Earnings Call Transcript
Primerica, Inc. (PRI)
Earnings Call Transcript - PRI Q4 2021
Operator, Operator
Welcome to today’s Primerica Q4 Earnings Results Conference Call and Webcast. My name is Nate and I'll be the moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I’d like to now pass the conference over to Nicole Russell with Primerica. Nicole, your line is open. You can go ahead.
Nicole Russell, Moderator
Thank you, Nate, and good morning, everyone. Welcome to Primerica's fourth 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 our 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 as modified by subsequent Forms 10-Q and the press release filed with our Form 8-K dated July 1, 2021, for a list of risks and uncertainties that could impact actual results. We will also reference certain non-GAAP measures, which we believe will 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. Fourth quarter and full year results continue to reflect the strong demand for our financial solutions and the resilience of our business model despite the uncertainties caused by the pandemic. Adjusted operating revenues increased 22% compared to both last year's fourth quarter and full year 2020 results. Diluted adjusted operating income per share increased 20% quarter-over-quarter and on a full year-over-year basis. Fourth quarter investment product sales remained well above our prior year period levels, while sales in the Term Life business continued to normalize as expected. In our Senior Health business, results from our first annual election period were weaker than expected due to a combination of lower sales volume and higher contract acquisition costs. We incurred a preliminary noncash impairment charge of $76 million during the fourth quarter. Continued elevated policy churn in the senior health market was a significant driver, along with other factors such as e-TeleQuote's recent financial performance and the decline in market values of publicly traded peers. Alison will address this impairment and our financial outlook for Senior Health in her prepared remarks, and I will expand on our plans to address e-TeleQuote's operational challenges in a moment. Taking a closer look at how the pandemic has impacted our distribution results on Slide 4. After nearly two years of COVID disruptions, our sales force has adapted extremely well to new ways of conducting business. Recruiting remains strong, built by greater utilization of web conferencing technology and more recently the great resignation, which has created a record number of individuals looking for alternative career paths. The licensing process remained constrained by many of the challenges we discussed in the past, including various limitations from state and provincial social distancing measures and individual comfort level when it comes to congregating in larger groups. Initially, we were encouraged when restrictions began to ease. However, our progress was again delayed with the reemergence of a new COVID variant. We believe it could take several more quarters before the licensing process returns to its pre-pandemic levels and suspect that our licensing results will remain under pressure through the first half of 2022 before gradually improving later in the year. Despite licensing headwinds, we ended the year with around 129,500 life licensed representatives versus 130,500 at the start of the pandemic. This is particularly noteworthy considering the numerous challenges we had to navigate during the pandemic. We continue to see significant opportunities to increase the size of our sales force as demand for our products and services continues to outpace our reach and competition for middle-income consumers remains relatively low. In addition, our entrepreneurial opportunity is very attractive in the current environment as demonstrated by strong recruiting numbers. Our success in growing the sales force from here will depend on continued strong recruiting and adjusted licensing efforts through increased focused leadership, more effective communication, and licensing incentives. Beyond the licensing process challenges posed by the pandemic, some improvements are needed to make test preparation more convenient and effective. While the process requires constant adjustment to remain effective, these changes are within our control and remain the building blocks of success. We expect long-term growth in the size of our sales force to be in the low to mid-single-digit range, although it will not be linear from year to year. In the near term, we anticipate growing the sales force around 2% in 2022. Turning next to Slide 5. As anticipated, Term Life insurance sales volume continued to normalize following a period of heightened fear and urgency that was created by the pandemic. We continue to see strong sustained demand for protection products with sales volumes in each quarter of 2021 above the pre-pandemic baseline level for their respective periods. We ended the year with over $900 billion of face amount in force, which represents a year-over-year increase of 5% and positions Primerica as one of the top issuers of individual term life insurance in North America. Looking forward to the future, we believe we can continue to build on the momentum that started mid-year 2019. Based on our current outlook, we expect full year 2022 Term Life sales to increase slightly over 2021's near-record levels, with first half results trailing the 2021 period and the second half of the year increasing versus the prior year period. Slide 6 summarizes results from our Investment and Savings Products segment. We ended the year on a strong footing with quarterly sales once again exceeding $3 billion and full year sales up nearly 50% versus last year's record-setting pace. Net flows remained at record levels throughout the year. And when combined with favorable equity market appreciation, led ending client asset values to a nearly 20% increase and a record-setting $97 billion at year-end. Our opportunity in the ISP business remains very attractive with more than 26,000 reps currently licensed to sell mutual funds. Given current levels of market volatility and uncertain economic conditions, we are projecting a more modest single-digit growth rate for investment product sales in 2022 versus 2021's record-breaking year. Included in this assumption are changes to the commission model in Canada that go into effect on June 1, which will require us to discontinue the use of mutual funds with the deferred sales charge compensation model, which is the primary model we currently use in Canada. We have plans to address this change, but it could create short-term disruptions in Canada as the field familiarizes itself with a new series of funds that will be sold exclusively by Primerica mutual fund licensed agents and with the new compensation model. Canadian mutual funds currently represent approximately 13% of total Investment and Savings Products sales. While there are many unknown factors that could derail investor confidence, our education-based approach helps focus investors on their long-term goals. Our licensed representatives continue to play an important role in keeping clients invested for the future. Turning next to the senior health market and our recent acquisition of e-TeleQuote on Slide 7. So far, Senior Health has underperformed expectations. This has been driven by a number of factors impacting the sector generally and e-TeleQuote specifically, including increased policy churn, which has reduced expected lifetime revenues, lower overall sales volume, and contract acquisition costs above anticipated levels. Starting with churn. While the reasons for churn are challenging to pinpoint, we believe this trend is driven in part by increased consumer awareness of the advantages of shopping for plans regularly and broader competition within the space. We monitor churn by carrier and stop selling carrier plans in certain geographies or altogether if their levels of churn remain outliers to other carriers. We are also evaluating other approaches to improve policy retention such as client affinity campaigns and predictive lapsation algorithms. Next, addressing sales volume. Just prior to the annual election period, or AEP, CMS imposed a regulatory change in its marketing material review process, which led to a slower start to AEP. Additionally, as I mentioned last quarter, we entered AEP below desired staffing levels. Historically, the starting agent count remains largely intact through AEP as agents typically do not attrite voluntarily, giving the selling opportunity. However, agent attrition in the fourth quarter was substantially higher than in past years. We believe this is a result of tight labor markets and employees from many sectors stepping away from traditional work. On a related labor and agent point, we have continued to see a falloff in productivity with our agents operating in a work-from-home environment. We continue to work to address ways to improve productivity, including a revised recruiting approach, formalized long-term hybrid work arrangements, compensation adjustments, and other strategies. Finally, with respect to contract acquisition costs, the labor issues I just described contributed to contract acquisition costs being higher than expected. Additionally, while we actively manage lead sources and mix, some sources proved less attractive than anticipated. We are adjusting our Senior Health business going forward to address the challenges that we and the industry as a whole are facing. Areas of investment include the continued build-out of the management team and growing a robust data science practice to better identify the best leads and route them to agents with the highest probability of closing. In 2022, our focus will be on addressing the fundamental issues I've just outlined and growing the business responsibly. As we tackle necessary changes, we will build our agent count and sales volume more slowly than originally planned. While the challenges are bigger than anticipated, the strategic rationale for acquiring e-TeleQuote remains unchanged. And the growth characteristics in the senior health market continue to exist. Offering senior health products allows us to provide an important service to the growing middle market senior population that can further strengthen their relationship with Primerica. The additional product line expands the income opportunity for our sales force and can facilitate sales of our core products. Over the long term, we expect the company and our stockholders to benefit from this acquisition. Early indications are that leads sourced by Primerica reps have an advantage due to the existing relationship between the rep and the client. We believe this is a competitive advantage within the space. We remain committed to e-TeleQuote and the senior health market. Now I'll turn it over to Alison.
Alison Rand, CFO
Thank you, Glenn, and good morning, everyone. I will start on Slide 8 by continuing the discussion on Senior Health, focusing on recent financial results, the goodwill impairment charge, and our outlook for the segment. I will then review financial results for our other segments, highlighting some key factors impacting our 2022 outlook. I'll conclude with a discussion of operating expenses and capital and liquidity. E-TeleQuote, along with other senior health distributors, has experienced elevated policy churn from carrier product changes and heightened competition, which, when combined with recent financial performance and the declining market values of publicly traded peers, triggered the need to review goodwill for possible impairment. The analysis entails creating new financial projections and updating cash flows for the business as well as an assessment of peer company market-based indicators. The derived fair market value was compared to the carrying value of the Senior Health segment, which includes the $515 million purchase consideration at the time of acquisition plus results of operations. Note that the $515 million reflects 100% of e-TeleQuote, including the 20% stake not currently owned by Primerica as valued using the formulaic price in the purchase contract. As a result of our analysis, we recorded a goodwill impairment charge of $76 million in the fourth quarter, which is preliminary and subject to change until we file our Form 10-K on or before March 1. The company excludes the goodwill impairment from operating results as it represents a nonrecurring item that causes incomparability of the company's core results from period to period. The critical component of our cash flow projections and approach to revenue recognition for our Senior Health business is the expected persistency curve for policy cohorts. Since the closing of the e-TeleQuote acquisition on July 1, 2021, we have been building a new algorithmic model that uses real-time trends in cash collections on the in-force book of policies to predict lifetime commissions for newly approved policies and update expected collections of renewal commissions for policies approved in previous periods. The model incorporates our accounting policies for calculating renewal commissions under the expected value approach, which in some cases differ from those historically used by e-TeleQuote. To conform e-TeleQuote's accounting policy to ours, we adjusted their preliminary allocation of the purchase consideration by lowering the renewal commission receivable as of July 1, 2021, by $46 million to reflect persistency experience as of the acquisition date. We made other changes to the purchase consideration allocation during the quarter that resulted in a revised goodwill balance of $255 million as of the date of acquisition. The allocation continues to be preliminary and subject to change until the end of the measurement period on July 1, 2022. The goodwill balance as at year-end of $179 million is the $255 million net of the $76 million impairment we just discussed. The new revenue recognition model was used to determine the expected lifetime value of commissions, or LTV, of $1,069 for policies approved during the fourth quarter. It was also used to update expectations for renewal commissions receivable on policies approved in previous periods based on changes in persistency estimates since the acquisition date. The result was a $5 million negative tail adjustment from continued shortfalls in cash collections in recent periods. Further to Glenn's earlier remarks, we plan to thoughtfully manage growth in Senior Health, while we adjust how the business is managed to address the challenges that we and the industry as a whole are facing. We expect operating income before income taxes for the segment to be negligible, including some continued deterioration in cash collections versus aggregate historical trends in 2022. The negative cash flow for this segment has been greatly reduced and is expected to be about $10 million to $15 million for 2022, including the cash tax benefit of NOL carryforwards that were acquired with the business. Under our current plans, which may change based on our success in addressing challenges in the business, we expect negative cash flow from the Senior Health segment to be less than $75 million in the aggregate before turning positive likely in 2027. While near-term risks are nominal, we continue to believe there is real opportunity for Senior Health to be a strong contributor to earnings in future years. Turning now to Slide 9, showing our Term Life segment. Operating revenues of $409 million grew 11% year-over-year, driven by a 12% increase in adjusted direct premiums. Growth in premiums continued to benefit from the compounding of nearly two years of strong sales and better policy persistency driven by COVID. Combined, these added $13 million to pretax income compared to $7 million in last year's fourth quarter. The operating pretax margin, which is generally lower in the fourth quarter due to normal seasonal patterns, was 18.6%, up slightly from last year's 18.2%. COVID continues to adversely impact benefits and claims. The fourth quarter of 2021 included an estimated $17 million in COVID-related net death claims, up from $14 million in last year's fourth quarter. The rate of COVID mortality in our insured population remained in line with the rate observed during the third quarter at around $14 million for 100,000 deaths in the U.S. and Canada. Current period results also included around $2 million in excess net death claims that were not specifically identified as COVID but may be indirectly linked due to the delay of medical care or the increased incidence of behavioral health issues. We expect this level of quarterly excess death claims to continue in 2022. Although total excess net death claims increased $5 million over the prior year quarter, the benefits and claims ratio declined by 130 basis points. The primary reason is the annual locking in of assumptions for new business, which typically takes place during the fourth quarter. This year's process had a negligible impact on current period results, whereas in the prior year period, a reduction to the long-term interest rate for new business resulted in a $5.5 million increase in benefit reserves. Persistency remains strong with aggregate lapses around 20% below the pre-pandemic baseline and early duration lapses around 10% below the baseline. Quarterly pretax income continues to benefit from elevated persistency with DAC amortization lower by $11 million and reserves higher by $7 million for a net positive $4 million impact versus the pre-COVID baseline. The corresponding net benefit was $10 million in the prior year period when lapses were at unsustainable record lows. As we look ahead to 2022, we expect modest growth in Term Life sales, as Glenn discussed earlier, and lapses to normalize at an aggregate level approximately 10% better than the pre-pandemic baseline. Considering these factors, we expect year-over-year adjusted direct premium growth, which slowed in 2021 from 16% in Q1 to 12% in Q4, to be around 9% on a full year basis in 2022. Based on published projections for COVID deaths and the anticipation of no new deadly strains emerging, we expect COVID-related net death claims to be around $20 million in 2022, largely occurring in the first half of the year. We anticipate the recent trend of excess non-COVID claims to continue at around $2 million per quarter throughout 2022. Considering these combined factors, we expect the full year 2022 pretax operating margin to be largely consistent with that experienced in 2021. We continue to work through the intricacies of implementing targeted improvements to the accounting for long-duration contracts, or LDTI, which goes into effect next year. The new guidance changes the way in which both benefit reserve changes and DAC amortization are recognized through earnings. It requires the remeasurement of reserves no less than annually and modifies the way experience variances and changes in assumptions for the entire imports are recognized through earnings. It also requires DAC to be amortized on a constant level basis over the expected term of the related contract versus the level percentage premium approach used today. We plan to adopt the new guidance on a modified retrospective basis with reserves and DAC adjusted prospectively beginning January 1, 2021. We are finalizing our accounting policies under LDTI in developing and testing the many actuarial assumptions and models needed for implementation. We expect to provide quantitative information on the impact to prospective earnings when we report second quarter results. The guidance also requires that the discount rate for measuring reserves be updated at each reporting period, using an upper medium grade fixed instrument yield with resulting reserve changes reflected through equity in accumulated other comprehensive income. Under the current guidance, the discount rate is locked in at issue and is based on the expected yield of the invested assets that support the reserves. Given the weighted average age of our reserve liability, the average locked-in discount rate is about 5.25%. Remeasuring reserves using the discount rate methodology required under LDTI in today's rate environment will result in a significant change to accumulated other comprehensive income as of the date of adoption. We will also introduce volatility in AOCI as investment yield environments change over time. We plan to remove the impact on AOCI from operating results where applicable and plan to provide quantitative details when we announce second quarter results. As a reminder, this new standard modifies the timing of profit emergence under GAAP, but does not impact the economics of the business, nor does it change the company's cash flow or statutory capital requirements. It will not change our ability to distribute capital from Primerica Life or our ability to deploy capital at the holding company level. Turning now to our Investment and Savings Products segment. Operating revenues of $247 million increased by 28%, and pretax income of $71 million increased by 25%. Sales and asset-based revenues grew in line with the rise in revenue-generating product sales and average client asset values, respectively. Sales-based commission expenses rose more quickly than sales-based revenues due to a $4 million adjustment of field bonuses during the quarter that reflected outstanding performance in 2021. Asset-based commission expenses increased in accordance with the related revenues. As Glenn mentioned, we expect ISP sales and market appreciation to return to more traditional growth levels in the mid-single digits for 2022. Operating margins for the segment are anticipated to remain stable. In our Corporate and Other Distributed Products segment, our adjusted operating loss of $22.3 million increased by $4.2 million year-over-year. This increase is primarily attributed to $3.6 million less allocated net investment income from lower portfolio yields and a higher allocation of net investment income to the Term Life segment to support the growing block of business. We also incurred higher interest expense from approximately one month of overlap in senior notes prior to the extinguishment of our 2012 notes. Offsetting these items was $2.9 million lower benefit and claims due to a reserve adjustment on a closed block of business in the prior year period. On Slide 11, consolidated insurance and operating expenses for the fourth quarter were largely in line with our expectations. Looking ahead to 2022, we expect insurance and other operating expenses to increase by about $80 million or 16%. About 1/4 of the increase, or $20 million, reflects a full year of Senior Health segment expenses versus six months in 2021. Of the remaining $60 million, we expect approximately 50% to be incurred in Term Life with the remainder split about evenly between ISP and Corporate and Other. The 12% year-over-year growth in our core business is driven by various factors, including growth in premiums, average client asset values and other business metrics, increased staffing costs from annual employee benefits and merit increases, service level improvements, and higher instructor salaries for more in-person licensing classes. And continued investment in technology to modernize platforms, enhance initiatives such as the mortgage program and our CRM system and accelerate our speed to market. Also note that with the delay in the convention from 2021 to 2022, we are incurring the cost of two field leadership trips, and the convention this year when in a typical year only two of the three would be incurred. Finally, on Slide 12, liquidity at the holding company remains very strong with invested assets and cash of $295 million. Primerica Life's statutory risk-based capital ratio is estimated to be 440% at year-end, and we anticipate maintaining the RBC ratio at around 420% in 2022. The performance of our Term Life and ISP businesses continues to drive strong levels of deployable capital. And as a result, the Board of Directors has increased the previously announced share repurchase authorization of $275 million by $50 million. Approximately $20 million was completed in 2021 and the remaining $305 million is expected to be completed this year. With that, I will turn the call over to the operator for questions.
Operator, Operator
Our first question goes to Andrew Kligerman with Credit Suisse. Andrew, your line is open. You can go ahead.
Andrew Kligerman, Analyst
Hey, good morning. Glenn, could you remind me again of what you expect recruiting to be up this year? You had mentioned a bunch of numbers, and I wanted to make sure I got that.
Glenn Williams, CEO
Yes. We expect recruiting to be up slightly this year, Andrew. We have used a lot of special incentives over the last couple of years, and we're trying to wean ourselves off of those. That puts a little pressure on it. But you do get a little less committed recruit when, generally, they've been enticed with a special incentive. So there's a pro and a con to each approach. But we do believe we're going to be up slightly this year overall over 2021 full year.
Andrew Kligerman, Analyst
I understand. As I reflect on the recruiting, you have experienced times of significant success. Is there anything different happening that we should consider for 2023 regarding a substantial increase in recruits? What changes in strategy might generate excitement about growth in the intermediate term?
Glenn Williams, CEO
Yes. Well, I think you've got to look beyond just the top line recruiting number, Andrew, because that's a number that's, as I said, easily influenced by the things that we do, but it's only a piece of us growing our sales force. So we're very pleased with the level of recruiting. We do think we're getting a tailwind from the great resignation, as I mentioned in my opening remarks, and that people on the move between careers are often interested in taking a look and maybe even taking a try at building a Primerica business. As we've mentioned throughout the pandemic, the challenge lies in the changes to the licensing pull-through because recruits need to be both field trained and licensed simultaneously. During the pandemic, we shifted to a remote-licensing process, which was our only option at the time. We quickly recognized that this situation highlights the balance between effectiveness and efficiency. While online programs offer more convenience and flexibility, leading to higher signup rates, we noticed that fewer participants actually complete the process. The increase in signups comes with the drawback of lower completion rates. The main reasons for this are a lack of accountability, discipline, and visibility. When participants attend in-person classes, it's easier to monitor their progress and provide encouragement and accountability. We are now working towards finding the best combination of both programs as states and provinces normalize our ability to implement them. Ultimately, the focus is on how successful we are at improving the pull-through rate in our licensing process, which is crucial for driving top line recruiting in the years to come.
Andrew Kligerman, Analyst
I see. That's very helpful. And then just maybe just shifting over to Senior Health. And Alison cited, I think was $75 million in negative cash flow in 2022 and then turning slightly positive in '23. So I guess, moving out...
Alison Rand, CFO
Andrew, I need to clarify something. The $75 million is actually the total negative cash flow we expect before it turns positive, likely around 2027. For 2022, the negative cash flow is probably in the range of $10 million to $15 million.
Andrew Kligerman, Analyst
Okay. Good correction. Okay. That's good to hear. So as we look out to '23, what gives you confidence that you can get your earnings back on track, cash flow to a positive number? What are the potential signs that are giving you any confidence that this business is attractive?
Glenn Williams, CEO
Well, we like the opportunity, Andrew, in the space and particularly the alignment it has with Primerica. That was our whole strategic analysis over multiple years and looking at all types of potential additional products to use the strength of our distribution to get into the marketplace. And of course, we chose, too, the mortgage business that we talked about that's a partnership and then the acquisition in the senior health space. And we continue to believe that the growth in that space, the need for the product, once again, some similarities to the life insurance business where maybe the middle market is not getting all the attention it could, kind of the things that are in our sweet spot within our other businesses, we all see true in this business. It's clearly a business that's gone through a significant transition in the last year or so, and that's what we're adapting to. But we do believe that we're a company that's good at the blocking and tackling the business and we believe we can adjust to those fundamental changes, and then we can apply the synergies of our two organizations to give us an edge in the marketplace over the similar models. And so we believe with a couple of years of hard work, we're going to get this to the right place.
Andrew Kligerman, Analyst
Okay. Thank you.
Operator, Operator
Thank you, Andrew. Our next question goes to Ryan Krueger with KBW. Ryan, your line is open. You can go ahead.
Ryan Krueger, Analyst
Hi, thanks, good morning. I guess the amount of free cash flow drag from senior health in your projections has changed quite a bit. I was hoping to understand the key drivers a little bit more. I guess, is a lot of it that your growth expectations have declined and so that will consume less of cash? Or could you just provide a little bit more detail on some of the key changes?
Alison Rand, CFO
Sure, you identified the main point. I've mentioned this before: similar to life insurance, adding new business can negatively affect cash flow due to high upfront costs, with revenue coming in over time. The distinctive aspect of our business is that we can recognize all revenues immediately under accounting rules, unlike insurance where revenues are matched with expenses through deferrals. A significant reason for our current approach is to ensure that we're adding business that offers a healthy return. We're concentrating on the ratio of lifetime value to contract acquisition costs and similar metrics. We aim to avoid overwhelming the business with new entries that would lead to cash burn without delivering genuine value, both in terms of GAAP and economic worth. This cautious approach allows us time to address issues mentioned by Glenn, like labor market changes, and to understand how churn stabilizes, as some of it is beyond our control. We're committed to adding substantial business only when we are confident in our economic management.
Ryan Krueger, Analyst
Got it. That's really helpful. Regarding cash flow generation, how do you view the $325 million buyback authorization and the common dividend? Can you explain the extent to which this might use some of our excess capital compared to the ongoing free cash flow generated by the businesses in 2022?
Alison Rand, CFO
I believe I understand your question. The best way to answer it is to say that all of the share buybacks we plan to undertake during 2022 will come from the capital generated and made available in 2022. Currently, we have $295 million at the holding company, but it's not primarily from that amount. Rather, it will come from the sources of capital we expect to have from our key businesses, including ISP and life insurance. I think that addresses your question.
Ryan Krueger, Analyst
Yes. No, that was. And then if I could just sneak in one real quick. What was the number of COVID deaths that you assumed when you were talking about $20 million of COVID claims?
Alison Rand, CFO
I believe the figure was around $14 million for every $100,000, which comes to approximately $140,000. We calculated this based on the $14 million per $100,000 rate that we observed in both the third and fourth quarters. This number is derived from our current data sources which they have indicated to us. However, I want to emphasize that this assumes there are no new deadly strains that could emerge, and this is the basis for our calculations. Additionally, our sales and persistency are also based on this same perspective.
Operator, Operator
Thank you, Ryan. Our next question goes to Mike Zaremski with Wolfe Research. Mike, your line is open. You can go ahead.
Mike Zaremski, Analyst
Good morning. Thank you for taking my question. My first inquiry relates to the health operations. Is the $50 million earn-out still applicable given the missed targets so far? Additionally, regarding the 20% stake that Primerica does not own, is the price fixed or can it be negotiated based on current and future performance?
Alison Rand, CFO
I will address both points. Regarding the earn-out, I want to remind you that when we initially recorded the purchase consideration, we assigned no value to the earn-out. This remains unchanged, and currently, there is no value attributed to the earn-out. Based on our current projections, we do not anticipate that any amount will become payable under that clause. As for the remaining 20%, I mentioned in my prepared remarks that the $515 million original purchase price represents the total enterprise value. This includes not only what we acquired but also the fair market value of the remaining 20% at that time. This figure is determined using a formula specified in the purchase agreement. It is a predetermined formula that depends on the performance of e-TeleQuote, along with a discount to the performance of peers.
Mike Zaremski, Analyst
Okay, that makes sense. Moving on to Canada, I understand there is a new mutual fund commission schedule. Could you provide additional details? Is this eliminating the trail commission? Also, will this new commission structure be applied across the industry? Will your sales team still be able to earn the same compensation under the new structure, assuming everything else remains equal?
Glenn Williams, CEO
Yes, Mike, that's a great question. This has been in development in Canada for several years. We've been aware of it and have been working with regulators and providers as it has progressed. It's not the elimination of trail commissions but rather one method for upfront commissions. Trail commissions will continue. The deferred sales charge associated with this model actually finances the upfront commission payment from the fund provider, which is not charged directly to the consumer. Instead, it's funded through ongoing product expenses or a redemption fee if the client exits the account within the first few years, typically around seven years. This option is being removed as a product choice, affecting the entire industry, not just us, meaning anyone selling those products will experience changes. There are other models in the marketplace that will continue, and we are pursuing a new product model with some of our key providers in Canada. These products will be unique to our company and sales force, although other companies may create similar products for their distribution. So it's not entirely unique to us, it doesn't have to be entirely unique to us, although as far as we know, there are not a lot of other players as far along in this process as we are. And we've been working with our sales force on this change and how it could impact their cash flows and their businesses and so forth. And actually, it's been a long-term process that we've been working on for more than a year specifically. And we believe we have our sales force ready to make the change, although all of that is theory, and we would expect some disruption in the product change like this in the months surrounding it mid-year. And so we just wanted to make everyone aware that if we see some noise around our Canadian numbers just before and just after the June change, it would be expected, but we feel good about our prospects. So we have a very strong ISP business in Canada, and we expect that to continue in the future.
Mike Zaremski, Analyst
Got it. Just to follow up, is there a way to compare the new series of funds to the existing ones? If your sales team sold the same amount of both, would the compensation be similar, a bit lower, a bit higher, or is it not comparable?
Glenn Williams, CEO
Yes, it's quite similar. The timing is an important factor. The previous DSC model offered upfront compensation that was financed over an extended period through the methods I previously outlined. We will explore options for advanced commissions. Essentially, the overall commission model remains similar, but there could be some timing differences. This isn't much different from the changes we've observed in U.S. products over the last decade, where a larger portion of compensation for distribution has shifted from being sales-based to asset-based. We are moving in a similar direction, which provides us with some insight into how this change may unfold, given our prior experiences with this shift in the U.S.
Mike Zaremski, Analyst
Very helpful. Thank you.
Operator, Operator
Thank you, Mike. Our next question goes to Mark Hughes with Truist. Mark, your line is open. You can go ahead.
Mark Hughes, Analyst
Okay. Thanks. Good morning. Alison, did I hear you say that the earnings from Senior Health this year ought to be negligible? And if that's the case, could you give us some sense of the kind of quarterly trajectory of earnings? I think Q1 was kind of not the seasonally strongest, but was expected to be profitable? And then anything on approved policy counts would be helpful as well.
Alison Rand, CFO
At this time, we're not sharing any forward-looking information on approved policies. From a quarterly perspective, we believe the beginning of our goals involves many of the improvements in the areas of focus mentioned by Glenn, which we aim to address early in the year. We hope that by the time we reach AUP, we've managed to resolve some of these issues and deliver stronger results in the fourth quarter. Generally, I would say that the fourth quarter is expected to be the best, with the first quarter as the next strongest, while the third quarter often experiences some setbacks as we ramp up sales agents. I want to note that since we are trying new strategies in this new business for us, our approach to ramping up agents will differ this year, making predictions more challenging. Additionally, the timing of tail adjustments remains uncertain, so results may be inconsistent. Therefore, I cannot provide specific figures for each quarter. Overall, we expect most of the earnings to materialize in the fourth quarter, consistent with past patterns, while we anticipate some losses or muted figures earlier in the year.
Mark Hughes, Analyst
Yeah, so the full year is kind of flat, negligible, as you say?
Alison Rand, CFO
Yes.
Mark Hughes, Analyst
The tail adjustment, the $5 million that flowed through the Senior Health in 4Q I assume, in buffer that earnings would have been $5 million higher, is that right way to think about that?
Alison Rand, CFO
That is correct. The tail adjustments do get reflected anytime we see that current persistency or collection trends indicate that there's been a deterioration from what we assumed in our current renewal receivable, we have to adjust it up or down for that matter, but it was a downward adjustment in this case.
Mark Hughes, Analyst
Yes. How much impact did your sales force make in e-TeleQuote? I think you said that you have reason to believe the churn is better, the longevity of those policies is better. Did your sales force make much of a contribution in terms of sales this quarter?
Glenn Williams, CEO
Yes, absolutely. The referral program is unique to our model, and we are excited about this venture. Our sales force had a very positive reception to the concept, recognizing the market need and the gap this product fills, as well as the income opportunity it generates through referrals rather than traditional sales. We expedited its launch in anticipation of the AEP period, which is crucial for us. The good news is that we managed to generate some promising activity. However, it is challenging to annualize the AEP results to predict our pull-through and activity rates for the year outside of AEP. While it’s difficult to extrapolate our findings to the other three quarters, the insights will definitely benefit the next AEP period. Overall, we received a strong response and generated good activity, which we believe positions us well to leverage our learnings as we progress through the year.
Mark Hughes, Analyst
Yeah. Alison, your lifetime commission, the 1059, that's not down much from your prior expectations. And I think about that properly?
Alison Rand, CFO
Yes. The expectation we gave for the fourth quarter, it's probably about 10% down. I think we had more like $1,170 or something along those lines.
Mark Hughes, Analyst
Yeah. And then your point about the LDTI the 5.25% discount rate, I think what is suggested by the market indicators now, for your book of business, what is your discount rate? And what is the – what does that imply when we think about this two numbers?
Alison Rand, CFO
No, that's actually incorrect. The 5.25% reflects the market rate of our portfolios. I need to clarify that it pertains to our current liabilities, not the current portfolio. It's important to note that we establish the discount rate and lock it in when the business is issued. We engage in very long-tail business, much of which was recorded many years ago. Consequently, the liabilities associated with that business are larger compared to newer business, which hasn't accumulated reserves yet. Currently, the weighted average discount rate on our reserve liability stands at 5.25%. If we adhered to what the literature suggests we should use, the discount rate today would be considerably lower than that.
Mark Hughes, Analyst
And given the age of your, Yes. Given the age of your portfolio, is there leeway in the rules for that? Or do you have to change the discount rate to reflect the current new business?
Alison Rand, CFO
You have to use current rates for the entire liability remeasurement. The literature specifies that we must utilize a medium, upper-grade fixed income security, typically an A-rated one, along with an appropriate yield curve. We're aligning the shorter-duration liabilities with the short end of the curve. There is no ability to make adjustments to that, which is an intriguing aspect of the changes being implemented. One notable improvement is that the adjustments will not affect earnings but will be reflected in AOCI. While the balance sheet will be remeasured at the current rate, the profit and loss benefits and reserve to loss ratios will continue to be recognized using the locked-in rate in the reserve, consistent with our current practices. Therefore, all variability will appear in AOCI.
Mark Hughes, Analyst
Thank you.
Alison Rand, CFO
You are welcome.
Operator, Operator
Thank you, Mark. Our next question goes to Dan Bergman with Jeffries. Dan, your line is open. You can go ahead.
Dan Bergman, Analyst
Thanks, morning. So as to start, Investment and Savings Products sales are up pretty nicely across nearly every product, not just in the retail mutual funds, which I tend to think of as the most linked to equity market sentiment. So could you just give a little more color on what has driven the recent strength? How much is due to that better sentiment given strong markets versus other factors? And I believe you talked about an expectation for slight growth off the record 2021 sales levels in 2022. So just given the equity market declines and volatility we've seen so far this year, I guess, is there any data you can provide on how sales have trended to date? And just generally, if market conditions remain choppy, how much of a risk do you see in terms of a drop off in ISP sales?
Glenn Williams, CEO
Yes, that's a great question, Dan. I appreciate it. We have a lot of uncertainties after a significant period of remarkable growth, and we don't want to assume that this growth will continue given the current market conditions. You are right that we've witnessed a broad increase across all our products in both countries. This growth is widespread within Primerica and is not limited to one specific product or outlook that typically influences certain sales. We are observing a general interest in long-term investing, which I believe has emerged from the pandemic. Initially, during the first year of the pandemic, our life insurance business set extraordinary records, but then it declined as our ISP business was only slightly positive in 2020. Eventually, the situation reversed; life sales began to normalize in 2021—still above pre-pandemic levels but below the previous year's figures—while the ISP business surged. In my opinion, this reflects different timing influenced by the pandemic. People were primarily focused on protecting against unexpected death initially and have since started to consider their long-term financial planning for unforeseen events. This broad interest aligns with our long-term, retirement-focused approach, which is consistent across all our products, not just mutual funds. The challenge lies in the unpredictability of the future. We aim to proceed cautiously in our forecasts for the coming year. We experienced strong performance in January across our operations, including the ISP segment, and observed good growth. However, we expect that this growth will likely slow throughout the year. Currently, we anticipate mid-single-digit growth for the full year. This could fluctuate if there is additional disruption in our volatile environment, but it could also improve if conditions remain stable. This is the standpoint from which we are approaching our projections.
Dan Bergman, Analyst
Got it. That's really helpful color. And then I guess just one more movement on the expense side. It looked like the 12% core increase in insurance and other operating expenses that I think you mentioned in the prepared remarks seems somewhat elevated. Should we think about 2022 expense levels as a baseline on which you'd expect to grow going forward? Or were some of the drivers of that expense increase this year more onetime in nature, whether related to some of the IT investments or convention timing that you mentioned that we might expect to drop off next year? Just any color on that would be great.
Alison Rand, CFO
It's a great question. The convention aspect is a significant part of the increase, excluding Senior Health, which has contributed notably to year-over-year growth. We usually don’t have this level of activity with our field meetings in any single year. During the pandemic, we moved the convention, which is important to us and something we want to do. While it involves considerable effort and time, we believe it was the right choice to proceed with it. However, this high level of activity won't persist; we will revert to our standard practice of holding two out of three events each year. Additionally, technology will remain a focal point for us, and we should expect continued investment in that area as it is critical for our growth and development. Some of the unusual increases this year shouldn't be seen as typical growth. While the expense level is justified, the growth off of 2022 was not anticipated. This mainly relates to staffing. To elaborate, we’ve had limited travel from our field staff for the past two years, and it’s essential to get them back on the road since that's crucial for business growth. Regarding in-person classes for licensing versus online options, we cover instructor salaries under staffing expenses, and we plan to offer more in-person classes, which we believe will aid our licensing success. We've also noticed increased employee benefit costs, particularly for medical-related expenses, likely due to delayed care from previous years. These factors contributed to elevated expenses this year, but moving forward, we expect growth to align more closely with typical rates. Generally, we would anticipate about a 5% growth for regular items. Other expenses that may grow at a different rate are linked to premiums or assets under management, growing in line with their respective revenues. Thus, for general operating expenses, we see a baseline of mid-single digits, roughly around 5%, with potential for decisions that go beyond that. I hope this clarifies things.
Dan Bergman, Analyst
Yeah, it's really helpful. Thank you.
Operator, Operator
That concludes today's Primerica Q4 2021 earnings results and conference call and webcast. Thank you for your participation. You can now disconnect your line.