounds like that's hundreds of basis points potentially, is that the magnitude?

[Alison Rand, EVP & CFO]

Yes. So again, at this point, and we're being very aware where we are with regard to our controls, our stock documentation and the like to make sure that we don't give out numbers ahead of where we've gotten everything nailed down.

So I can't quantify it at this point, although I think if you just want to think about things along the lines of all the our book of business, those should really start to flush back out to have -- under the current gap. The other thing to remember that mortality risk. So it's only the volatility on the exposure that we retained. I don't want to say nothing changes because of the pieces that are reinsurers. But those costs, if you will, are pretty locked in.

[Mark Hughes, Truist Securities]

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

[Glenn Williams, CEO]

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

[Mark Hughes, Truist Securities]

Yes, exactly.

[Glenn Williams, CEO]

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

[Mark Hughes, Truist Securities]

Yes, very good. And then one other question, the senior health policies in the quarter, [audio gap] were from Primerica reps?

[Glenn Williams, CEO]

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

[Mark Hughes, Truist Securities]

Okay. Thank you very much.

[Operator]

Our next question comes from Andrew Kligerman of Credit Suisse. Andrew, your line is now open. Please go ahead.

[Andrew Kligerman, Credit Suisse]

I was wondering on Senior Health. You talked about a model to improve activity, maybe a little color on that to that segment -- debt to profitability. I know you're predicting $35 million loss this year. Where might you see some light at the end of the turnoff for this? A lot of questions.

[Alison Rand, EVP & CFO]

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

We do, as I said during my prepared remarks, expect there to be a loss this year -- at loss with almost no if possibly no, I said less than $10 million need for funding. So we're very -- how much money we're putting into this business as it tries to rebuild and work through the dynamics of the industry itself.

So I will say our focus has been very much on how much capital we put in, and it's one of the reasons why we're actually keeping the number of agents that very low, which Glenn will get to in a moment.

But with that said, we do expect our key -- Our goal is to get to a point where we can make a profit this year during AEP and then look to next year for AEP in the first quarter to really be a continued driver of that profit.

We're not -- again, because we're being very cautious about this and very focused on how much cash we want to put into this business, we are not going to take our foot completely off the break until we really think it will still take us several quarters to assess how we're doing.

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

[Glenn Williams, CEO]

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

[Andrew Kligerman, Credit Suisse]

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

[Glenn Williams, CEO]

Well, we're working through all the levers of trying to make sure -- that's down from about 400 at the beginning of the year. So we are working toward our most productive agents reducing force of those that are not productive and not profitable.

And so that's part of our process right now as we're finding our productivity dynamics and focusing on the most productive, most profitable reps, as well as working with care could be a product flow and so we work with characters on changing or improving the products. So we're pulling all of those levers and watching productivity dynamics change. And things are moving in a positive direction, but we've got significantly more work to do.

[Andrew Kligerman, Credit Suisse]

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

[Glenn Williams, CEO]

Yes, Andrew. As we've talked about in many of our discussions over the years, our client base tends to react a little more slowly to market events then maybe a higher income client base would. And so generally, when things start turning down, we have some resistance to that for a period of time. And then when things start normalizing, it takes us a little longer, ongoing stability and even improvement. Then hopefully, we'll see that turnaround start to take place. Just not sure if what's left in the third quarter if we can see it by then. So we're trying to take a reasonable approach to that. .

[Operator]

Our next question comes from Ryan Krueger of KBW. Ryan, your line is now open. Please go ahead.

[Ryan Krueger, KBW]

That was a bit of a different question maybe for Alison. Could you talk a little bit about how much the rough amount of annual dividends you'd expect to normally take out of your U.S. Life stubs? I know it posed around a fair amount.

[Alison Rand, EVP & CFO]

Yes. [Audio Gap] bit of thought that's not necessarily something -- and you can actually see it if you look at the blue book, but that number is rising. We had a little bit -- I'll give you color on the dynamics.

So we did have some anomalies going on a few years to go with regard to how the XXX transactions, how the economic reserves. That's behind us. It was constrained -- We actually have seen I'll give some color. We are increasing our expectations by about $50 million for next year from what we had been thinking may be.

So all in, the signs are pretty strong. We also ended up with -- that's one of the things because we ended up with a 450% RBC, that is, in our opinion, more than we need to have as the life insurance company. So part of that $50 million is bringing that back down closer to, let's say, the $420 million level with obviously our target being not going below $400 million. .

So we monitor that. We obviously want to make sure we keep enough capital in the company to -- for two reasons, the reason the two that I'll throw out for you. One is to make sure we support any kind of growth initiatives we have at the life insurance company; and two, to maintain our ratings.

One of the key drivers of the strong range that we have is our robust capital position. So with all that said, I see the number coming out of the life insurance companies, the operating unit is very stable. I think there'll be improvement annually and we're looking to...

[Ryan Krueger, KBW]

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

[Alison Rand, EVP & CFO]

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

And back then, we did see it not just on any one duration we saw across the board, that's where we see the impact -- happening from sort of what's going on in the market. I will tell you, I haven't seen the up or down notably because of the economy since then. COVID deterioration across the board in at both Glenn and I pointed out was that our average base amount -- on the ISP side, we're not seeing higher redemptions. So all the -- in an intact is the economy was really deteriorating our business.

[Glenn Williams, CEO]

Yes. I would echo Alison's comments. As we look at sales, we really -- we would expect to see that in -- we're not seeing it in smaller sales size is staying very consistent, continuing to grow. And anything specific in the number of sales, and that could be a balance in the positive good sentiment of the importance of protecting family and so forth.

We expected a tell you, we've talked about that in previous quarters that we'd expect to get some positive benefit from that just kind of a stale made against on sales, and it's kind of holding in place. So it's a lot of there, a lot of supposition but at the same time, the net results is we're pleased with where we are in this environment, kind of regardless of what's causing it exactly. We feel good about where we are.

And to the previous question, if we can hang on until things turn around, then sometimes we state across some of the to a positive footing accelerate our growth from here.

[Ryan Krueger, KBW]

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

[Glenn Williams, CEO]

Not in that period. As Alison said, it's just only been in the most severe both severe and extended, I would say. .

[Operator]

[Operator Instructions] Our next question comes from Jeff Schmitt from William Blair. Jeff, your line is now open. Please go ahead.

[Jeff Schmitt, William Blair]

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

[Alison Rand, EVP & CFO]

And one quarter in, I'm reluctant to say there's a trend or a change in the feature. I will say -- obviously have listened to what others in the state have said specifically some of the reinsurers like We've spoken to some of our other reinsurers. And there has definitely been an improvement that they've all give me some feel that this could actually be something that's positive for us.

Again, we're keeping an eye on it. We're not going to automatically assume -- with us, but we are seeing the indicators, especially given what other people in the space have been saying publicly as well.

The one thing I'll point out is sort of an usual amount of it was in Canada. So that piece of it, I do speculate it may be more of what we would call regular volatility, but that only makes up about half of what we saw. So there is definitely some upside there. We are just waiting to see what develops before we say. In fact, we actually believe mortality improvement is here.

[Jeff Schmitt, William Blair]

In the ISP business, net flows were close to 4% in the quarter. I think well in 2020 and now begin after one of the toughest first half is in the stock market in a long time. Could you maybe talk to the industry?

[Glenn Williams, CEO]

I mentioned in my prepared remarks, Jeff, the -- we do see a stickier set of assets, we believe, in the industry -- a little hard to draw a beat on it because the comparisons are imperfect, the reporting on the data is -- our long-term systematic investment in taking a impacted by trying to time the market and so forth, serves us well, serves our clients well.

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

[Jeff Schmitt, William Blair]

Okay. Great. On mortgage business, is there a cost structure there that's up the contract I'm just kind of a 50% decline in mortgage volume. Is that driving losses in that business now?

[Glenn Williams, CEO]

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

[Operator]

Next question is from Daniel Bergman of Jefferies. Daniel, your line is now open. Please go ahead.

[Daniel Bergman, Jefferies]

So thank you for the detail -- I wanted to see if there's any more color you could get compared to your prior expectations and kind of what you saw in the first quarter that I think the DAC amortization ratio came in a little bit above the guidance you had previously given.

And just given this trend, coupled with pressure from inflation or recession, just how are you thinking about the risk that persistency could continue to worsen ahead instead of stabilizing our current levels? Any additional thoughts on that would be great.

[Alison Rand, EVP & CFO]

Yes. And again, it's interesting to watch. As I said in my prepared remakes, seasonality in the numbers. So putting that aside and our -- we've had set in the business because of COVID, that it's hard to actually isolate what's causing any trend or steadily, if you will, something will normalize.

I think -- the first 2 duration, we never had any doubt that some of the business we were selling during the COVID, the height of the pandemic was the surprise that those particular blocks are not performing as well as perhaps pre-pandemic mark. But I do think the fact that we're seeing everything else still come in favorable is a positive notion about where it will land and stabilize.

Again, we're not necessarily saying we need to see any improvement from what it looked like pre-pandemic because we actually think where we were pre-pandemic was very strong. We're putting everything in the context of can we get back to that level of consistency, profitability, et cetera. And as of now, we believe we still are on that path.

[Daniel Bergman, Jefferies]

SP1 Got it. That's very helpful. And then maybe switching gears, just to follow up on your prepared remarks about the convention and the message you delivered there. I just wanted to see if there's any additional color you could provide on the event and whether there are any specific incentives or initiatives you rolled out? I think you might have mentioned the recruiting incentives, is just any way to help us think about how the conference could affect near-term trends or third quarter results in terms of recruiting our product sales would be great.

[Glenn Williams, CEO]

Big event post COVID. And as we said, we did see some challenge with the crowd size. Also, we're very pleased with almost 35,000 in attendance. It was down a little bit from 2019 for the obvious reasons. There was no surprise there. I think if we that the desire for our -- we said kind of let's look to the future instead of looking back on the rough path we've all been down as the society for the last few years. It was very refreshing.

It was very healthy. We talked about the importance of our goals of growing our sales force because that enables us to both impact more families positively and create more success for our sales leaders themselves. And so that was the focus of the event is that we need to be bigger to reach a larger market and to create more success for all constituencies of Primerica.

And that message was not only received well, it was jointly carried by the sales force speakers. The majority of speakers of that have been a lead us to the sales force in addition to Peter and me and Julie and other home office leaders and we were all only shared with the sales force. .

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

And so as I said, we're expecting extraordinarily strong -- in addition to the increased optimism you have on going the size of the sales force. So we counted as a very successful event.

[Operator]

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