Primerica Inc (PRI) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2010 Primerica Earnings Conference Call. My name is Michelle and I will be your operator for today. At this time all participants are in listen-only mode. We will be conducting a question and answer session towards the end of today's conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference, Ms. Kathryn Kieser, senior vice president and investor relations officer. Please proceed.

Good morning, everyone. Thank you for joining us today as we discuss Primerica's results for the second quarter 2010. Yesterday afternoon we issued our press release reporting financial results for the quarter ended June 30, 2010.

A copy of the press release is available in the Investor Relations section of our website at investors.primerica.com. With us on the call this morning are Rick Williams, our Chairman and co-CEO; John Addison, Chairman of Primerica Distribution and co-CEO; and Alison Rand, our CFO.

We referenced certain non-GAAP financial measures in our press release in this call. These non-GAAP measures are provided because management uses them to make financial, operating and planning decision, and in evaluating the Company's performance. We believe these measures will assist you in assessing the Company's underlying performance for the periods being reported.

These non-GAAP measures have limitations and reconciliations between non-GAAP and GAAP financial measures are attached to our press release. You can see our GAAP result on page three of the presentation. On today's call we will make forward-looking statements in accordance with the Safe Harbor Provision of the Securities Litigation Reform Act of 1995.

Forward-looking statements include any statements that may project, indicate or imply future results, events, performance or achievements and may contain words such as expect, intend, plan, anticipate, estimate and believe or similar words derived from those words. They are not guarantees and such statements may have risks and uncertainties that could cause actual results to differ materially from these statements.

Please see the risk factors contained in our registration statement on Form S-1 originally filed November 5, 2009 and amended through March 31, 2010 and our Form 10-Q for the quarter ended March 31, 2010 for discussion of these risks.

This morning call is being recorded and webcast live on the Internet. The webcast and correcting slides will be available in the Investor Relations section of our website for at least 30 days after the presentation. After the prepared remarks, we will open the call to questions from our dial-in participants.

Now, I'll turn the call over to Rick.

Thank you, Kathryn, and good morning, everyone. Welcome to Primerica's second quarter earnings call. This is the first time we will be reporting the actual results of Primerica as an independent public company since our initial public offering that occurred April 1st.

The offering and reinsurance transactions had the effect shrinking our financial profile on both our balance sheet and income statement. This enhances our growth profile as we add new business to our now relatively small amount of net-enforced business.

Let me start by giving you some financial highlights and then John will talk about our sales force. Alison will follow with a detailed discussion about our second quarter results.

Beginning on slide four, we have provided operating results for the second quarter 2010 and the same period last year for comparison. We believe this is the most appropriate measure for you to use to gauge our performance so we will focus most of our comments on the quarter's results using that measure.

Our net operating income for the second quarter was $37.2 million or $0.49 per diluted share including one-time expenses related to the promotion and the launch of the public company. Stockholders' equity was $1.3 billion in June 30, 2010. Adjusted stockholders' equity was $1.2 billion, and net operating income return on average adjusted stockholders' equity was 12.3% for the same period.

Net income return on average stockholders' equity was 6.8% due to the equity awards granted at the time of the IPO. Adjusted book value per share was $16.83 at June 30, 2010. A highlight for the quarter was 26.3% increase in investment and savings product sales. We believe our messages of (inaudible) and utilizing retirement accounts resonates with our clients more than ever are involved to market conditions.

Our client assets increased 12.2% to $29.7 billion at the end of the second quarter, compared to $26.5 billion a year ago due to improved market conditions. Average client assets increased by 24.6% in the second quarter over the prior year. However, asset values were down 9% compared to the end of the first quarter 2010 due to the May and June market declines.

In our Term Life business, issued policies were down 2.9% over second quarter a year ago. As we have said in the past, life production is highly correlated to the size of our sales force. The decline in our issued policies was primarily due to a similar decline in the size of the sales force during the same period. John will talk to you more about the sales force dynamics in a minute.

Sequentially, issued policies were up 15.2% due to seasonality. December is a low activity month for our sales force and December-submitted policies are predominantly issued in the first quarter. Our average policy premium issued was $811, down 1.3% from second quarter 2009. We believe this is due to the difficult economic environment for our middle income clients.

Persistency continued to improve in the second quarter which helped degenerate, directing and growth of 4% compared to a year ago. We're encouraged by the positive trends we have been seeing although persistency still has not come back to historical levels.

We were pleased to see our second quarter results and are optimists about the future would be combination of our capital strength, attractive products, significant market opportunity and strong distribution capabilities will enable us to capture the substantial growth opportunity before us.

With that, let me introduce John Addison who will talk about our sales force and distribution.

Thank you, Rick, and good morning, everyone. And my goal in the room today is not to catch the cold that Alison and Rick have. So if you hear coughing and wheezing while I'm talking -- just hopefully, I won't catch that.

You know, folks, these are very exciting times for Primerica. The sales force's enthusiasm about becoming a public company has exceeding our expectations, and I'm extremely proud of their efforts. Primerica was up 13.6% in the second quarter compared to a year ago. This was our best recruiting quarter in the history of the Company. We believe recruiting was driven by our successful IPO and our incentive programs, which I'll talk about later.

We're encouraged by these results because recruiting is the initial step and the leading indicator in growing out business. We are constantly focused on growing the numbers of recruits in order to grow the size of a life insurance licensed sales force which, ultimately, leads to the growth of issued policies and earnings.

Growth in life licenses lags recruiting growth because of the time and effort it takes to get someone licensed after joining the business. Our life licensed sales force was down about 1.3% from the first quarter 2010. When you think about the sales force, there are two factors that ultimately determine the size of the sales force.

First, the number of new people getting licensed. And second, the number of licensed reps who do not renew their licenses at the end of a renewal period. Each of these numbers has a lot of moving parts. With new life licenses, growth is primarily driven by recruiting, although there are a number of things that have an effect on our net life sales force focus and also state processes.

Non-renewals are driven primarily by the timing of state renewal cycles, but they are also influenced by factors such as a representative's willingness and ability to pay for the license renewal.

Looking at changes in the size of the sales force from quarter to quarter can be extremely challenging, but basically, what happened in the second quarter was license non-renewals exceeded new life licenses. New life licenses were essentially flat, but in line with the recruiting trends that we have been seeing prior to the IPO. So, the license non-renewals are the primary cause of the decline.

What happened with license non-renewals is kind of twofold. First, a few states had their biannual, every two year license renewal process and other states have modified their processes. This produced higher non-renewals because it has been two years rather than one since the last time that rep had to make a decision of whether or not to pay for a renewal. Biannual renewals can also impact year-over-year comparisons because of the absence of a renewal the prior year.

We believe the second factor affecting non-renewals was the challenging economic environment that we're experiencing in the country. In a good economy it is easier for a part-time rep to make the decision, to write a check for renewal fees when their money is tight -- than when their money is tight. When money is tight they more carefully weigh their decision of whether or not to pay anything including the renewal of a license. This trend has been evident to us over the last year and a half.

Now, let me tell you about some of the incentive programs that we're excited about. First, following the IPO, we now see opportunity for our regional vice president, our most senior sales force leaders, who we refer to as RVPs, to compete for equity awards on a quarterly basis. They compete each quarter based on growth of life insurance premium, combined with factors that lead to the growth of the size of the sales force; Primerica's key long-term growth drive.

In the second quarter, RVPs competed for an aggregate 375,000 shares. And in the third quarter, RVPs are competing for an aggregate 187,500 shares. We also finished an incentive contest to take 1500 couples to San Diego California later this month, where the weather will be much better than Atlanta, Georgia, I might add.

The competition was from January through May and reps with all qualified levels -- qualified at all levels based on life insurance premium, combined with activities related to growing their team. The San Diego event will be the first ever large business incentive trip since the IPO. At the meeting we will rollout new print materials, position the public company with a sales force to help sustain the momentum and excitement generated by the IPO.

In June, we announced we'll be going to the El Conquistador in Puerto Rico in February of 2011, which by the way will also have better weather than Atlanta, Georgia in February. Representatives at all levels are competing to be one of the 1500 couples that will qualify. The competition runs from June to November, and is based on the same factors as the San Diego contest.

Our incentive competitions are designed so that reps -- that all levels of reps from regional vice presidents down to our newest representatives can compete and qualify for a trip. We provide continuous incentive programs because these programs are key drivers to our business. Our business gets a constant inflow of new people, motivating and incenting those new people to become engaged and productive is incredibly important.

We pay a lot of attention to communicate effectively with our sales force, and we have a number of new methods of communicating. One is producing -- we produce a weekly program at our TV studio on our PFN network, which stands for the Primerica Freedom Network.

The program streams over our Primerica online Internet site. In the past, RVPs had access to weekly programs and that they would project or download the program to watch for their team. During the second quarter, we were able to open a PFN network to all plus 100,000 plus of our Primerica online subscribers, making communications even more effective.

Consistent with our strategy to introduce innovative technology, we rolled out some sales force automation initiatives during the quarter. Our goal is to constantly improve the ability for our sales force to build and manage their business. We want to simplify the administrative functions that allow them to focus on the business and to simplify and multiply their business.

The first initiative is what we call our turbo application for investment and savings products; it gives reps the ability to take paperless mutual fund applications on handheld device. This makes the sales force and record keeping of the application much more efficient, and frees up the reps' time to be more productive.

We're already seeing approximately 20% of the US mutual fund applications coming in via the turbo app. And people are coughing on me all around -- I'm sorry everyone. We also continue to rollout functionality on our client website, part of the -- an important initiative to simplify administrative components of the business for both our clients and the sales force.

Now that the IPO is behind us, we are looking at new ways to improve the business. We are very proud of the engagement of our sales force and the spirit of the sales force leaders, as well as the great team we have here at the home office. And we're encouraged by the second quarter recruiting results, and we're working hard to turn this momentum and the results for the future.

Now with that, I'm going to turn it over to Alison to go through the second quarter results.

Thank you, John, and good morning, everybody. Let me start today by discussing how we will be describing our result. Beginning with the second quarter, our GAAP financial statements fully reflect the impact of the reinsurance and reorganization transaction consummated in connection with our IPO.

Our second quarter operating results, including net operating income and operating revenue, exclude realized investment gains and losses and the impact of the IPO equity awards. Past periods presented for comparative purposes now reflect operating results excluding the same items, plus the impact of the reinsurance and reorganization transaction.

Management believes these operating results, which are non-GAAP financial measures, are a better reflection of our ongoing business and underlying profitability drivers. The remainder of my discussion will be largely focused on operating measures.

If you would please turn to page six of the presentation, we have provided a reconciliation from net income to net operating income, as well as the calculation of diluted operating earnings per share. The primary adjustment to drive net operating income is the $25.5 million expense-related to the IPO equity awards.

On April 1, 2010, Primerica issued 75 million shares to Citi, which then contributed approximately 5 million of those shares back to Primerica to fund the IPO equity awards. The solution related to the equity awards granted at the IPO was therefore fully borne by Citi.

$22.4 million of the expense relates to sales force leader awards fully vested, and therefore fully expensed, in the second quarter. The remaining $3.1 million relates to management equity awards that we'll vest over the next three years. The IPO equity awards introduced some notable impacts on our per share calculation.

Because our equity awards, both vested and unvested, participate in dividends -- dividend rights on a one-to-one ratio with common shares, we calculate earnings per share under the two-class method. Shares associated with unvested equity awards and the pro-rata earnings allocated to those shares are not included in the EPS presented on our income statement, reducing our basic EPS as if the unvested shares were fully vested.

As the shares vest going forward, they and the pro-rata earnings allocated to them will be included in our EPS calculation without causing dilution. We calculate the dilution association with our outstanding warrants using the treasury-stock method.

Turning to page seven, in our Term Life Insurance segment, operating income before income taxes for the second quarter 2010 was $44.1 million, up slightly from $43.8 million in the same period last year. The $20.4 million or 4% increase in direct premium reflects the growth in face amount of our in force insurance. The $18.7 million or 4.4% increase in ceded premiums, which is highly influenced by the Citi reinsurance, followed the same trend.

Net premium was at 8.5% sequentially over the first quarter 2010, reflecting growth in what we refer to as new term or policies ran after the effective date of the Citi reinsurance agreement, offset by the seasonality of our YRT ceded premiums. It's important to point out that our total net premium revenue during the quarter, $17.4 million, was attributable to new term policies significantly higher than the first quarter.

We are pleased to see the results of our efforts to begin rebuilding our base of long-term recurring revenue. While we will discuss overall invested asset performance later in the call, net investment income allocated to the Term Life segment was down $2.3 million or 12.7% partly due to lower yields on invested assets. Approximately 55% of our invested assets are allocated to this segment.

Benefits and expenses were $64.3 million, virtually unchanged from the same period a year ago. While claims remain level, we experienced a $3.7 million increase in benefit reserves due to premium growth and improved persistency. Offsetting the reserve increase was $1.4 million lower DAC amortization largely due to favorable persistency in $2 million lower operating expenses, due in part to the prior year expense related to canceling our 2009 biannual sales force convention.

Turning to page eight, you'll see the result for our Investment and Savings Products segment. Operating income before income taxes increased 29% to $26.7 million, compared with $20.7 million in second quarter 2009.

The trends in year-over-year sales in asset growth that Rick discussed earlier directly drive this segment's result, with sales-based revenue up $6.9 million or 23.3% and asset-based revenue up $9.7 million or 32.7%. Account-based revenues were down slightly in line with our account.

We do experience seasonality in our investment and savings product sales, with the first quarter generally weighted towards mutual funds and segregated funds, due to the IRA season and RRSP season in Canada. Strong variable annuity sales in the second quarter led to sales-based revenue being flat on a sequential quarter basis.

Although asset values were down sequentially due to changes in the market value, net flows were marginally positive. Average asset values were flat sequentially and asset-based revenue was up 3.8%. Expenses were up $9.7 million or 18.8% year-over-year. $7.8 million of the increase came from sales in asset-based commissions and are highly correlated to revenue growth.

DAC amortization on segregated funds increased as a result of the increase in asset values year-over-year. In addition, DAC amortization had an unfavorable adjustment in the second quarter of 2010 due to the decline in ending asset value from the prior quarter end, and a favorable adjustment in the same period of the prior year due to growth in asset-values for that period.

Our third segment, Corporate and Other Distributed Products, is highlighted on page nine. On an operating basis, this segment includes revenue and expenses associated with our distributed third-party products, life and disability products underwritten by our New York subsidiary but not distributed to our sales force, and net investment income and operating expenses not allocated to our two primary segments.

Commission and fees on other distributed products continue to see downward pressure from the reduction in our Lending business, while other product lines remain stable. The trends in net premium and benefit and claims largely reflect a rate reduction in our disability income products sold by our New York subsidiary at the beginning of the year, as well as the runoff of their discontinued lines.

Net investment income of $12 million was flat with the year-ago period at slightly higher allocated asset, were offset by lower portfolio yields. The $9.4 million pre-tax operating loss was largely driven by higher expenses associated with the IPO, including one-time launch expense of $5.1 million, as well as the emergence of ongoing prevalent company expenses of approximately [$2 million]. Further driving expense increase was a $2.7 million credit received from Citi in the prior year for corporate expense allocation.

It's important to note that Primerica will continue to incur incremental public company expenses, as we build out functions to support our public company. Also, certain IT employee benefits and other expenses that we had anticipated for the second quarter did not occur, but are likely to occur in future quarters.

Turning now to page ten, we'll look in our balance sheet and cash flow. We continue to maintain a conservative balance sheet with a strong capital position. Notable changes in our balance sheet in the second quarter include cash settlements with Citi, the introduction of the $300 million note payable to Citi, and a shift in tax balances.

Last, these items reflect the election we made under Section 338h10 of the Internal Revenue Code that provides an opportunity for certain of our IPO-related transactions to have the tax-effect of an asset acquisition, in lieu of the common law effect of a stock sale. The adjustments do reflect our new tax basis resulted in changes to our deferred tax balances and reduction to stockholders' equity of $177.3 million.

As of June 30, 2010, our risk based capital ratio is estimated to be greater than 530%, well in excess of our long-term RBC target. We maintain this excess capital to fund the future growth anticipated in our business.

Cash decrease by $718.6 million in the quarter to $210.5 million, reflecting the payment of dividends and first quarter reinsurance related down to Citi. Net of these two items, cash flow was positive by $82.6 million for the quarter, about half of which is from investment maturities and sales in excess of purchases, and half from positive cash flows from investing -- invested assets in operations.

Turning to page 11, as of June 30 we had cash and invested assets of $2.3 billion. Excluding cash all but 1% of our invested assets were in fixed income investments, of which 92% were rated invested grade. The portfolio had net unrealized gains of $93.8 million, down from year-end 2009 largely due to our smaller invested asset base.

The average duration of our fixed income portfolio is currently 3.4 years, which is shorter than our general target of five to seven years. We do not believe this creates concerns with matching the duration of assets to our policy liabilities, as expected future premiums exceed expected future claims and expenses on such policies. Cash flows from invested assets are not required to support our policy liability since, on an economic basis, the product cash load create an asset not a liability.

Fixed income investors are dealing with an environment of rapidly tightening credit spread combined with strong demand for US Treasury, pushing yields to near historically low level. Limited new issuance in the second quarter cannot satisfy demand. The risk/reward tradeoff in fixed income in our view has become less compelling. In this environment, our strategy has been to balance the near-term pressure on new money rates, with our view that rates will likely rise again in the near to medium term.

We have, therefore, been actively purchasing shorter duration investment grade securities to modestly improve yield without locking ourselves into relative low yields further out the curve. We believe this strategy will allow us to maintain liquidity to keep some powder dry for better opportunities in the future. While this has had an effect in our book yield, we feel it is prudent to maintain some flexibility in this type of environment and to avoid overreaching for yield.

The yield on our new purchases for the quarter was 2.43% with approximately 70% of purchases having durations of three years or less, and an average quality of A. 20% purchases were at durations of five years or greater with an average yield of 5.52%, an average quality of BBB-plus.

Currently, our fixed income portfolio had a good yield of 5.72%, but when weighted to include our $210 million in cash, our total portfolio had a yield of 5.15% or about 350 basis points above current five-year Treasury yield. To sum-up, we have a strong balance sheet with a conservative profile and stable financial performance. We believe we are well positioned for future growth.

With that, I will turn the call back over to Rick.

Thanks, Alison, and I apologize to everybody for my cough and sniffing back here. Like all financial services we've been following the Dodd-Frank Act recently signed into law. This legislation requires regulators to conduct a significant number of studies and to draft various rules and regulations.

Until the final rules are published, any assessment of the impact of the new laws on our business is speculative. Our preliminary view is that we have no reason to believe that our business will be unable to adapt to any new requirements.

In addition to the Dodd-Frank legislation, we are in the process of thoroughly reviewing the SEC's recent proposal to restructure 12b-1 fees. If final rules are inline with the proposal, we do not expect any major impact on our business. Again, these are our thoughts after quick high level review; we expect to have more insight once we've had the chance to thoroughly analyze the proposal, and we'll be carefully monitoring regulatory developments in this area.

Before we begin our question and answer session, let me just recap some of our second quarter highlights. Net operating earnings per diluted share were $0.49. Annualized net operating income return on average adjusted equity was 12.3%. Recruiting was up 13.6%. Net new term premium increased to $17.4 million, and investment in savings and product sales increased 26.3%. We are all extremely proud of our company and the steps we have taken in the second quarter to initiate growth.

With that, I'd like to open up the call for questions and answers.

Thank you.

(Operator Instructions)

Your first question comes from Steven Schwartz of Raymond James & Associates. Please proceed.

Hey, good morning, everybody.

Hey, Steven.

John, I hope you're okay.

I'm doing well. I'm feeling good. You know, I don't know what's wrong with the rest of the team here.

I got a few, for Alison, I guess. I've lost track of it, but last week FASB was meeting on this EITF 09-G with regards to DAC. I don't know if you're familiar with that or not, but I'm just wondering if you'll comment on how that could affect you.

Alison, you also mentioned some IT expenses that you've been planning to put in this quarter that's going to be moved; if you could maybe quantify that and tell us when that might occur, that would be helpful. And then just a -- general thoughts on what you can do if interest rates stay where they are for a while and don't turn up in the intermediate term.

Sure, Steven. And yes, fortunately or unfortunately, I'm very much aware of the EITF 09-G proposal, and it's obviously something that everybody in our industry is very actively monitoring. So specifically on that topic, the FASB have tentatively delayed the DAC accounting change effective date to January 2012 subject to final approval in September.

The expected outcome will require deferrals for successful policy issuances and only for direct acquisition cost that would not have occurred but for those incremental policies. This change in methodology will not affect our economic for cash flow, just the timing of recognizing the expenses.

To get a feel for the scope, look at our DAC roll forward on the balance sheet tab of our financial supplement. We believe commission cost will still largely be eligible for deferral, but a portion of the general expenses that we defer which was $15 million this quarter will not.

As the definition of indirect cost has not been finalized, we cannot say at this time what portion of these expenses will no longer be deferral. Note, also, that we already do not defer cost associated with our sales force such as licensing, field technology, field supervision, print materials and so forth.

I think, Alison, that you had that prepared.

I actually did.

Just a quick question on that. Have you thought about what you might do to your -- well I guess it's very small, right -- with the existing DAC?

We have talked about it. And you are right that -- you are right that because of the Citi reinsurance deal, the amount of DAC that are currently have on the book is essentially less than its been historically. Our view would be that about 20% of the existing DAC balance relates to these general expense type items that I was just referring to. And so, you need to look at that and say what percentage of the 20% would be subject to write-off. And I say write-off (inaudible) we did a retroactive -- of adoption of the rules. And so, some subset of that 20%.

And, again, we have a good feel of direct -- excuse me, successful versus unsuccessful. What we don't have a good feel for yet is what's going to be the definition of direct versus indirect.

All right. And then, maybe IT expenses in longer term interest rate environment.

On the IT expenses, really, what a lot of that relates to is, one, is less really focus on specific projects, but more associated with the fact that as we are moving away from being part of Citi we need to, one, build out certain aspects of our infrastructure -- IT infrastructure, as well as the fact that we find that we're losing purchasing power as no longer being part of Citi.

So, some of those items we had actually anticipated were [short] more so in the second quarter and they've been delayed to the third and fourth quarter.

But, do you have a number for that?

Let me actually go through just -- instead of just highlighting IT, why don't I just talk a little bit broader about the expenses?

Okay.

Because there are other items -- there are -- let me actually sit back and talk a little bit about expenses in the aggregate. Expenses were lower than we had anticipated for the quarter, obviously. As you may recall, approximately $2 million of the IPO related launch expenses hit last quarter, even though we had anticipated they would happen this quarter.

As we continue to build up our public company infrastructure we do expect our operating and insurance expenses to rise in the third quarter from where they were in the second quarter. And we expect that increase to be in about the $4 million range; some of that is coming from the IT that I was just discussing.

We also have some compensation and benefit related items. One specific example is that because of our switch over from the Citi benefit system to our own benefit system, we did not do any 41K matching. We did not allow any contributions during the second quarter, and we are obviously beginning to back up now that we've launched our own HR system in the third quarter.

So, that's an expense that we thought would actually happen beginning the second quarter was pushed off to the third quarter. And then there's some other general legal costs as we do things like building out just our standalone infrastructure. So, hopefully that gives you a reasonable sense.

That was good. Thank you.

On the interest rate that -- and I will not claim to be an economist. We work very closely with the folks at Conning Asset Management, who are our investment managers with regard to the best decisions to make with regards to the portfolio. But what we are trying to do right now is at least put some money to work in this sort of zero to three year space so we can get a little bit of pick-up on yield.

We have been -- you can see 20% of our purchases were in five year or greater, so we are selectively putting money out longer on the curve, but overall are pretty reluctant to go too steep in that direction just because we don't want to be buying at the complete height of the market.

So we do feel -- because of the points I made about how our product liabilities work, we do feel like we can opportunistically manage the investment portfolio, rather than being tight to matching our portfolio duration specifically to our liabilities.

So I would expect, over the course of the next few quarters unless there's some dramatic change in the environment, that we will stand in the short end, but I think you will see us start to put a little more money out in the five or so year range -- five year to ten year range as we see those opportunities.

Okay. That's fantastic. Thank you, Alison.

You're welcome.

Your next question comes from the line of Paul Sarran from Macquarie. Please, proceed.

Good morning.

Good morning.

Good morning.

One kind of specific question. Can you quantify the higher DAC expense in the quarter related to weaker equity markets and investment and saving products? That's the first one.

And then, a bit of a more general question. Some of your peer companies have begun selling their term product that's built on a UL chassis, which is designed to save some of the statutory capital strain. Is this something that you've looked at and would consider? And if so, what kind of timeframe would it look like for a rollout?

Okay.

I'll go ahead and cover the first one, and then I'll turn the second one over to Rick and John. That will give each of us a chance to practice coughing. So, just specific on the seg funds -- or, on the Investment Savings Product segment, that is on the seg fund product.

And the distinction there is that we do account for the seg fund using FAS 97 whereas obviously term is FAS 60. So, very different accounting mechanism and it's really not something that's broadly used obviously within our business, the seg funds being a relatively small piece of the business.

That said, as you well know with FAS 97, the fluctuations can be pretty large because whenever you do have an adjustment to the amortization rate, it's done retroactively back to issue date. So what we had -- what we saw this year was we saw higher market values overall, which essentially would have been a good guide to amortization, but specific overall, meaning year-over-year.

But when you look at period end first quarter to period end second quarter, market values were down. So in the quarter, we had to accelerate amortization. And in the prior year, the exact opposite happened; it was the exact opposite phenomenon. So when you actually look at a year-over-year comparison, you have sort of a double-dip of a favorable adjustment in 2009 and a negative adjustment in 2010.

Can you maybe quantify the swing at all?

I think if you look at our financial supplement, you could see all the statistics on what the average asset values were. I think the assets were down about 3% or 4% at the end period point. Average assets were actually up. So, it's somewhere in that range this year. Off the top of my head, I don't know what 2009's trend was, but that was really what the driver was.

Just to give you a sizing of it, it looks rather large but it's really because we had a $600,000 or $700,000 favorable in the second quarter of last year and a $600,000 or $700,000 negative this year. So, on an absolute scale it really wasn't a big adjustment in any one of the quarters.

Okay. And then on the term life on the UL chassis.

Got it. Hi, Paul. John Addison here with the Southern accent, but who is not coughing at you. Just to kind of get -- we are right now beginning -- post IPO really in the early phases of looking at improvements to all of our product offerings, and in enhancements to our product offering.

But, we are not looking at UL chassis for our term life insurance. We're looking at the improvements that are going to make our product better, make it easier for our sales force to do the business.

But all of those companies historically have whatever is going on in financing or whatever done different things with our term products. One thing about our structure is we've been able to stay very consistent in how we build our term insurance so we're not looking at anything that has the word Universal Life and the chassis of it.

Okay.

Okay?

Yes, thank you. Thanks for the response.

Your next question comes from the line of Andrew Kligerman of UBS. Please, proceed.

Hey, Andrew. Andrew? Hello?

Your next question comes from the line of Mark Hughes from SunTrust. Please, proceed.

Hey, Mark.

Good morning. How are you?

Doing well.

Good. The investment sales in the quarter were pretty consistent, despite the volatility in the broader stock market. Any particular push you've had? I guess, variable annuities were quite strong. What's your latest view on how much those sales are influenced by what's going on in the broader environment?

You go first, Rick, then I'll [stay in] course on it.

Yes. I mean, we're clearly are impacted by the broader environment. Typically, I think, as we've said, there is somewhat of a delay between what our clients do versus what happens in the broader environment.

Yes, we did see good variable annuity sales in the second quarter, and I think a lot of that has to do with the volatility in the markets and the guarantees provided by the variable annuity product are sort of a feature that's attractive to consumers there.

Right. And I'll just say, clearly, as Rick said, we are -- it's not we're immune to market conditions going on in the United States. One of the things -- just to add an anecdote that we're very proud in our recruiting being up.

One of the questions that I think several of you have consistently asked us particularly at the time we were working on the IPO is, isn't good employment good for recruiting? And as I've said, it's not. Okay? The best recruit for Primerica is a true part-time person with the discretionary time and income to build their business. So, one of the things I'm very proud about our recruiting is that it's not like we were swimming downstream, you were swimming upstream to make that happen.

The long term volatility of the market is not good for our Investment business, but one thing that I would say beyond the fact of variable annuities and how it performed, is one of the things we're excited about with the equity grants and the ongoing equity programs and with the direct to chair program for our sales force purchased in significantly, our sales force understands the earnings dynamics of the Company.

There is an alignment now of their interest with the interest of the firm. We're [not now] a part of a much larger company with other issues. And there is an understanding that investment sales are an important part of the ongoing economic dynamic of the new Primerica. I believe that has been greatly understood and executed on by our sales force.

Right. And a two-part question regarding the sales force -- the issue of the non-renewals, the biannual renewals, little change in the processes. Is that a midyear phenomenon? Is there -- do you have visibility for what those dynamics might be in Q3?

And then secondly, I think you would up to your expenses a little bit related to a post-IPO push. That extra push, how long did that persist? Is the level of intensity going to be sustained as you go forward?

Okay. I'm going to let Rick talk first. Yes, I could assure you we have a view of the future that Rick has (inaudible) of viewing everything as it relates to state renewals. I'll let Rick cover the first part of it, and then I'll answer the second part of it.

Okay. Yes. As far as the biannual renewals, we don't see -- or don't forecast a third quarter impact of additional states having those. There were four states that did have biannuals in the second quarter, but that will not be a continuing phenomenon into the third quarter.

And let me talk a little bit about the ongoing push. Again, you know, as we finish the -- we had several things -- from my perspective well, force of recruiting, one was the first quarter ever out the gate equity competition for the sales force.

And then, the El Conquistador location has been a well received and extremely -- I mean, if you're in Minnesota competing with Primerica right now, the idea of being in February in Puerto Rico at a gorgeous resort, has been very, very well received as a contest location. So, we had a successful out-the-gate there.

I absolutely see ongoing continuation of the momentum in the incentives out of the IPO. Our goal is through equity and through the incentives and through things we're working on to enhance and build on that not to see the effects of that dissipate at all.

Thank you.

(Operator Instructions)

Your next question comes from the line of Ryan Krueger of KBW. Please, proceed.

Thanks. Good morning.

Hey, Ryan. How are you doing, buddy?

Good. I had a question on the sales force. Your recruiting was very strong in the quarter, but you did mention that the percentage of the recruits that became licensed -- it looked like it was about 15% in the quarter which compared to more of a historical rate in kind of the 17% range.

So I was wondering what the driver of that was and if it was more of a temporary phenomenon, or something that we should expect to continue.

You go first, Rick.

To understand sort of the licensing process, in most states, once you submit your application, you have to go through a pre -- a licensing course and then take a test. If you look at it, that's about 90 to 120 day average duration and -- for people to go through that process. So what you saw in the second quarter was the spike in the recruiting, but they'll get licensed over a 90 to 100 day period of time. So, the fact that the non-closed block aspect of it ratio declined, it would be expected.

Right. As you look -- one of the things that happened in the quarter as you saw -- if you recall the previous quarter and stuff heading into the IPO, you saw lower recruiting results. And those recruiting results predominantly are what was driving the new licenses for the quarter. Now, we've had an increase in recruiting and you'll see that pull through in the future.

Okay. Great. So, it's really just timing issue.

Yes.

And then I just had a quick follow-up for Alison on the expense question. I think you mentioned $4 million higher expenses next quarter. I'm just wondering, are those all expenses that you've kind of expect to be more ongoing expenses over time, or is any portion of that were one time in nature?

I would say generally speaking, that's going to be ongoing in nature. Some of the items might be slightly elevated in the third quarter -- just to say the initiation of a program. I think that IT will be a little bit lumpy. They wont necessary be sequentially exactly the same, but definitely, for example, the 401K item I mentioned, will be consistent from here on out.

Okay. Thank you.

You're welcome.

Thank you for the question.

Ladies and gentlemen, that concludes the question-and-answer portion of our call. I will now turn the call back over to Rick Williams for closing remarks.

Well, thank you everybody for joining us this morning. We look forward to speaking to you at the end of the third quarter. Good day.

Good day, everyone.

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a great day.