Primerica, Inc. (PRI) Q4 2017 Earnings Report, Transcript and Summary

Good morning. My name is Kelly and I will be your conference operator today. At this time, I would like to welcome everyone to the Primerica Fourth Quarter Earnings Result Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Ms. Kathryn Kieser, Executive Vice President of Investor Relations. You may begin your conference.

Thank you, Kelly. Good morning, everyone. Welcome to Primerica's fourth quarter earnings call. A copy of our earnings release, financial supplement, presentation, and Webcast of today's call are all available on our Web-site at investors.primerica.com. Glenn Williams, our Chief Executive Officer, and Alison Rand, our Chief Financial Officer, will deliver prepared remarks. Then we'll open it up for questions. We reference certain non-GAAP financial measures in our press release and on this call. These non-GAAP measures have limitations, and reconciliations between GAAP and non-GAAP financial measures are attached to our press release. Our fourth quarter GAAP results reflect a net benefit of $95.5 million to recognize the transition effect of the Tax Cuts and Jobs Act of 2017 during the quarter. Given the one time and unusual nature of this benefit, we removed this impact from our non-GAAP operating results. During the call, we will make forward-looking statements in accordance with the Safe Harbor provision of the Securities Litigation Reform Act. The Company will not revise or update these statements to reflect new information, subsequent events or changes in the strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the Company's 2016 annual report on Form 10-K, as updated by our quarterly reports on Form 10-Q. Now, I'll turn the call over to Glenn.

Thank you, Kathryn. Good morning, everyone. During the call today I will begin with a recap of our 2017 accomplishments, then move to fourth quarter results, and wrap up with an overview of our strategic plans for the future. In 2017, we showcased our ability to drive growth across the business, while at the same time adapting to changes and implementing enhancements to deliver production growth and positive financial results. These results were accomplished as we successfully navigated through regulatory uncertainty, like the DOL fiduciary rule and the full implementation of the new licensing regime in Canada. Ongoing technology improvements continue to play a significant role in the performance of our core model. During the year we revitalized the new representative online experience, starting from their first exposure to Primerica through the licensing and training process and beyond. New capabilities now allow us to deliver real-time customized communications to individual representatives based on their unique stage in the business. We also continued developing mobile sales tools that appeal to a broad spectrum of our representatives and provided platform for effective interaction with prospective clients and our sales force. And we transitioned our electronic applications to a system that allows representatives to use their personal technology regardless of the device or platform. Midyear, we launched a new mobile life insurance app allowing policy changes to be submitted electronically, which has reduced the paper forms we receive each month by the thousands. These initiatives, along with sales force growth, led to our life insurance issued face amount surpassing $95 billion in 2017, ranking us among the top term life insurance issuers in North America. In the Investment and Savings Products business, we launched our Lifetime Investment Platform in order to better serve our clients who have significant assets. This new state-of-the-art advisory platform with significantly expanded product offerings drove strong managed account sales growth in the second half of 2017 and we expect this momentum to continue in 2018. These efforts enhanced our value proposition and helped increase the number of insurance and mutual fund license representatives to over 126,000 and 24,300 representatives respectively at the end of 2017. All of these accomplishments combined with proven capital management allowed us to successfully drive strong financial results in 2017. As Kathryn mentioned, we excluded the impact of tax reform from our operating results. On Slide 3, you can see our adjusted net operating income grew 17% and we achieved a 22% increase in adjusted net operating earnings per share and a 160 basis point increase in adjusted operating ROAE to 20.6% compared with 2016. In 2018, our ROAE should continue to be among the best in the industry, as we expect it to expand to around 22% for the full year. Financial results were driven by solid Term Life and ISP performance, including 15% growth in both adjusted direct premiums and average ISP client asset values as well as 11% growth in total ISP sales year-over-year. Our strong and diversified cash flow allowed us to return 73% of our operating earnings to stockholders in 2017 in the form of share repurchases and stockholder dividends, resulting in the retirement of about 4% of our common stock outstanding as of year-end 2016. Now let's turn to fourth quarter results on Slide 4. Adjusted operating revenues increased 13% and adjusted net operating income grew 29% compared with the fourth quarter of 2016. Adjusted operating EPS increased 34% to $1.60 and ROAE expanded to 22.1% in the fourth quarter of 2017. The Term Life business results reflected continued momentum in adjusted direct premiums, consistent claims experience, and persistency that was in line with the guidance we provided last quarter. Our Investment and Savings Products segment continued to perform well in the fourth quarter due to higher average client asset values and growth in product sales year-over-year. Turning to Slide 5, strong recruiting and licensing trends in recent quarters drove an 8% year-over-year increase in the size of the sales force in the fourth quarter. We saw recruiting of new representatives and new life insurance licenses both increase 7% from the year ago quarter. The additional recruits from the hurricane-affected areas who had their independent business application fees waived contributed to licensing growth in the fourth quarter, even though they are obtaining licenses at a rate that is slightly less than half the usual rate. We expect the size of the life insurance sales force to continue to grow in the first quarter, with an annualized growth rate similar to the 8% growth we experienced in 2017. On Slide 6, you can see Term Life Insurance policies increased 1% over the strong results in the fourth quarter a year ago. Although productivity slowed year-over-year, it remained at the higher end of historical productivity range at 0.21 policies per life insurance license representative per month. Fourth-quarter Investment and Savings Products sales grew 14%, driven by a 16% increase in retail mutual fund sales as well as a 178% increase in managed account sales following the launch of the new Lifetime Investment Platform earlier this year. Variable annuity sales declined 4%, in line with the industry, and fixed indexed annuity sales declined year-over-year, reflecting a lower demand for principal protection products among our clients and a continued shift in larger-sized trades to managed accounts and retail mutual funds. Net flows were positive $297 million in the fourth quarter and client asset values increased 17% versus prior year to a record $61.2 billion at the end of the year. We remain well-positioned to outperform the industry by effectively serving middle income families with one of the largest exclusive financial services sales forces in North America. Our educational approach provides these families with the financial roadmap to help them make prudent financial decisions about protecting their income and saving for retirement. There's a significant need for what we do. According to industry sources, middle income households need approximately $12 trillion of additional life insurance to become properly protected, and 84% of all American households are falling short of reasonable retirement savings targets, which may create an additional $14 trillion need for retirement savings in America. We are currently striving to drive long-term value for all of our stakeholders by executing our strategy for future growth through business initiatives and prudent capital management. Over the course of the last few years, we have developed and we are executing a business strategy that is organized across four primary areas. On Slide 8, you can see the four components of our business strategy include; maximizing our sales force growth, leadership and productivity; broadening our portfolio of protection products; enhancing our Investment and Savings Products business; and developing digital capabilities to deepen our client relationships. Our distribution capabilities also allow us to consider offering other products and services to better meet our clients' needs throughout their lifecycle. We've been assessing opportunities to partner with third-party providers in a couple of areas. We currently have about 23,000 life insurance representatives who also have a health insurance license but do not have a significant health product to offer to their clients. So we see health insurance as an area of opportunity. We believe partnering to provide a mortgage lending product to further help our clients consolidate and eliminate their debt also presents opportunities. Today we show our clients how to budget and prioritize their debt payments in order to get out of debt more quickly. Our previous mortgage lending business was very successful and we believe a new program could also see success now that many middle income families have equity in their homes. Later this year we plan to launch an Investment and Savings Products application tool, called [EZ-Key] [ph], which will create efficiencies allowing us to better serve clients with fewer assets by making it faster and more convenient to complete investment applications. [EZ-Key] [ph] should drive long-term productivity and make the ISP business more attractive to representatives who are considering obtaining a mutual fund license. We have an ongoing commitment to invest in technology development to enhance the effectiveness of our representatives and deepen client relationships. Successful strategy execution requires significant investment in digital initiatives. This year we plan to lay the groundwork for a multiyear initiative to modernize end-to-end systems, data gathering and processes to enable speed, agility, innovation and continuous delivery, replacing slower complex systems and processes. We plan to invest about $11 million in 2018 to start the process. In addition to our strategic initiatives to drive organic growth, we remain committed to increasing stockholder value by actively deploying capital. We're confident in our business and future prospects and expect to accelerate capital deployment in 2018. Strong capital generation enables us to increase our expected share repurchases by about 33% to around $200 million in 2018. We also raised our stockholder dividend 25% from the third quarter to $0.25 per share payable in March of 2018. Tax reform positively impacts Primerica. Had tax reform been effective for all of 2017, our net operating income would have been about $35 million higher than actual experience. We believe this creates an opportunity for us to accelerate planned initiatives and give back to our key constituents. We've always invested in our communities, our people and our clients. While we are carefully considering the options before us, we expect to invest approximately $7 million to $10 million more in these areas in 2018. Our commitment to the Primerica foundation will increase, enabling us to increase our impact in the communities we serve. We will further invest in our people by earmarking funds for additional compensation for our non-management employees and creating new positions to support growth. I'm optimistic about the growth opportunities ahead and our ability to deliver long-term value for all of our stakeholders. Now, I'll turn it over to Alison.

Thank you, Glenn, and good morning everyone. Today I will share with you the key drivers behind our fourth quarter financial results and insight into 2018 expectations, followed by an overview of how tax reform impacts Primerica. Starting on Slide 9, in the fourth quarter our Term Life segment's adjusted operating revenues increased 16%, driven by 60% growth in adjusted direct premiums year-over-year. Results reflect continued strength in Term Life production as well as growth in both new business and end-of-term business, not subject to IPO-related coinsurance agreements. Adjusted operating income before income taxes grew 33% and the pre-tax operating margin expanded to 19 .8% from 17.3% in the prior year period. Incurred claims in the fourth quarter were consistent with historical trends in both the current and prior year periods. As we typically do in the fourth quarter, we locked in assumptions such as persistency and mortality for the current issue year. The finalization of assumptions this period did not meaningfully impact the benefits and claims ratio, which was 57.6% for the quarter, whereas in the prior year period the assumption locking process resulted in a higher ratio of 58%. On a full-year basis, the 2017 benefits and claims ratio was 58.5%, which is consistent with both the prior year and our expectations for 2018. Persistency continued to stabilize in the second half of the year. The fourth quarter DAC amortization ratio was 16.9%, whereas in the prior year period the ratio was about 100 basis points higher, largely due to weaker early-duration persistency in that period. On a full-year basis, the 2017 ratio was 15.9%, up slightly from 15.6% in 2016. As we look to 2018, we expect the DAC amortization ratio, which you will notice from our financial supplement, includes non-deferred insurance commissions to be at or slightly below the 2017 full year level. While we believe 2018 will not see a repeat of the weaker persistency results experienced in the first half of the year in 2017, we do expect to see a modest shift from deferred to non-deferred insurance commissions due to a change in our sales force equity program. Note that while there will be a change in the timing of expense recognition, the level of sales force compensation remains unchanged. The net insurance expense ratio of 6.5% was lower than usual. In December of 2017, we changed the state of domicile for Primerica Life Insurance Company to Tennessee, which reduced the retaliatory premium taxes and representative licensing fees incurred for 2017. The $3.3 million full-year benefit of this change was recognized in the fourth quarter of 2017, and increased adjusted operating EPS by about $0.05 for the period. For 2018, this benefit will be recognized ratably throughout the year. On a full-year basis, the net insurance expense ratio was 7.5% in 2017 and we expect it to increase slightly in 2018 largely due to the strategic investment in the business that Glenn just discussed. Adjusted direct premiums grew 15% in 2017 on a full-year basis, driven by strong sales levels in the past few years, the runoff of business subject to IPO-related coinsurance, and policies that continue when reaching the end of the initial level premium period, which beginning in January of 2017 we stopped seeding to the IPO reinsurers. Retaining these end-of-term policies positively impacted our adjusted direct premiums growth by approximately 2% in 2017. We expect adjusted direct premiums to continue to grow by 15% to 16% in 2018. The Term Life business continues to produce steady and predictable long-term earnings. While there were quarterly fluctuations in persistency and claims during 2017, the full-year Term Life margin of 18.8% was consistent with the margin achieved in 2016. Assuming mortality experience stays at normal levels and persistency experiences consistent with the second half of 2017, we would expect the Term Life margin in 2018 to be slightly below the 2017 level, reflecting modest pressure from the business investments Glenn described earlier. Moving now to our Investment and Savings Products segment, on Slide 10 you'll see our ISP operating revenues and operating income before income taxes increased 8% and 15% respectively from the fourth quarter a year ago. Year-over-year revenue generating product sales increased 8% while sales-based revenue increased 2%, reflecting a continued shift in sales from annuities to other products with lower sales-based earnings. Sales of managed accounts increased significantly during the second half of 2017, following the launch of our Primerica Advisors Lifetime Investment Platform in June. While these sales do not generate sales-based revenues, they do provide ongoing asset-based earnings above what we receive for U.S. retail mutual funds. In the fourth quarter, the 18% growth in asset-based revenues was driven by 16% growth in average client asset values. Account based revenue declined 8% year-over-year, largely related to the full-year benefit of a change made in the account-based fee structure in the fourth quarter of 2016 which was recognized ratably throughout 2017. In December of 2017, we negotiated new contracts with certain parties involved with our recordkeeping platform that will improve our recordkeeping economics by approximately $3 million in 2018. As a result of these new contracts, in 2018 we expect account-based revenue to increase by about $27 million with an offset of about $24 million in higher operating expenses, both of which will be generally incurred throughout the year. As we typically do in the fourth quarter, we updated Canadian segregated fund DAC amortization assumption to reflect emerging redemption experience. In both this quarter and the fourth quarter of 2016, the resulting adjustments lowered DAC amortization by about $2 million as redemption levels continued to improve. We also experienced strong market performance in the current year period, which when combined with the redemption assumption update resulted in an overall reversal of DAC amortization this period. On Slide 11 you can see the Corporate and Other Distributed Products segment operating revenues was $30.3 million and operating losses before income taxes were $8.2 million in the fourth quarter of 2017. Benefits and claims for our New York subsidiary's closed block of life insurance products were approximately $1 million higher than the prior year, reflecting normal volatility. The increase in net investment income reflects a larger invested asset portfolio, partially offset by the continued impact of low investment yields. While rising rates should continue to provide us with better yielding investment opportunities, the impact of reinvestment will be somewhat gradual. Over the next 12 months, approximately 10% or $184 million of our portfolio will mature with an average yield of around 3.9%. Now I'll move to a discussion of the Company's insurance and other operating expenses. On Slide 12, you can see our fourth quarter expenses of $80.9 million were $3 million higher than the fourth quarter of last year. The year-over-year change primarily reflects higher employee growth and technology related expenses. These expenses were partially offset by lower retaliatory premium taxes and agent licensing fees from the change in Primerica Life's state of domicile to Tennessee. In the first quarter of 2018, we expect the typical increases in our insurance and other operating expenses that we normally see each year. As a reminder, our first quarter expenses are usually higher due to the annual grant of management equity awards to retirement-eligible employees and are fully spent when granted, as well as other annual employee related and operational expenses unique to the first quarter. In comparison to the prior year period, we expect expenses in the first quarter of 2018 to increase by about $18 million. We anticipate an increase of approximately $2 million in growth related costs, driven by Term Life premiums and ISP client asset values. We expect another $7 million increase due to the new ISP recordkeeping contracts, which will be more than offset by an increase in account-based revenue. We expect the remaining increase to be in employee and technology related expenses, some of which comes from the $11 million technology investment Glenn discussed earlier. Given our initiatives, we'll modernize end-to-end systems and transform the way Primerica builds and delivers technology in the future. About two-thirds of the cost will be concentrated in the Corporate and Other Distributed Products segment during 2018. As we execute our digital strategy, these expenses will shift to other segments based on individual initiatives. Glenn also mentioned our intention to invest an additional $7 million to $10 million in our community, people and businesses as a result of tax reform. We are still working through these plans, so very little is expected to be incurred in the first quarter of 2018. Moving now to income taxes, the effective tax rate for the fourth quarter of 2017 excluding the impact of tax reform was 32.5%. The rate reflects excess tax benefit of approximately $1 million for the difference between the stock price of sales force equity awards at the time of grant and when the sales restrictions lapsed, which was reflected in equity in the prior year period. As a result of tax reform, the Company's U.S. net deferred tax liability was revalued using a 21% tax rate in the fourth quarter of 2017, and taxes were increased to include mandatory deemed repatriated earnings from the Company's Canadian subsidiaries. As you can see on Slide 13, the net effect of these transition adjustments was a $95.5 million reduction to income tax expense during the quarter. As previously noted, Primerica has excluded this benefit from adjusted net operating income. Given the mix of business between U.S. and Canada, Primerica's annual effective tax rate is expected to be in the 22% to 23% range for 2018. Tax reform includes two life insurance specific provisions that do not impact the effective tax rate but essentially offset the cash tax benefit of a lower corporate rate in our life insurance business. While cash taxes in our non-life businesses benefit from a lower effective tax rate, the Company's overall free cash flow is not expected to materially change from tax reform. As I wrap up, let me say that we remain committed to maintaining a strong balance sheet and continue to demonstrate a strong capital position with Primerica Life Insurance Company's statutory risk-based capital ratio estimated to be around 450% and holding company liquidity of $112 million at the end of 2017. The NAIC formula to calculate the Company's RBC ratio has not been updated to reflect the reduction in the federal income tax rate. If or when the NAIC adjust the RBC calculation, the Company's RBC ratio would be negatively impacted by approximately 70 to 80 basis points. While the lower corporate tax rate could change the way the RBC ratio is calculated, it does not detract from how we view our capital strength. We'll be monitoring the developments at the NAIC and the responses by rating agencies to determine whether permanent changes to targeted RBC levels are necessary. We continue to generate a significant free cash flow from our diverse businesses. As the block of Term Life business under principle-based reserving grows, the lower reserve requirement will create distributable capital without the need for financing transactions, which require regulatory approval. This provides us with more certainty about capital distribution from our Term Life business, which when combined with the growth from our ISP segment have allowed us to increase our capital deployment plans in 2018 to around 200 million of share repurchases in addition to 25% increase in stockholder dividends. Now, let's open the line up for questions.

[Operator Instructions] Our first question comes from the line of Dan Bergman from Citi. Your line is open.

So for the incremental expenses you talked about, both the technology improvements and the community businesses, I apologize if I missed it, but how should we think about how each of those, should we think of them as kind of ongoing annual expenses or more isolated 2018, any color on how those might look over the next couple of years, it will be much appreciated.

Glenn, I'll go ahead and take that one. It's interesting, I think the technology specifically I believe, as everyone knows, technology never stays the same. So, while we do have some I'll call one-time costs to do some fundamental changes to our infrastructure, I would expect that we will continue to invest somewhere around this level of our annual earnings towards improving our technology, so long as we continue to see obviously benefits associated with those efforts. With regard to the pieces associated with tax reform, most of those items are really going to be pretty permanent in nature because we are really trying to get at benefits to our employees which really would not be one-time type of events. So, I would expect both of those to be fundamentally part of our expense base going forward.

Great, thanks. And then I guess you had a really strong run with Investment and Savings Products sales over the past year or so, and given that that metric has historically had some level of correlation with market performance, I just wanted to see if you had any thoughts on what impact the recent market volatility might have on ISP sales and should we expect growth to continue or maybe a shift from mutual funds to annuity? Any thoughts would be much appreciated.

Obviously, for every market I believe that kind of volatility creates a lot of questions and confusion. We tend to be a little insulated from that on main street, but with today's communications ability, it gets to main-street pretty quickly. I think the answer to your question is really how long the disruption goes. If it's something that's a blip and it smoothes out fairly quickly, I don't think it impacts the long-term trajectory of our business very much. If the volatility continues over a period of weeks or months, then clearly that's going to create some nervousness and people tend to stand on the sidelines when nervous. So, it's a little too early to tell exactly how to answer that question, but I think you would be right in assuming that if it stayed volatile for a longer period of time, we'd start to see a headwind as a result of it. If it's kind of the shift rights itself fairly quickly, it would be much less disruption.

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

Alison, the benefit of the change in the IPO coinsurance treatment and the term issue, I think you said it was a 2 point tailwind for the year, presumably stronger for the fourth quarter. Should that relative impact, I think it will be sustained, but should the impact be greater should that 2 become 4 or should that impact stabilize or even diminish a bit over time?

So, first of all I'm disappointed that you didn't start singing Rocky Top, but okay. Anyway, you are correct and I think we've indicated that this benefit is going to be there for quite some time. I think the number might be closer to about 3% for 2018 of a benefit. Probably starts to tail off a little bit after that. And the reason it doesn't continue to grow is, you got to remember, this is a really lumpy block of business. So it really has to do with what we sold 10 or 20, whatever years ago to see what's coming through the pipeline. But one thing to caution, and that's why we went ahead and gave you sort of our overall estimate for adjusted direct premium growth, the number of 15% to 16% growth does incorporate that benefit. You have to remember, one of the things that would be otherwise taking the growth rate down is sort of this mix, if you will, between our old legacy business and the new business that we've been putting on since the IPO, and that's sort of an effect that we've been seeing since we've been public. Over the last few years you haven't seen a negative trend because we've had really strong new business production, and that combined with now this end-of-term component is what is continuing to maintain sort of that overall growth level in adjusted direct premiums.

Thank you for that. The managed account sales, it looks like your asset-based revenue as a percentage of assets has moved up. I assume that the managed account sales contribute to that, if I understand it properly. Can you give us a sense of is that going to be a material change in the model if your managed account sales continue to be strong, how quickly could that ratio of asset-based revenue to assets, how quickly could that move up?

And I do think it is a permanent piece of our model. If you just look at the things that we have been developing, we put a lot of time and energy towards developing that expanded platform in 2017, as we do believe it is a key component of how our population wants to do their investing, especially for the people who have accumulated more assets over time. So, I do think it's a permanent component. As a model shift, it does really take quite a bit of time for our total assets to move. So you'll look we've got $61 billion-plus in assets under management. We're not quite settling that level of managed. So, I do think it will be a pretty mild or more moderate type of movement or shift between sales-based and asset-based. Unfortunately you see the sales-based hit almost immediately because there is no sales-based component, but the asset-based piece will build up over time. Again, if our existing assets under management weren't so large, it would be more profound. But given that we are adding to a pretty large in-force base, if you will, it will be a little slower. I think the important thing though is that it's there I say for good. It has really a very long tail on it. Obviously we've got a lot of – we've got a very high retention rate on our ISP business. So, those assets should be there generating earnings for quite some time.

Then a final question, it looked like the persistency was a little bit weaker in the quarter. I think fourth quarter, it looks like historically here persistency has been a little bit lower, but then this was still down a little bit year-over-year. Am I seeing that properly, anything to read into that?

Yu are correct that fourth quarter is generally a weaker quarter. I would not say necessarily that persistency is down. I'm not sure. It does have to really do with where the lapses are coming from. We're very focused, and from a DAC perspective what we were talking about earlier, in earlier quarters, it is early duration persistency and early duration persistency actually was very much in line, if not maybe mildly better than last year. So you might be looking at overall lapsation rate maybe from the [indiscernible]. I'm not sure where you're getting that from.

Yes, you got it right.

If that is where you're getting it from, you have to remember too, unfortunately end-of-term, and I think I talked about this last quarter, end-of-term does create a little bit of a phenomenon there. Theoretically when a policy reaches the end of term, those policies all are supposed to lapse. So they can lapse. What we see happening is some people, because of whatever is happening in their lifestyle, there are changes in the market, and where they are in their lives, is they go ahead and either renew or continue their policy. So, depending on the volumes that we are going to have in end-of-term business from period to period, you can see sort of some lift, if you will, in lapsation. And if you are looking specifically at the roll-forward of the in-force block, and if you really look at the underlying details, which is hard for you to see but from what we are able to see, again I say, early duration persistency was consistent or potentially modestly improved from where it was last year.

Yes, and it was there in the supplemental we're looking at. Thank you very much.

Our next question comes from the line of Sean Dargan of Wells Fargo. Your line is open.

I have a question about I guess the targeted RBC ratio and the move of the state of domicile to Tennessee. It's my understanding that at the time of the IPO, you made representations for Massachusetts that you'll keep RBC up around 450%, which seems high given the product that you're selling. Putting aside the hit to RBC from the change in the tax code, just wondering if you think Tennessee is going to let you run at a lower RBC.

I will tell you this that the attempt or the desire to run at a lower RBC was not a factor in our decision to move to Tennessee. Again, we've always operated based on what we have felt we really needed. Part of the reason we were keeping it so high early on is just the newness of the organization and the fact that we had quite frankly taken out quite a bit of capital when we separated from city. But Massachusetts, their credit has been very willing to work with us and has never stood in the way of anything we've wanted to do. So, it really isn't a function of trying to manage our RBC level. We had very strong open dialog with Massachusetts, and I can see from our early relationships with Tennessee, it will be the same there that they understand the business and understand what the business' needs are. So, simply focusing on a ratio I don't think will be what anybody looks to do.

Okay. And just as I think about the capacity to buy back stock and pay common dividend, is that being driven by higher free cash flow out of ISP?

It's two things. One is absolutely the higher free cash flow out of ISP. One other item very specifically for us is principle-based reserving, and it does take some time for the reserves that are under that new regime to build, but the unique thing here is we have certainty around what our required capital will be or what our reserves will be. Whereas in the past under XXX, while we always felt like we were going to be able to execute financing transactions, they did require regulatory approval and therefore we could really never say with certainty what would or would not be distributable. So, what you are looking at here and what you are seeing with our effort to increase our deployment for 2018 is a combination of having that certainty now as well as the strength we have seen in ISP.

Our next question comes from the line of Peter [indiscernible] from KBW. Your line is open.

Just a quick follow up on the increased share repurchase. So does the 200 million represent a good proxy for free cash flow generation at this point?

It represents a good proxy for what we believe will be available at the holding company.

Okay, got it. Thanks. And another quick question on agent recruiting, so growth has been really strong for the last three years now, so do prior year comparisons start getting tougher at this point and do you see this continued momentum going forward?

Peter, as the number get bigger, I mean clearly the comparisons often are tougher. But at the same time, that's offset by the fact that we see just ever-increasing need for what we do in the marketplace, which we believe directly impacts the attractiveness of our opportunity. So, like most things in life, you got a combination of headwinds and tailwinds. Just continuing the incredible growth we have experienced does get harder mathematically, but at the same time we do believe we've got a powerful story and we expect to be able to continue the momentum in the same general vicinity of what you've seen recently as we head into 2018.

Good. Thank you, everyone.

And our last question comes from the line of Adam Klauber from William Blair. Your line is open.

Clearly mutual fund sales are doing well. Are the amount of reps being licensed, is that growing or how does the pipeline look for new reps to get a license to sell mutual funds?

Yes, that group is still growing. The size of our sales force, as we reported in my prepared remarks, at about 24,300, it has not been growing as we talked about on previous calls quite at the same level as our insurance sales force, and that's just to be expected. Number one is we move our insurance sales force first because that is the pool of resources from which we get those license to mutual fund reps, and so that has to go first. And we expect the mutual fund licensing process, which is a little more difficult, to be delayed somewhat due to timing of it being the second license. But also since it is a more difficult exam and it's one that people have to have a higher level of commitment of both time and effort to get and maintain, it probably goes at a little bit slower rate. But we also look at the opportunities, both kind of the push and pull opportunities to increase that number and that rate of growth. We have a lot of work going on right now on assisting people as they get that license. There is some licensing process changes FINRA has planned in the future that we are preparing for and making sure that we find good reasons for people to take action both before and after those changes are made to try to accelerate that growth rate as well. And then, as I mentioned, we are trying to make our business easier. The [EZ-Key] [ph] technology tool that we are building for our ISP business, we believe will make that business more attractive. And so, we have a whole series of initiatives going on to continue to grow that sales force and hopefully increase the rate of growth so that it gets a little closer to the life rate of growth.

Okay. And then you did mention some new products, health and one or two others. Will next year be more of the testing bid year that it will take really till 2019 till it ramps up?

I think you are exactly right about that. I mean, these things take – we are very deliberate as you have seen I think from our history. We are very proud of our distribution capabilities but we also recognize that continuing to grow the businesses we are succeeding in now is important and we don't want to do anything to disrupt that. So we move very deliberately. Traditionally, once we identify an opportunity and bid it, we then start with a pilot project to test it and see if we get the results to both the intended and unintended consequences that we hope for, and then roll it out methodically from there. So, I think you are dead on. I think 2018 is year of evaluation and possibly some piloting, and we'll keep you posted on that as it happens, and then we'll look to start to achieve measurable success after that.

Okay. Thanks a lot.

That was our last question of the day. I would like to thank everyone for joining the Primerica Fourth Quarter 2017 Earnings Results Webcast. This does conclude the call and you may now disconnect.