Primerica Inc (PRI) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Primerica earnings conference call. My name is Gwen, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session toward the end of this conference. (Operator Instructions) I would now like to turn the call over to your host today, Miss Kathryn Kieser, Senior Vice President of Investor Relations. Please proceed, ma'am.

Good morning, everyone. Thank you for joining us today as we discuss Primerica's results for the fourth quarter 2010. Yesterday afternoon, we issued our press release reporting financial results for the quarter ended December 31, 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 reference certain non-GAAP financial measures in our press release and on this call. These non-GAAP measures are provided because management uses them to make -- in making financial decisions, operating and planning decisions, 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 results 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 statement 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 involve risks and uncertainties that could -- that could cause actual results to differ material from these statements. Please see the risk factors contained in our registration statement on Form S-1 originally filed on November 5, 2009 and amended through March 31, 2010, and our Form 10-Q for the quarter ended September 30, 2010 for a discussion of these risks.

This morning's call is being recorded and webcast live on the Internet. The webcast and corresponding 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 fourth quarter 2010 earnings call. Let me start by saying that 2010 was a remarkable year for Primerica. The IPO allowed us the opportunity to fold our 34 years of experience, expertise, and innovation into an organization with a more streamlined balance sheet following the Citi reinsurance transactions. The IPO also removed the uncertainty about Primerica's future and helped reinforce our position as a stable, trusted advisor to middle-income families.

The initial equity grants and the quarterly equity incentive programs have allowed us to align both the short- and long-term interests of all of our stakeholders. Importantly, the offering also refocused us on building Primerica for the long term. This focus has led to innovative incentives and improved product offerings we'll be announcing at our biannual convention in June.

The economic headwinds in 2010 did have an impact on our recruiting, sales force size, and life sales, but we are very proud of what we were able to accomplish. Our term life business outperformed the industry, as our policies issued through the third quarter of 2010 compared to 2009 were down only 4%, while the term life policies issued in the industry declined 11%.

Through the third quarter, our recruiting also outpaced the recruiting by the direct selling industry. During that time, Primerica achieved a 4% increase in recruiting, while the direct selling industry experienced a 10% decline in recruiting compared to the prior year.

The difficult market conditions also affected our investment portfolio. Although with prudent expense management and growth in our investment and savings product sales and asset sales, we were able to deliver strong results for the year.

As you can see, beginning on slide four, our net operating income for the fourth quarter was $45.2 million, or $0.59 per dilutes share, reflecting stable core performance in term life and investment and savings product growth, partially offset by lower investment income. Alison will get into the details later.

Stockholders' equity was $1.44 billion at year end. Adjusted stockholders' equity was $1.34 billion, and net operating income return on adjusted stockholders' equity was 13.8% for the fourth quarter. This was up from 13.1% in the third quarter.

This expansion primarily reflects three items -- a lower effective income tax rate compared to the third quarter, the accounting corrections made in the fourth quarter, and a reduction in Citi premiums related to the innovation of a reinsurance treaty that were previously assumed to be uncollectable. Alison will tell you more about these items in a minute.

We expect downward pressure on return on adjusted equity as equity grows and public company expenses build out. Adjusted book value per share was $18.42 at December 31, 2010.

A highlight for the quarter was the 9% increase in investment and savings products sales primarily driven by a 23% increase in variable annuity sales. Growth in variable annuity sales continued to outpace the industry in fourth quarter 2010, reflecting our clients' desire to mitigate financial risk with guaranteed lifetime income.

Sequentially, investment and savings product sales were up 10%. Improved market conditions continued to drive our client assets up 11% to $34.87 billion at the end of the fourth quarter compared to a year ago. Sequentially, asset values at the end of the period were up $2.27 billion, or 7%, compared to the third quarter 2010.

For the full year, investment and savings products sales were up 21% with annuity sales growth at 27% compared to 2009. Average asset values were up 19% in 2010 compared to the prior year, reflecting improved market conditions and sales growth.

Term life remains stable with improved persistency and consistent mortality offset by 7% decline on life insurance policies issued the fourth quarter 2010 compared to a year ago. For the full year, term policies issued declined 4%. The decline in issue policies was consistent with life industry trends coupled with a year-over-year decline in the size of the life licensed sales force. John will spend some time discussing the sales force highlights in a minute.

Sequentially, life insurance issue policies increased 4% in fourth quarter, largely reflecting fewer issued policies due to lower sales during the summer months. Our average policy issued premium was $791, down 5% from fourth quarter 2009, and down 3% from the third quarter 2010.

We are pleased with our solid net operating income and earnings per share, reflecting continued growth in our term life net premium revenues and investment and savings product sales. Our strong capitalization and clear focus on growth strategies paired with our unique distribution position us to drive higher growth and improve performance going forward. With that, let me introduce John Addison, who will talk about our sales force and distribution.

Good morning, everybody. 2010 was indeed a historic year for our company. We're extremely proud of what we've been able to accomplish in our first year as a public company, and we're excited about the things that we're working on for the future.

As you can see, on slide five, recruiting was up 4% in the fourth quarter 2010 compared to 2009. It was up 4% for the full year compared to a year ago. The size of our sales force in insurance licenses declined 2% from the third quarter of 2010, while our new life licenses declined 11% in the fourth quarter 2010 compared to the fourth quarter a year ago.

We typically experience fewer new licenses in the fourth quarter than in other quarters due to the holiday season. We also see higher non-renewals due to the fact that more states have renewal cycles at the end of the year.

Our life license sales -- the life license sales force was down 5% at year end compared with year-end 2009 while new life licenses were down 8% and non-renewals were up 2% year-over-year. A couple of factors contributed to these results.

First, as we mentioned in the past, the State of Georgia changed their licensing process at the beginning of 2010, which took some time to implement. So the number of new licenses issued at the beginning of 2010 was down.

Right now we are laser-focused on building Primerica for the future. So our focus is on things we can control, like developing new innovative incentive programs that reward RVPs for distribution and sales growth, improving our product offerings to better serve our clients, and creating a positive and energetic environment through promotion of our unique strengths and new initiatives in order to enhance the business opportunity for new recruits.

I just got back from a fairly grueling 12-city tour where I met with approximately 4,000 RVPs and other senior leaders. At these meetings, I spoke about two specific incentives aimed at driving distribution growth. The first new initiative is the equity incentive program. It has been revamped so that the majority of equity goes to RVPs who grow their premium and number of life licensed reps on their team in the first quarter of 2011 compared to the first quarter of a year ago.

Also, everyone who qualifies for equity will receive additional equity if the company grows in premium and licenses. The total shares available for this incentive program are 187,500 in the first quarter of 2011.

The second initiative we discussed at these events is the new qualifications for the fast start bonus. After launching the fast start bonus, we saw a pickup in recruiting and field training activities, but the new license activity was lagging. So we announced changes to more heavily incent new recruits to get licensed as well as to provide an even more financial motivation for the RVP to assist these new recruits through the licensing process.

At the meeting, we spoke heavily about our biannual convention in June that will be at the Georgia Dome. I talked about how it will be the first ever convention of the new public Primerica. I also discussed how we plan to deliver things at the convention that will enhance the business opportunity for our sales force.

Some of the things I mentioned were the additions we'll be making to our investment and savings products, new life product enhancements, including best-in-class technology. As you're all aware, we currently process 60% of our life applications and 80% of our recruit applications using a smart phone device.

We are moving to a web-based platform where our sales force can use devices such as an iPad. Picture this. This will allow them to present our products, show company videos, take the application, all on one device without changing devices. They will also be able to immediately transmit the application to the company for processing, allowing the reps to more efficiently utilize their time. This advanced technology platform will also be used as a recruiting tool, appealing to the younger, more tech savvy market.

I also talked about the convention competitions we are currently running, including the opportunity for special dome seating, VIP dinner invitations, and recognition on the gigantic dome stage for recruiting, licensing, product sales, promotions, income milestones, and other growth drivers. The new initiatives announced in the dome combined with the motivation and training reps receive at the event should position us for growth heading into the fall.

To give you more of an idea about what we're working on, we continue to work on enhancing our investment and savings platform. As I've mentioned before, we plan to enter the managed account business later this year. In December, we launched a campaign to get our top investment producers Series 65 licensed by summer. In the first quarter, we also enhanced our existing ISP bonus program to increase the pay-out and to the number of reps that can qualify on a quarterly basis. This volume-based bonus should continue to help drive ISP sales. We also launched the largest ISP incentive trip we've ever had. We'll be taking over 280 qualifiers and their spouses to The Breakers in Florida. The competition is based on total ISP sales volume, sales growth, and growth in securities licensing.

The economy has created a few speed bumps this year. And it may continue to cause some downward pressure on licensing ratios near term. But I can tell you one thing. We have our foot on the accelerator, and we are 100% focused on growing the size of this sales force. I am very optimistic that with reasonable economic and market conditions, our short-term focused incentives paired with our longer-term focus on building the infrastructure to enhance our business opportunity that we will generate growth. With that, I'll turn it over to Alison.

Thank you, John, and good morning. As Kathryn noted earlier, we believe that operating results are the appropriate measures to gauge our performance. So my discussion will largely focus on these measures. Let me start on page six of the presentation with the reconciliation of net operating income to net income. As in the past, operating results exclude realized investment gains and losses and the expenses associated with IPO-related equity awards.

For the fourth quarter of 2010, operating results also exclude $13.1 million of pre-tax income related to agreements with certain reinsures to recover ceded premiums for post-issue underwriting class upgrades. The most common reason for an upgrade is when someone who was originally issued a term life policy as a tobacco user subsequently quits using tobacco.

Historically we have reduced policy holder premiums for such upgrades, but not have reduced to get premiums to reflect the new underwriting class. We were uncertain of our ability to recover past ceded premiums, but in the fourth quarter of 2010, we approached our reinsurers and ultimately reached an agreement to collect them.

During the quarter we recognized recoveries related to prior underwriting class upgrades of approximately $18.8 million on certain of our reinsurers. Citi's share of the recoveries under our co-insurance agreement was approximately $5.7 million for a net pre-tax impact of $13.1 million. We will have recognized about $9 million of additional pre-tax recoveries in the first quarter of 2010 for agreements reached with the remaining reinsurers.

Given the magnitude of these recoveries, we believe that the impact is not indicative of ongoing operation and should be removed from our operating results. As a result of this or any other operating adjustments, diluted operating earnings per share is $0.10 lower than diluted earnings per share presented on a GAAP basis.

In the fourth quarter of 2010, we began reflecting these post-issue underwriting class upgrades in our ceded premium calculations as they are incurred. Operating revenues in the fourth quarter, therefore, were approximately half a million higher, net of Citi share, than they would have been without this change. This impact will be ongoing in nature.

Before we move to segment results, there are two additional items to note. First, our effective tax rate was lower in the fourth quarter compared to prior periods contributing net income of approximately $0.02 per diluted share. This reflects the retroactive extension of certain expiring provisions in the US tax law that previously required us to accelerate the recognition of tax on foreign investment income.

Second, we made corrections to certain items previously recognized as income on a cash basis. These corrections were one-time in nature and contributed earnings of about $0.01 per diluted share. The impact on a segment and financial statement line item basis is more pronounced, and I will highlight these adjustments for you as I discuss the segment results.

Turning now to page seven, our term life operating revenues were down slightly versus the prior-year period. Direct premiums increased by $13.1 million or 3%, reflecting improved persistency offset by lower sales in the period. The $12.3 million or 3% increase in ceded premiums, which is highly influenced by the Citi reinsurance, followed the same pattern as direct premium.

Additionally, during the fourth quarter, we recognized a reduction in ceded premiums of $3 million that contributed earnings of $0.03 per diluted share from notes that were previously assumed to be uncollectable due to the notation of a reinsurance trading.

Net investment income was down $1.4 million or 9% versus the prior year period due to declines in the fair value of assets held in the Citi 10% coinsurance track. GAAP accounting requires us to recognize these changes in fair market value in income currently. While we discuss our general account invested asset performance later in the call, net investment income allocated to term life was generally flat year-over-year.

Benefits and claims increased over the prior year period driven by higher reserve increases from improved persistency. Claims were level versus the prior year.

Back amortization declined year-over-year due to improved persistency and lower sales. An offsetting factor was the lower interest rate assumption for 2010 issue business that I discussed last quarter.

Excluding the one-time $4 million accounting correction to accrue certain premium-related taxes, insurance expenses remained level versus the prior year, as the expected runoff and Citi reinsurance expense allowances was offset by non-recurring expenses in the prior year.

On a sequential quarter basis, term life results reflected the growth in the new term block offset by the runoff of the legacy block. For the new term block, we expect operating income to grow in line with premiums. However, increased back amortization from seasonally worse fourth quarter persistency caused operating income to decline slightly.

For the legacy block, we expect operating income to decline with the runoff of the block. Excluding the one-time premium tax accrual collection, operating income for the legacy block increased slightly, driven by the $3 million ceded premium recovery, partially offset by the decline in Citi reinsurance trust assets, both mentioned earlier.

Turning to page eight, you'll see the results for our investment and savings product segment. In the fourth quarter of 2010, we recorded a one-time accounting correction to commission and fee revenue and expense largely reflecting the accrual of 12b-1 fee and the corresponding sales force payout. The correction increased revenue and expenses by $11.6 million and $6.8 million, respectively.

Excluding these corrections, our operating results were as follows. Operating revenues increased to $91.4 million or by 10%, driven by the higher sales and increased client asset values that Rick discussed earlier. Operating income before income taxes increased to $29.9 million or 15% compared to fourth quarter a year ago.

Sales-based revenue outpaced growth in sales-based commission expense due to a volume-related incentive payment we earned for strong variable annuity sales in 2010. Asset-based revenue and commission expense increased 10%, consistent with average client asset values in the fourth quarter.

Operating expenses were largely flat except for those that typically fluctuate with client asset values. The sequential quarter trends are generally consistent with those described for the year-over-year period.

In our third segment, corporate and other distributed products, operating revenues decreased by 11% or $4.4 million year-over-year. The segment had lower investment income primarily attributable to a smaller invested asset portfolio. Commission and fees on other distributed products continue to see downward pressure from the reduction in our lending business. Results for other product lines within the segment were generally -- were slightly favorable.

Corporate expense payments to Citi were down $2.2 million from the prior-year period. And our full transition away from Citi-provided services is largely complete. Cost to replace these services as well as other public company expenses were $3.1 million for the quarter. In the aggregate, expenses were flat compared to the prior-year period, as expenses in fourth quarter 2009 included non-recurring IPO-related items.

As we move into 2011, we believe that the $3.1 million that I just mentioned will grow to approximately $4 million per quarter. Throughout 2011, we will continue to negotiate our IT spender contracts with increases anticipated for 2012.

In addition, here are a few other expense areas to consider for 2011. As I've mentioned in the past, equity incentive award amortization was accelerated in 2010 in conjunction with the IPO. As we begin awarding PRI management equity awards in 2011, we will start to see a regular quarterly trend in amortization again. By the end of the second quarter, we'll be at our quarterly run rate for the year.

Our annual merit increases to the staff will occur in the first quarter causing an increase in our sales and benefits, excuse me, our salaries and benefits. As John mentioned earlier, we plan to roll out new products during 2011, and new expenditures will emerge accordingly. As legacy block runs off, we will continue to see decreases in the Citi reinsurance allowances. And finally, as I mentioned earlier, we are fully -- nearly completely out of our Citi services. And therefore, there will not be future savings along those lines.

Turning now to page ten, we'll look at our balance sheet and cash flow. We continue to maintain a conservative balance sheet with a strong capital position. As of December 31, 2010, our risk-based capital ratio is estimated to be over 570%, well in excess of our long-term RBC target. We maintain this excess capital to fund the future growth anticipated in our business and expect the RBC ratio to decline over time. Our debt-to-capital ratio remains low at 17.3%, as does our invested asset to projected equity ratio of 1.7 times.

Our cash position increased during the quarter from 3% of our portfolio at September 30 to 6% at the end of the fourth quarter, largely due to the timing of operational cash flows, the reinsurance recoveries discussed earlier, and the timing of investment asset purchases. Cash flow from operations continues to be positive.

Turning to page 11, as of December 31, we had investments and cash totaling $2.28 billion. We continue to hold a high-quality invested asset portfolio with an average credit rating of A on our fixed income portfolio, and a diverse mix among asset classes in sectors. Excluding cash, all but 1% of our invested assets were in fixed income investments of which 93% were rated investment grade.

Our invested asset portfolio has a net unrealized gain of $157.4 million, including unrealized losses of only $7.4 million at December 31, 2010. The reduction in net unrealized gains from the prior quarter-end balance of $188.9 million is largely reflective of interest rate trends. We had minimal other than temporary impairments during the quarter and net realized gains of $1.7 million.

Higher rates and robust new issuances during the quarter allowed for a more constructive investing environment. As interest rates increased during the latter part of the quarter, we extended the duration of our purchases modestly to enhance the yield, while maintaining an average credit quality of A on our purchases.

The average yield on our new investments for the quarter was approximately 3.6%, over 100 basis points higher than in the third quarter. And for the last two months of the quarter, averaged more than 4%. The average duration of our new purchases is slightly over five years. This extended the average duration of our fixed income portfolio slightly to 3.6 years. We expect that our duration will continue to increase gradually towards our general target of five to seven years, as we continue to reinvest further out the yield curve to enhance yield. With that, I will turn the call back over to Rick.

Thanks, Alison. Before we being our question-and-answer session, let me recap some of the fourth quarter highlights. An operating earnings per diluted share were $0.59. Annualized net operating return on average adjusted equity was 13.8%. And our investment savings product sales were up 9% over a year ago. With that, we'll open it up for questions.

(Operator Instructions) Our first question comes from the line of Steven Schwartz with Raymond James. Please proceed, sir.

Hey, good morning, everybody.

Hey, Steven.

Hey. A couple of things. If I was -- I'm writing down numbers awfully fast, but from the accounting adjustments, the ceded premium, the act of financing income exemption, I would kind of normalize this quarter out from a [59] to a [53]. You know, I was doing the math very fast. Does that -- Alison, is that about accurate?

I think it's a little -- I think you're adjustments are a little bit heavy. The three items to where we look at -- because, remember, we already adjusted for the $13 million reinsurance recovery when we started.

That has taken that out, yeah. Yeah, I was not including that.

Okay, so then the three items are -- that I would focus on are, the ones you mentioned is the change in the effect of tax rate, which is probably about $0.02, the accounting adjustment, which is about $0.01, and the $3 million -- you're referring to the $3 million uncollectable reinsurance amount that we actually ended up collecting.

Right.

And the probably about another $0.03. So that's about $0.05 or $0.06 there. So you're pretty close, yeah.

Okay, all right. And then the two items that you didn't touch on that I think may affect how we look at that number, the Citi reinsurance fee, the investment trust.

Yes.

Sounds to me kind of like some kind of like modco arrangement or something like that, where you're taking the mark to market into your income. How did the mark to market affect you for the quarter?

It, yeah, that's a great point. And just to back up a second, what that is, if you all recall, at the time of the IPO we had two reinsurance contracts between Primerica Life and Citi. This one, the 10% one, is a little bit unusual. It's not a straight coinsurance because there is an experienced refund associated with it. So we do hold certain assets to support the economic reserves on deposit. Basically they're held on deposit by them, and we get to have it as an acted-on deposit.

They're held -- those assets are held in a specific trust. The accounting rules for those trust assets require us to take the current period mark to market through income, whereas normally, you'd obviously see on our general account that flowing through AOCI. In this period, we had a mark to market adjustment of about $1.4 million.

In total, you know, just to size it up a little bit for you, in total there is about $50 million or so in this trust. And, you know, if you think about it, 1% -- and the average duration is about four or five years, closer to five years. So you can do the math, but for 100 basis point swing in interest rates, we'd expect to have anywhere close to about a five -- a $2.5 million, excuse me, type of impact. So, give or take -- there's definitely volatility associated with those assets, and certainly not consistent with what you see in our general accounts.

Okay, great. And then the incentive fee on the VA sales?

Yes, that's a very positive item for us. Our provider for variable annuities, which is MetLife, we had a bonus program or an incentive program with them whereby if we hit certain sales levels, we get a lump sum bonus. Now the sales levels build throughout the year, but until we hit that hurdle mark, we don't really accrue anything or we're not entitled to anything. In the fourth quarter, we hit that mark and were able to record revenue of about $1 million associated with that. And that is an ongoing item. The interesting thing about that, like I said, is we don't accrue it during the year because we have to wait to hit the hurdle. And generally we'll hit that about the fourth quarter.

Okay, great. And then if I may, I don't want to take up too much time, but one for John Addison. The recruiting, one of the risk factors from the IPO is -- were the changes -- the increasing difficulty in making home loans. I'm wondering if -- John, if you think that that's part of what's going on here with regards to getting recruits to being licensed.

Now I thought you were going to ask me a reinsurance question, Steve.

I'm sorry, maybe next time.

Steven, you have thrown me totally off, so I'm going to have to regroup. At Primerica, the -- one of the things that as you look at anything on the front end of our business; recruiting, licensing, all that -- I mean, it's very easy for anyone to identify one thing and attribute it to that. and Primerica is -- sometimes it's a very simple business, but sometimes it's complicated in its simplicity. And you can have multiple reasons for something. That clearly is one of the reasons.

Let me -- since you've asked the question, let me just kind of walk through, particularly having been out now on a 12-city tour, my view of the things -- when we say the word headwinds what some of those things are.

Clearly, the economy is, in my mind, the largest. And as I said many times to you all, the issue -- we -- we're talking to someone about an opportunity, not a job. Okay? And when the economy is challenging, people, if they make the commitment to do it, make a more marginal commitment to get going. And people are -- my description before I think I've used with you all are a little bit more like a turtle. They go inside their shell the more rain that's falling in the economy.

And -- but one of the things we are proud of as Rick mentioned in his portion is that when you compare on the recruiting front us to the domestic direct sales industry, we're doing better than them in marketing our business opportunity.

One of the things in particular to your question, Steven, is west of the Mississippi we had a significant amount of our sales force because of the markets. You know Vegas, California, those places, because of the equity buildup in homes the debt elimination business, which was the lending business, was a significant portion. Not only of their business model but of their story that they were using.

With that going away, we've -- a lot of our leaders there have been adjusting to kind of our -- what the new story is -- and more focused on investment and savings products and our core life insurance business. But, you know, one thing I would just say to you is Primerica is an amoeba. It adjusts to -- it may take a shot on one side, but it adjusts to those.

And one of the things you see beyond just the rhetoric in our -- what we're saying we're doing, the core focus on the investment and savings business is to drive that business as it -- not a replacement, but a shift from what the lending business was.

I wish all of you could tell me again when people will have equity in their homes in this country again. In fact, I've got a couple of pieces of property you could help me with if you could help me figure that out.

I'm not sure when that type of business or if it ever comes back. But the investment and savings business, a big piece of the reason of our investment in that platform and our focus in that platform is not just because we know that's the right thing to do for our clients and also the right thing to do for our sales force, but it is also, I believe, going to be a big piece of the story of the new Primerica as we build out this infrastructure and build our business. So hopefully that answered that.

Yes, I'm all good. Thank you, guys.

Hey, good talking to you, Steven.

Our next question comes from the line of Mark Finkelstein with Macquarie. Please, proceed, sir.

Good morning, I'm trying --

Hey, Mark.

Trying to figure out this amoeba comment, but --

It moves and adjusts. An amoeba, you can drop something on it, and it doesn't just get squished. It kind of moves in a different direction.

There you go. I guess I just wanted to dig in recruiting maybe a little bit more. On the one hand we have the incentive plans, kind of the fast start, 187,500 stock incentive awards for RSVPs. But you also made the comment, John, about seeing downward pressure on licensing. And so I'm trying to think about these two factors together. And I guess if you're willing or able to maybe give an outlook on what you think with these two things going on, the aging count might look like as we look out the next couple quarters.

I'm going to let Rick talk about the count issue or whatever. Let me talk more about what I see and what I believe the direction of things are as we go out both short term and long term. I believe that we will experience some headwinds, okay? And let me give the two headwinds.

One is I -- despite what you see on the news and the economy in the middle market. Having been out there and being with our people and being around for a lot this. It's still challenging. You have to see more people to do the same production that you were doing in 2007 and 2008. That's reality.

The second thing that I would just say is -- and one of the things I say in life, and one of things that doing these calls with you guys is kind of an interesting new thing for me. I believe in life there are two things. There are excuses and results. And so I'm not a person that likes to spend a lot of time saying what happened or what the challenges are.

But one of the things -- one of the areas I've mentioned is the western part of the US One of the areas where a really feel the best about what we have going on in our business for example is the Northeast. I -- doing a Primerica meeting around the country, you have different feels depending on where you're at.

And unfortunately, the business of Primerica is part-timers, either getting in their car and driving to a meeting or people driving to someone's home doing a sale. The weather has not been particularly helpful the first part of this year. So those are just two items I would say in kind of short term headwinds.

From a standpoint of how I view and feel about the business, I feel incredibly strongly about the incentives we're doing, particularly building toward our convention in Atlanta. My message, I'm about to be at our huge incentive trip in Puerto Rico, which fortunately we won't have a snow issue there. That is that we're building momentum into the dome so that we have dome-mentum, which -- interesting play on words coming out -- to have a significant lift in our business.

On the licensing side of our business if you look at the agent count, one of the things I'm extremely pleased with is, given the challenges of the economy the last few years, if you look at the core of our business, which is our full-time regional vice presidents and those positions, who are 100% commissions, who lost the lending business, that kind of thing. That number has stayed basically flat. Our people are still with us, they are the core.

The -- where you see at -- where you see challenges is at the front of the business. And besides the recruiting, it is on licensing. And when you look the numbers, the biggest view there is that when less people are following through in the process, and our view is that is economy driven, that people get started.

And understand when you're talking to a new person about our business, Primerica, I've told people before is basically a power of positive thinking business with a compensation package attached that does great things for consumers. And when people feel economically challenged, they're not as opportunity minded. And so we've seen some there.

And on the agent count, the other piece is people that come up for their first license renewal, they pay they themselves. If times are challenging economically, they make the decision to not do that.

Having said that, despite short-term headwinds, our view of this business long range has not changed at all about what we're going to do and what we're going to be able -- When I said we hit the accelerator, my view is when the water's are choppy, if you sit in your boat with the engine idling it's not particularly good. The choppier things are, the more gas you give it. And our focus is to build, build infrastructure, build incentives, and to push through this kind of short-term phenomena we see. With that, Rick, I don't know if you --

No, I -- as you know, we don't give guidance. I do think sort of the worst near-term pressure with the weather and the dynamics that John talked about sort of do apply for the first half of the year, but no more specifics than that.

But, Mark, I do look forward to you being in the Georgia Dome with us in June as we build Dome-mentum into the company.

Sounds good. I guess just Alison. Question on -- should we be thinking about higher expenses with some of the incentive plans, or how should we think about that over the near term?

No, I think the expense -- I see what you mean on the -- you mean the equity awards to the field?

Equity awards, fast start, all those.

Yeah, those are really already reflected in our financial statements because we've been running the same -- we've been tweaking the qualification of the program considerably. But the overall expense associated with it, or the amount of shares that we've made eligible for the program hasn't changed. So now-- and we also expensed them all basically at the point we deliver them.

Yes, on the fast start program there is a little bit of pickup. You actually see it already hitting in the new term segment, or sub segment of our life business. There's about $600,000 or $700,000 a quarter that we're not deferring, and that's because part of the program relates to things that aren't life premium driven, so they're not -- they're not eligible for deferral.

Right.

And so you do see a little bit of an uptick that happened already in the fourth quarter, and we anticipate it will continue to happen throughout 2011, $100,000 or so.

All right, perfect. Thank you.

Our next question comes from the line of Mark Hughes. Please proceed, sir.

Thank you very much. Alison, you were talking about some expense items that you might see a little bit of an uptick in the first quarter, second quarter here; salary, benefits, a corporate expense. You also mentioned amortization. Which category was that in, and can you tell us what the magnitude will be?

Sure, the amortization that I was referring to there was specifically for management equity awards. As I have mentioned in the past, with the IPO -- we've always had -- we've always historically had an equity component to our incentive program in the past. It's obviously been Citi shares.

With the IPO there was the full acceleration of the outstanding awards, and things will all close in basically at time of the IPO. So for the rest of the year, you didn't see -- or we didn't experience any kind of ongoing amortization expense associated with those awards, except for the piece that we had related to the IPO initial grants, but those we removed from our operating results. So, generally I haven't been talking about them.

Beginning in the first quarter, we will have our annual cycle of incentives to the management. And then, of course, we will begin to amortize those equity awards going forward. So you'll see in 2011 the amount emerge. It'll be -- hit its full potential, if you will, for the year, in the second quarter because we expect the rewards to be rewarded late in the first quarter. And then obviously, each year you're going to see sort of a progression of that as you layer in another year of awards. Generally speaking, our award programs vest ratably over three years.

So what should we look for in 2Q?

I'm not exactly comfortable saying that because our Board hasn't approved the incentive compensation yet. So, in the first Q you won't see much. In the second quarter, it'll start to uptick. At this point, I don't think there's more I can give, only because the awards really haven't been approved by the Board.

Okay. And then in terms of the new term life business, can you give us a snapshot, what's going in terms of the pricing environment, how much coverage people are buying these days, what you might anticipate over the next six months?

This is Rick. On the pricing environment, we're not seeing much activity on that front at this point in time. What you did see is average size on a premium declined 2.5% from the third quarter to the fourth quarter. And we see -- we do attribute that to -- practically to the economy. Another just dynamic that happened in the business in the fourth quarter was we had sold more individual policies and fewer family policies. Our family policies have a higher average size than do our individual policies to a certain extent. But we're not seeing a lot of pressure there.

I mentioned in my comments up front, the term part of the insurance industry has been under significant pressure through the first three quarters of the year. For the industry as a whole, we've done better than that. I believe the -- that -- the declines year-over-year for the industry will start to improve in the fourth quarter. Although I haven't seen any data that suggests that at this point.

Thank you.

(Operator Instructions) Our next question comes from the line of Darin Arita. Please proceed.

Good morning.

Good morning.

I had a question on the ROE expectations. It sounded like in the opening remarks you'd expect some downward pressure and was wondering over what time frame? Is it just in a one-year period, or multiple-year periods?

The downward pressure comes from sort of two dynamics. One is the -- as Alison described sort of as we get to a full expense run rate, there will be some downward pressure associated with that. The second dynamic relates to just the build up in equity over time, which sort of does lead me to just make one comment that we have had a conservative equity capital structure. We came out as a public company. It was a very uncertain economic environment at the time. We were a new company, so we had a conservative capital structure.

As the marketplace -- market environment stabilizes and as we have some experience under our belt, we will be revealing sort of our capital -- or long-term capital structure. We don't have anything to say at this point in time, but one of the pressures that you have on ROE is as your equity builds up, you do see a decline in that.

Okay, and maybe this leads -- well, I guess before I go there, though -- So is it fair if we think about the expenses, though, we'll be at the full expense run rate in 2011, or should we expect even higher expenses going into 2012?

I'll take that one. I think for the most part, 2011 will experience a run rate. The main thing to consider going into 2012 and 2013 would be our IT vendor negotiation. Several of our contracts are tied to the ownership structure of Citi and so as some of that phases out, we are actively negotiating those contracts. We do not anticipate any sizable increases in 2011, but in 2012 and 2013 as the remainder comes to term, we may see additional increases. Other than that, I think we'll be at our normal operating expense base by the end of -- or actually by mid-2011.

Okay, that's helpful. And then just in terms of the excess capital, I was wondering what's been causing the RBC ratio to rise this year? It seems like it's been going up about 20 points per quarter.

Right. Well, specifically for this quarter, there's been some items in each and every quarter. And one important thing for me to remind you of is that, obviously, we only do the formal calculation once a year, and we're in the process of doing that now with our annual statutory preparation. But we do try to run an estimate each period, which we think is a pretty good proxy of what the ultimate capitalizing will be.

In the fourth quarter, specifically, there are two things that have happened. One is that the reinsurance recovery that I mentioned earlier, normally we'd expect from the build out of the business to see the RBC run down. Those recoveries actually more than offset the natural rundown in the RBC that would've happened just for general growth in the business. So in and of itself, that remained a neutral type of item, the business itself.

The item that we had specifically in the fourth quarter was we took a very strong look at our deferred tax position under SATR, and based on some of the projections that we had for our three years going forward of statutory income, we were able to put up a larger admitted assets than we had been doing in the previous quarters. And so that's the main reason you see the fourth quarter pickup.

Right, that's helpful. Thank you.

Our last question comes from the line of Andrew Kligerman with UBS. Please proceed, sir.

Hey, Drew.

Most of my question has been answered, but just a couple of minor things. On the tax rate, so coming in at a normalized rate of 36%, you would have a $0.02 tax hit, implying that your run rate tax rate should be 34%. But you've guided closer to 35%. So I want to get a sense of where you see the tax rate going forward. Is it really 34%?

No, it's not, and I -- we can go through the calculations offline if you need to. But I would say the impact is really that we're sowing is $0.01 to $0.02. And part of that is that we had been running particularly high prior to this quarter. And a large reason for that, as I've mentioned in the past is with our [338-Z] election that we did, part of the IPO, we basically had to wipe out our foreign tax credits.

So until we build those back up, we expect to see some volatility in the amount of our Canadian income that we can avoid, I'll call it double taxation, but we can maintain the benefit of the foreign tax credits. And so there's a little bit of lumpiness there. With that said, I think over time the rate will get closer to the statutory rate. We do anticipate it being a little bit higher than the statutory rate in 2011.

And the statutory rate is?

35%. Mainly because of a couple things. But our -- if you look at, sort of, just permanent differences that you have, because our income base is so much lower with the IPO than it used to be, they represent a relatively larger percentage of our total income. As we continue to build this business each year with having a business that's not Citi related, they will become a smaller and smaller percentage of our total earnings. So I think the rate will normalize in the future for that.

Obviously we have state taxes to deal with for certain aspects of our business, and one of the positives we have is the Canadian tax rate. It is lower, and it has come down this year. But again, until we build up those foreign tax credits, there will be some lumpiness in the rate.

Great and just a last thought about some of these incentives. Acknowledging that the economy is extremely difficult, you highlighted a $600,000 to $700,000 per quarter pickup in some of these incentive plans. What -- is it just that the margin of this business is just going to keep contracting as you try to get it right?

Let me actually make sure I'm clear on that one item. The $600,000 to $700,000 that I mentioned isn't an economic difference, because it's the same money, same cash we had historically been spending. We've just -- we've figured how we're going to spend it.

Really where the distinction comes in is the timing of the recognition of that expense. We used to be able to say DAC or defer 100% of it because it was a purely 100% tied to on premiums. And now based on the other new launches of the program, we've chosen to not DAC a component of it. That said, it doesn't change the overall economics of the business at all. It does change the timing or the emergence GAAP earnings.

I see. So it's not an economic change.

No, it's not.

It's not an increment.

Then it's going to depend on Primerica's ability to be effective in the way you've revised your program. So you're spending the same in economic dollars. It's just a question of how effective these adjustments have been. And oh, by the way, amoebas -- if I remember, an amoeba splits. So you might be splitting or something too.

No, no. We don't split.

We're split already.

So maybe we're more of a paramecium.

There you go. You know that biology.

A paramecium with a little -- with the little tentacles out and stuff. So, look, I mean, here's, [Rick]. As we do things -- Primerica is a business of aiming and adjusting. This is a battleship. It's not a speedboat. And you're building and communicating to a vast audience. And you build and gather people is our business. And as we look at any incentive, whether it's a fast start bonus, whether it's the equity program, we are constantly reviewing, aiming, and adjusting.

And one of the things I may have said to you guys on the call before, maybe when we've met in person. You know, doing things with Primerica incentives is a little bit like the kids game Whack-a-Mole. You hit one thing; something else pops us. You go, oh, my lord. If I'd have had a brain, I would have adjusted to that. And so you just sit, and you have to constantly aim and adjust.

The reason that we are bullish on Primerica long term is not an incentive program. It is our leadership of our sales force. The vast experience that they have, and the fact that Primerica is a leadership company, okay? We're a company that believes in building and developing people. And we don't believe that goes out of style.

And so when you look at what we're -- what our game plan is, and by the way, when I said the word bullish, I was not saying stock price or anything like that for all of you to adjust to. I was talking in terms of why we feel strongly about the future of our company.

Our view is that we've got incredible leaders, and that it is not just a short-term incentive, although short-term incentives are important. It is that we're a leadership -- strong leadership company, that we do something great for the consumer, and that doesn't go out of style. And that you can have short-term headwinds and short-term challenges, but that we aim and adjust to those and that if you've got the right concepts, and you've got the right leaders, you're going to adjust to that, and you're going to prevail.

Got it, John. But I guess from my vantage point -- I mean, I -- you clearly have some very talented people at Primerica. But if you're spending the same money, something really good has to happen that hasn't happened in the past. So you must be confident that these adjustments are going to be stronger than what you've done in the past, right?

Well, I'm -- one thing that has happened if you look at the numbers is, as Rick talked about the increase in our investment and savings products, okay? And we believe as we build out that business that that's going to be a positive for the sales force and for the company. And that is one of the things that being our own business has given us the ability to focus on and do.

And the other thing, if you look, is that we do believe as -- whether it's incentives and as the economic environment of the country changes, being a company of optimists that we're going to build and grow the size of this license distribution system. And so we believe that the -- we absolutely do believe that those two things are going to happen.

And anything on the products that you want to comment on? The investment and savings area that's -- anything specific that --

We genuinely believe that we've always had -- and one of the things that we're very proud of is our core mutual fund business and our core variable annuity business. Adding the managed accounts, we believe particularly for our stronger securities producers in our sales force, is adding -- besides just our wealth accumulation business, it's adding another level to our business of being able to take a product that has typically been preserved for the fortunate wealthy few to Main Street.

And so that coupled with the things we're doing with our technology platform and building out what we believe is going to be the best platform for taking investment and savings products with our distribution system to Main Street.

So -- but I think the short term on the table for 2011 as we drive toward the convention is our managed account program that we're working on very diligently right now.

There are no more questions.

Okay, thank you, everyone for joining us this morning for the fourth quarter earnings call. We look forward to speaking to you in the future. Have a nice day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.