Primerica Inc (PRI) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Primerica Incorporated Earnings Conference Call. My name is Regina and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session.

(Operator Instructions) Today's event is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Kathryn Kieser, SVP of Investor Relations. Please proceed, ma'am.

Good morning, everyone. Thank you for joining us today as we discuss Primerica's results for the second quarter 2011.

Yesterday afternoon, we issued our press release reporting financial results for the quarter ended June 30, 2011. A copy of the press release is available in the Investor Relations section of our Website, investors.primerica.com.

With us on the call today are Rick Williams, our Chairman and Co-CEO, John Addison, our 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 financial, 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 provisions 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 involve risks and uncertainties that could cause actual results to differ material from these statements.

Please see the risk factors contained in our Form 10-K for the year ended March 31, 2011, as modified by the exhibit to our Form 8-K, dated April 12, 2011, 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 second-quarter 2011 earnings call.

Beginning on slide four, you can see our operating revenues increased 17% for the second quarter to $273.1 million, compared to the year-ago quarter. Net operating income for the second quarter grew 21% to $45 million, or $0.59 per diluted share, reflecting growth in new term premium, strong investment in savings-product sales, as well as higher client asset values, seasonally favorable persistency, and a lower tax rate offset by higher expenses. Allison will walk you through the details in a minute.

Net operating income returned on adjusted stockholder equity was 12.7% in the second quarter of 2011, which was down from 14.2% in the first quarter, reflecting higher expenses in the second quarter and non-recurring items that enhanced first-quarter ROE. As discussed in the past, we anticipate downward pressure on ROE near term as equity grows. And longer term, we believe returns in the 14% range are achievable as we execute our capital strategy.

Investment and savings products continue to drive earnings in the second quarter, as total sales increased by 23% and were primarily driven by a 49% increase in variable-annuity sales. During the second quarter, variable-annuity sales were positively impacted by clients redeeming older contracts and not incurring surrender charges in order to purchase a current Prime Elite 4 product that has an attractive living benefit that provides guaranteed lifetime income.

Additionally, we recently added annuity clients to our client-account-manager system, which has facilitated representatives' re-visitation of existing variable-annuity clients who have products that do not have a living benefit. Without these transactions, total investment and savings products' year-over-year sales growth would have been in line with the first quarter of 2011's year-over-year growth.

Historically, this type of sale has accounted for a much smaller portion of total new variable-annuity sales. We anticipate this elevated level of activity to decline and return to a more normalized level by the end of the year. Until then, variable-annuity sales will be positively impacted by these transactions.

Year-over-year client assets increased 21% to $36.02 billion at June 30, 2011, due to improved market conditions. Sequentially, client asset values at June 30, 2011, were flat compared with March 31, 2011, while average client assets increased 2% compared with the previous quarter, which is a more indicative of driver of earnings.

In our term-life business, life-insurance-issued policies were flat in the second quarter of 2011 compared to -- with a year ago. Productivity increased slightly in the quarter, with insurance policies issued per average life-insurance representative, increasing 5%, compared with second quarter 2010, which was within our historical productivity range.

Sequentially, life-insurance policies issued increased 17% in the second quarter 2011, largely reflecting typical seasonality. Our average policy-issued premium was flat compared with the first quarter of 2011.

During the quarter, we continued to work on our long-term capital strategy. We have completed a substantial amount of the actuarial analysis and the administrative work necessary to execute a triple-X redundant reserve financing with an unfunded solution such as a letter of credit. The amount and timing of this type of transaction will be subject to regulatory approval and other factors. Right now, we are evaluating a potential transaction, but can give no assurances that a transaction will be complete.

Also during the quarter, Moody's assigned an A2 insurance financial strength rating to Primerica Life Insurance Company and a BAA2 senior unsecured-debt rating to our self-registration statement. A.M. Best affirmed our A+ financial-strength rating and improved our outlook to "stable." S&P also affirmed our AA- financial-strength rating. With these ratings, we are well positioned to approach the debt market at an opportune time.

Our debt-to-capital ratio remains low at 16.2%. As I said last quarter, we'll continue to give you information as our capital plans become definitive.

With that, I'll turn it over to John.

Thanks, Rick. And, hey, everybody -- how you doing today? I'll start by spending a few minutes talking about the momentum in activity generated by our convention, and then go into some of the sales-force dynamics of the second quarter.

First, I want to thank everyone that's on the call that was at our convention. I hope you had a great time. It was wonderful for us to see all of you there, as a part of the re-founding of Primerica and our first-ever convention on our own.

As we told you to expect last quarter, there was a lull in recruiting activity leading into our convention, with a significant increase in activity following the event. The convention has historically increased the energy level, excitement and sense of team within the sales force, but this convention truly surpassed our expectations. The last time we held a convention was in 2007, when Primerica and the US economy and the world were in a fundamentally different place.

Now, four years later, we are our own public company, and this convention was another celebration of our independence and freedom. The energetic environment paired with the revolutionary product, technology and incentive announcements, created an excitement which has led to a post-convention surge in activity that I'll talk about in a minute.

At the convention, we launched a new rapid-issue term-life product called Term Now for client face amounts of $250,000 and below. Term Now allows a rep to take an online application. And with the client's permission, the Company accesses databases including prescription drug, medical-information bureau and motor-vehicle records as a part of the underwriting process. This replaces the old process of taking a saliva sample at the kitchen table.

Results of those searches are reported to our underwriting system in real time in order for the underwriting system to make a decision about whether or not to rapidly issue the policy.

Another big announcement at the convention was moving our online sales tools from a device-specific system to an Internet-based system. This allows representatives to use their current Web-based devices, such as a phone or tablet, to give sales presentations and take online applications. This was a really big deal for our sales force, particularly newer reps, because previously they had to replace their existing phone if it was not compatible with the system we used, and they wanted to take online applications.

The new Web-based sales tools at Term Now rapid-issue insurance product were a fundamental change in how reps transact business. In our experience, even the most positive changes can be disruptive as people try to adapt their methods and sales processes around those changes.

To facilitate a smooth transition, we spent a significant amount of time and effort making sure the sales-force leaders had the information, tools and training materials to adapt their businesses in advance of these process changes. And it really paid off because we've experienced very quick adoption of the new processes.

Prior to the convention, 60% of term-life applications were received electronically. 85% of the applications for new life products introduced at the convention, since the convention, have been submitted electronically. To date, 80% of Term Now lives eligible for rapid issue at the time of submission were accepted in under one minute. And prior to the convention, 24% of life applications submitted were issued within five days. And in July, that jumped to over 40% of applications issued within five days.

In our investment and savings business, the launch of managed accounts at the convention generated a lot of enthusiasm among our top investment producers, and the life-license sales force was interested to learn more about the new indexed annuity we will be offering through Lincoln National starting in late 2011.

We also talked about the new incentive trip contest that will run through November to take 1,500 qualifiers to Orlando next February, where a highlight of the trip will be Primerica taking over Universal Studios for a night. So, you guys need to be there when we go to Harry Potter Land.

On the last night of the convention, we dropped the bombshell announcement that we are lowering the independent-business application licensing fee that a new recruit must pay from $99 to $50 until the end of July. And we challenged the sales force to set a recruiting record. Before the convention, recruiting was trending down. But post-convention, recruiting was so strong in the last two weeks of June that recruiting finished flat in the second quarter compared with a year ago. In June, we set the all-time monthly recruiting record for the Company, with over 29,000 recruits.

To capitalize on the recruiting momentum created in June, we tried to stretch the [field's] vision by challenging them to recruit 40,000 people in July, which would blow away the Company record. While we're still closing out July and the numbers aren't final, we are currently already over 40,000 recruits, which makes July the best recruiting month in the history of the Company.

The size of our life-licensed sales force ended the quarter at 90,519 -- a decline of 6% from June 30th a year ago -- and 2% from March 31, 2011. Our new life licenses were up 13% from the first quarter of 2011 and declined 18% from a year ago. The non-renewal rate was consistent with the first quarter but remained moderately elevated from historical levels. The year-over-year decrease in new life licenses was primarily due to the year-to-date decline in recruiting prior to the convention.

So I'm sure you're wondering, "What does this recent recruiting surge mean to licensing?" What I can say is that we are encouraged by the increase in the number of new recruits registering for classes and attending pre-licensing classes in July 2011, compared to July 2010. Historically significant spikes in recruiting have typically been accompanied by deterioration in the licensing pull-through rate, but have generally led to more licenses.

We are optimistic that the recent recruiting surge will lead to more licenses. Later today, we'll be having our monthly RVP call, where we'll be announcing a series of initiatives to encourage recruiting and incentivize new recruits to complete the licensing process. Our goal is to capitalize on the recruiting momentum in order to generate growth in the fall.

The convention provided the environment and the platform to launch our new products, technology initiatives and incentive programs, which has led to significant recruiting momentum. We must now build on that momentum to increase distribution and generate organic growth in order to positively impact future earnings.

With that, I'll turn it over to Alison with the truly exciting part of today's presentation.

Thank you, John, and good morning, everyone.

Given that it's been a little over a year since our IPO and that we've had an emerging operating-expense base with the notable increases this quarter, I'd like to start today by walking you through the trends in operating expenses on a consolidated basis, including some detail by segment. Afterwards, I'll move into a discussion of the other earnings drivers for each of the segments.

Turning to slide six, you'll see insurance and operating expenses increased $7.6 million, or 15%, year over year, to $57.4 million. This variance includes some period-specific items for this year and for the prior-year period, as well as ongoing variables.

In the second quarter of 2011, we incurred $3.2 million of expenses associated with convention announcements, including the launch of our new term product that triggered a $2.3 million write-off of obsolete medical-underwriting inventory. We also incurred $1.3 million of expenses associated with the secondary offering of our stock by Citi in April, and other capital-structuring projects.

In the second quarter of 2010, we incurred $5.5 million of expenses associated with our IPO and the public-company launch, and a one-time premium tax-rate refund of $900,000, and did not make an employer matching contribution as we transitioned out of the Citi 401(k) plan and set up a plan of our own.

In considering the ongoing variables, we have seen the anticipated runoff of legacy expense allowances, as well as increased expenses related to the launch of our managed-account products, our Canadian segregated-fund assets, and growth in premium taxes as we build out the new term block. The launch of the Fast Start bonus accelerated the recognition of compensation expense and a record-keeping-fee structure change in ISP -- while earnings-neutral -- increased our expense base. Other increases were largely related to building out our public-company infrastructure.

Term-life-insurance expenses increased $9 million year over year. In addition to the convention-related items, the prior-year premium-tax refund and the prior-year 401(k)-match suspension mentioned earlier, incremental premium taxes contributed approximately $900,000 to expenses directly related to ongoing business growth. Additionally, legacy term expense allowances declined approximately $1.3 million and will continue to do so as the block runs off.

In the second quarter of 2011, the investment and savings product segment reflected approximately $4 million in year-over-year expense increases. The increases include approximately $1.1 million related to Management fees on higher Canadian segregated-fund client account values and the new managed account product launched at the convention.

The change in our new mutual-fund record-keeping fee structure, which increased our account-based revenue but eliminated our out-of-pocket expense reimbursement for certain fund families, also contributed an additional $800,000 to expense. Again, this change had no impact on net earnings.

In our corporate and other segment, the largest year-over-year changes relate to the IPO and secondary offering. Also, we are no longer obligated for Citi expense allowances.

On a sequential-quarter basis, in last quarter's earnings call, I highlighted expected expense increases of about $5 million, largely for Management incentive-comp normalization and the secondary offering. The additional increases were primarily associated with the convention announcements and the change in the mutual-fund record-keeping fee structure -- both discussed earlier.

Our ongoing expense base, absent the period-specific items, is approaching maturity. As we move forward in 2011, we expect our quarterly expense base to be in the range of $54 million to $56 million on an operating basis. This anticipates additional charges in the third quarter for our convention IBA promotion, modest capital-structuring costs, and various quarter-to-quarter activities associated with managing our business. It also anticipates continued growth in premium taxes for new term and allowance runoffs for legacy term.

As a portion of the legacy term block reinsured with Citi runs off and the expense allowances we receive decrease, the overall earnings impact will depend on our ability to grow premium sufficiently to replace the runoff business and to manage expenses accordingly.

As we move forward to 2012, we anticipate continued moderate increases in our ongoing expense base as our business grows; and as we layer on additional future equity grants and negotiate our long-term I.T. contracts as they expire.

Turning now to page seven, in our term-life insurance segment, operating revenues grew by 21% in the second quarter of 2011, compared with the same period a year ago, primarily reflecting new term premiums following the Citi reinsurance transaction, partially offset by anticipated runoff in legacy term premiums.

Operating income before income taxes also increased, but at a slower pace of 4% over the prior-year period. As discussed last quarter, we expect term-life operating income before income taxes to increase at a lower rate than revenues, reflecting the continued runoff of both Citi expense allowances and legacy term-mortality gains, which result from actual claims being less than the historical assumptions in the benefit reserve that are locked in at the time the policy is issued under GAAP accounting rules.

The flat-to-declining trend on allocated investment income will also cause a negative spread between top and bottom-line growth rates. In the second quarter of 2011, the gap in growth between operating revenue and operating income before income taxes also reflects higher expenses for new term, partially offset by slightly favorable mortality experience in the legacy block and the impact of favorable seasonal persistency in the new term block.

New-term operating income before income taxes was $3.1 million in the second quarter of 2011, reflecting normal growth due to incremental premiums and the impact of seasonally favorable persistency, partially offset by higher expenses. Historically, second-quarter persistency is more favorable than our average annual level. Favorable persistency creates both lower DAC amortization and higher reserve increases.

Since new-term DAC balances are much higher than benefit reserves, the new-term growth combined with the seasonally favorable persistency resulted in a positive net impact of approximately $3 million to operating income before income taxes year over year. In comparison with the seasonally favorable second quarter, the first and third quarters of the year are more in line with our average annual persistency level, while the fourth quarter is typically lower.

Legacy term operating income before income taxes declined $3.1 million versus prior year, or 7%, consistent with the runoff of premium on the closed block. The seasonal persistency discussed for new term does not have a significant impact on the legacy block, as the DAC balances are similar in size to the benefit reserves and the fluctuations caused by persistency in the DAC amortization are generally offset by reserves increases. Also, the DAC balances and benefit reserve do not change as much from period to period when compared to the rapidly growing new-term block.

Turning to page eight, you'll see the results for our investment and savings product segment. Operating revenues increased 19% to $104.6 million. And operating income before income taxes increased 14% to $30.5 million compared to the year-ago period, driven by higher sales and increased client asset values, as well as a shift in the product mix to higher-margin US variable-annuity products. DAC amortization on our Canadian segregated fund was also higher due to the lower investment turns during the second quarter of 2011.

Sales-based revenue was up $8.6 million, or 24%; and asset-based revenue was up $5.9 million, or 15% -- both consistent with sales and asset growth in the second quarter.

Account-based revenues grew 15%, reflecting the change in record-keeping fee structure, offsetting a 5% decline in the average number of fee-generating accounts. As previously discussed, there was also a corresponding increase in operating expenses that had a slightly negative impact on operating leverage, but overall was earnings-neutral. Net asset flows were marginally positive in the second quarter.

Sequentially, the segment experienced higher sales and slightly higher asset values, as operating revenues increased by 4%, or $3.7 million. Operating income before income taxes decreased by 2%, or $600,000 in the second quarter of 2011, compared with the prior quarter, primarily due to higher DAC amortization related to Canadian segregated funds and the first-quarter 2011 Management-compensation accrual release.

On page nine you can see that corporate and other distributed product operating revenues were flat year over year and operating losses before income taxes were $6.6 million in the second quarter of 2011, compared with $9.4 million in the same period of 2010. The improvement largely reflects lower expenses. Last year, we incurred one-time IPO-related expenses and we are happily no longer obligated for Citi expense allocations.

Results for the second quarter 2011 also reflect higher claims primarily on short-term-disability insurance products underwritten by our New York Insurance subsidiary. The loss experienced on this block of business can be cyclical and heavily influenced by economic conditions. Although we have implemented a premium-adjustment program, these adjustments lag emerging experience due to implementation timing. We expect our initiatives to return the block to normal loss levels early next year.

Turning now to page 10, we'll look at our balance sheet. We continue to maintain a conservative balance sheet with a strong capital position. As of June 30, 2011, our risk-based capital ratio is estimated to be in excess of 600%. While we've held RBC high intentionally to fund new-business-surplus [strain], ceded premium recoveries and favorable expenses in past periods, combined with a favorable impact from our admitted statutory deferred-tax asset, has resulted in statutory surplus being higher than expected for the first half of 2011. Ongoing statutory-surplus needs will be considered as we develop and implement our long-term capital strategy. Our debt-to-capital ratio remains low at less than 17%, as does our invested asset-to-equity ratio of 1.5 times.

Turning to page 11, investments and cash totaled $2.3 billion as of June 30, 2011. 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 and sectors.

Excluding cash, all but 1% of our invested assets were in fixed-income investments, of which 94% were rated "investment grade." The new money rate on our purchases for the quarter was 4.45%, up from 2.72% in the first quarter, as we focused most of our purchases in 10-year corporate issues. We continue to purchase almost exclusively investment-grade securities and continue our prudent strategy of diversification across industry sectors.

Our total purchases had an average duration of approximately 6.5 years, with an average credit rating of A-. Duration continues to increase slightly as we roll maturities further out the curve. The average book yield of investments excluding cash at quarter end was 5.38%, up slightly from 5.3% at March 31st.

We remain cognizant of the extreme uncertainty in the markets, whether due to European sovereign issues or the ongoing US fiscal-policy debates. We continue to have no direct exposure to Greece or Portugal. And our exposure to Italy and Spain is primarily to telecom and utility companies. We are comfortable with our overall global bank exposure at approximately 11% of our corporate-bond portfolio, which is well below the 24% allocation of the Barclay's Corporate Index at quarter end.

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

Thanks, Alison. In summary, we were pleased to report solid net operating-income growth, reflecting our strong market position in core businesses. We continue to focus on developing meaningful shareholder value by growing earnings and building the business to enhance long-term growth.

Now, I'll open it up for questions.

(Operator Instructions). And your first question today comes from the line of Mark Hughes with SunTrust.

Thank you very much. The better productivity on the life sales in the quarter -- what drove that? Is that sustainable? Is that a function of just the sales force being a little bit smaller, and so you've got a more solid core of sales people?

Yes. I mean I think it's a function of, one -- as you say, the sales force being a bit smaller. But the other dynamic is with -- well, as you say, with a smaller sales force, licensing -- having licensed fewer new people, it is slightly more productive. But, as I said, it's still very much within our historical productivity standards.

It really just moved -- the band, we've talked about with you guys a number of times of kind of -- the productivity band. It did not move out of norm; it just moved up some from where it had been. And remember it had been at a pretty -- with the economy, a pretty historical low. So it just moved up some within the band.

Okay. That $50 fee -- have you bumped that back up to $99?

You need to be on the RVP call later, when we launch the mega-bombshell momentum August campaign. Yes, we are going back to the $99, but we are -- which I will be, again -- so don't tell anybody from the field when you're done with the call -- I will be doing shortly, as soon as I'm done with this. I'll be a little more animated version of John, doing that.

But we have some other exciting announcements. And our announcements are very focused on continuing recruiting momentum and driving the 70,000 new members of the Primerica class of 2011 toward being licensed. I'm going to be referring to the new people out of the convention as kind of our convention surge recruiting class. And so we've got incentives driving toward them getting licensed.

Right.

But yes, we are -- but we are readjusting. That was a short-term phenomenon.

Exactly.

Then one final question -- Alison, you described the $54 million to $56 million expense base going forward -- could you clarify that -- what all that encompasses when you say $54 million to $56 million?

Sure. Specifically, if you look at our financial statements, it would be the line items of Insurance expenses and other operated expenses. And that number, to be clear, is on an operating basis. A lot of words -- a lot of operating there -- meaning that it excludes the IPO equity awards that we've been operating out of our results since the IPO. So that is -- that's what it incorporates. It incorporates the results for all three segments.

Okay. And so that's insurance and other operating expenses for all three segments?

Correct. Obviously, it excludes things like commissions and DAC amortization and the like.

Exactly. Thank you.

Mark, thanks for being at the convention.

Yes, I enjoyed it. It was fabulous. Thank you.

Your next question comes from the line of Jeffrey Schuman with KBW.

Thanks. Good morning. John, I was wondering if you could talk a little bit more about recruiting.

This surge here is kind of new to us. Obviously, it's very big and very dramatic. I think you had signaled to us in the past that you would expect a bounce coming out of a convention. But is this something that typically plays out in weeks or months or kind of -- and is there then, at some point, a lull on the back side of the surge? Or how do we -- how do you --?

Okay. Let me talk a little bit about that. It's actually -- I always love, in Kathryn's open -- I'm going to use words like, expect, intend, anticipate -- what all the Safe Harbor words are.

In complete candor, this was at a level that exceeded what we expected. Okay? And if I could, let me just kind of talk about that dynamic and then talk about what, historically, we've seen. But this is a historical surge that -- people have asked us -- you sit around in our business, one of the things that -- and a lot of you that were there that heard Art Williams on the first night -- he talked about, "You've just got to keep calling the plays." And there is a lot of that that is completely true in our business. You've got to just keep calling the plays.

Sometimes you think you've drawn up the greatest thing in the history of the world and the quarterback gets sacked behind the line for 10 yards. And then sometimes you do something -- you go, "My Lord, that exceeded my expectations."

Just a couple of -- and so there's the -- how much of it was the $50? How much of it was all the different dynamics? It really was a combination of everything we did and what happened in that convention. Number one, every time -- if you meet with me a month before a big convention, I'm always going, Why are we doing this? Dealing with John -- Rick is a 55-mile-an-hour guy. I'm either at 100 or -- I mean it's -- I'm up and down, yo-yoing all over the place. And about a month before the convention I wind up going, Why are we doing this? Okay?

Well then, when we got there I realized the impact of not having had that for four years; and the fact that the world had truly become quote, unquote, the new normal during that timeframe, and how different the world was -- the team being there, the family being there, everything being together. And out of that, we got a historical jump.

But I think it was a combination of things. It was all the work we had done. We decided that we were going in there and we were breaking every pick we had on new products, improvement, things better. And at the end, with the $50, I wanted to light the -- my thing I was telling people is, On the last night we're putting all this in. I want to light the fuse. Okay?

And our approach had been, in all honesty, that -- I mean a thing I say quite a bit -- or I've said quite a bit -- is from something I read years ago -- You've got to cause things to happen. But 1% of people make things happen, 9% of people watch things happen, and 90% of people wonder what happened.

We lit a fuse there. At the last convention -- 2007 -- we had a great convention. The economy was great. Everything was rolling, and all that stuff. We introduced a lot of improvement and we had a 24% increase in recruiting that led to a 5% increase in licensing, but that was very sustainable through the time when, in the fall of '08, a meteor hit the Earth and the economy fundamentally changed.

So we've had a historical jump. It's very early to tell what that is going to lead to. But the thing I will say is that -- as I said, we are encouraged by the fact that we had a significant improvement in our attendees and people going to PFSU, which says they're moving toward getting licensed.

But if I could, I couldn't say what all is going to come out of that because it was, compared to what we've had in the past, a jump that exceeded any jump we've ever had before. And it's not -- and we weren't low-balling you saying what we thought was going to happen after the convention and then, Oh my God -- yes, they just -- it was a jump that surprised all of us here. So I -- that was kind of rambly, but did that get somewhere near what you wanted to know?

Well, I think it was a good historical explanation. I'm not sure it informed my model a whole lot.

And in all honesty, I guess what I should have said is, It's very hard to, right now, give you information that's going to inform your model a lot other than we got a big recruiting jump coming out of that convention.

Okay. And I'll just try to squeeze one other one in, if I may. And it's a little bit of a loaded question.

Obviously, you wouldn't have prepared to launch the indexed annuity if you didn't think it was worthwhile. But as I look at the success you've had with registered products -- but in the context of a lot of your folks not being registered -- now you come with an investment product that's available to the non-registered folks -- it would seem like maybe there's a big opening there. I mean how do you size that opportunity?

You go first, then I'll --

Yes, I mean -- in Canada, we have the seg-funds product that can be sold by life agents who are not securities-licensed, and that is a significant component of our Canadian business. And so, by analogy, you would think that there would be a real opportunity for the indexed annuity. The challenge is the minimum size is $10,000. And, therefore, a lot of the clientele the unlicensed people speak to -- it won't be appropriate for. So we think there's an opportunity there. We'll wait and see how big of one as it unfolds.

Okay. Thanks a lot, guys.

Your next question comes from the line of Steven Schwartz with Raymond James.

Hey. Good morning, everybody.

How you doing.

Good. Two questions for you, if I could -- first, something I'm missing here is -- obviously, the variable annuities -- the sales are affected by the turnover from a non-living benefit product to a living benefit product. But shouldn't we have seen that in redemptions? It doesn't look like there was a change in redemptions at all really as a percentage of beginning value.

We record those both as redemptions as well as new sales because they're commissionable. So they are reflected in both components of the asset roll.

Any idea how much that would have contributed to the asset roll?

We think about $100 million.

About $100 million -- okay.

And that's looking at the numbers in comparison to sort of what we would call a normal run rate transfer activity.

Okay. Okay, and then, if I may -- another numbers question for you, Alison. The two DAC items that you pulled out -- you were going a little fast there. So I think you said favorable persistency in life insurance -- that added $3 million year over year?

That is correct.

Okay. What would that be versus normal; I mean, as opposed to just year over year? Let's say you were looking at the quarter.

Yes, and recognize that normal is a bit hard to define here because last year we had virtually no business. Remember we were really in our second quarter -- our first full quarter -- of post-IPO. So I would look at this and say that this was a normal seasonal result in and of itself. The thing that will exacerbate it going to future is obviously -- the block of business is growing exponentially just based on the nature of how we develop the new term block. But had we been a steady run rate, this would have been a normal result basically because they're coming off a threshold of virtually no business.

Okay. And what was it -- you also gave some persistency guidance for seasonality.

Yes. And again, as you would expect, we develop our factors and we do our reserving and our DAC using an annual-persistency assumption. The seasonality that we do see is that the second quarter has historically been the most favorable quarter from a persistency perspective. First and third quarter generally run along the lines of our average annual rate, and fourth quarter tends to be a little bit worse than the average.

Okay, that makes sense. And then on the -- I'm not sure you gave a number on this at all -- on the Canadian seg funds it sounded like -- that what you were talking about here was some type of unlocking.

Yes, that is correct. And remember that -- I guess I should know what the AFC is -- but it's a FAS-97 type product. So the unlocking there is a quarterly event; and, obviously, nothing unusual about doing unlocking for that product.

We did unlock because of changes in redemption rates and returns -- mostly because of returns. It had about a $900,000 negative impact in the quarter. Year over year, that was about a $400,000 variance because we also had a negative last year.

Okay, that's great. That's what I needed. Thank you, guys.

You bet.

Hey, good to talk to you, Steven.

Hey, take care.

Your next question comes from the line of Andrew Kligerman with UBS Securities.

Hey, good morning.

Hey, Andrew.

A few questions -- Rick, the securitization -- triple-X securitization you mentioned earlier -- I assume that would be around $300 million. And it sounds like if you had to handicap it, it seems more likely than not that you'd want to -- you're going to do it -- that the markets could support it. So I'd like to get a sense on that. And then the other part of it is -- if you do it, that'd be a lot of excess capital that you're sitting on. Your RBC is extremely high. Would you use that money to buy back stock?

The answer is, yes, we would. A transaction would free up somewhere between $300 million and $350 million of capital to -- that could be deployed. And the best use would probably be stock purchases. So, yes, that's correct.

Great. And then, Alison, with regard to the insurance expenses and the other operating expenses -- so that's the $57.4 million that was mentioned a little earlier -- and then you covered a lot in that slide -- was it slide six -- in terms of the expenses. I mean is the run rate really in the $54 million to $56 million range, just X-ing out maybe the medical expense and maybe some of the convention expenses? What exactly would you say is a good run rate for the expenses -- those two lines put together?

Sure. As I indicated in my prepared comments, I do think $54 million to $56 million per quarter -- again, on an operating basis, so excluding the things that we take out in our operating measures -- in our non-GAAP measures -- would be appropriate for the third and fourth quarters of this year.

I do think we'll see some continued development next year; obviously, as the new term block continues to develop, grow, there are variable costs such as premium taxes associated with that. We will continue to see the runoff of the legacy allowances. And then also we do have a few unique items. One is the layering in of future equity grants. Obviously, those have a three-year vesting period.

So until we get three years out, you will see a growing base there; as well as some of our long-term I.T. vendor contracts are still up for negotiation. And we continue to work on those, and we'll see some increases throughout 2012 and '13.

So you mentioned about four items, then -- premium tax, runoff of the legacy, future equity grants, and you said this I.T. contract. So that would mean that -- I mean what kind of -- adding all those up, what could we be looking at next year, then, in terms of a pickup? Would it be 5%, 10%, 15% pickup off of the $54-million-to-$56-million base?

Well, obviously, we will do everything we can to manage our expenses as closely as possible to the results from this year, but we do have those headwinds coming up against us. Obviously, you will see some natural increases for things along the lines of merit increases, normal cost-of-living type of adjustments.

That said -- a significant portion of our expense base is fairly fixed in nature, and so we will not expect to see significant growth there. We haven't fully looked at our budget. We also haven't -- we tend not to give that long-term type of guidance or forward-looking type of information.

But I don't -- I'm not aware of anything that would drive expenses outside of the ranges that you're talking about. They should be really more -- I'll call it a mature expense-based growth pattern rather than what we saw this year, being our first year out as a public company.

Wait -- so just your -- the very tail end of your comment -- then you're implying that you can stay in the $54-million-to-$56-million despite all this. I think that's what you were -- at first you were saying you're not -- you can't tell us the budget. But now you're saying maybe that's where the range sits anyway next year?

No, Andrew. I think what you were mentioning is that it would be a 5%, 10% type growth. I think you actually said, 5%, 10%, 15% type of growth rate.

Yes.

And so I'm indicating -- is that I'm very comfortable that we can work within that range; although, at this point, that's about as much information as I can provide.

All right, thanks. And then lastly, going back to John -- you talked about how you -- this tremendous pickup in recruiting. And it's tough to say at this time where recruiting is going to go. Maybe you could talk a little bit historically about coming out of past conventions and big pickups -- I'm sure recruiting always picked up. What would happen three to four months later to recruiting? Would there be sort of a recruiting fatigue? And do you think that could happen again?

No, it -- as I've said in the -- as I talked about, in 2007 -- which probably is the one that is the closest from a standpoint -- we had a significant improvement in the kind of front-end process then -- we had an immediate 24% increase in recruiting that led to kind of a 5% increase in licensing, as I said, that carried through -- really was very sustainable through 2008 until it really -- kind of the day the world ended.

And as you look at it, this is a historical jump. I mean we've never had a jump in recruiting like this. And just so -- and so saying -- in all -- if I could, I really couldn't say what does that -- how does that sustain -- what do you do? Clearly, it's not going to -- I mean you just had the record recruiting month, which was 40,000-plus recruits compared to the record recruiting month; 29,000 the month before, which, then you've got to go back a number of years in the past to have kind of a 28,000 recruit.

Our goal out of that and our goal when we did what we did at the convention was to create -- people had been through a pretty tough time economically and with all the things -- to create a jump where people go to a level that just stretches people's vision of what can happen -- a belief level; and then establish a kind of new plateau-type level above where you were at.

Given what happened, it's very hard to say right now; even if I wasn't on an earnings call or whatever -- if it was just you and I having a beer somewhere talking about it -- it's very hard to say what's going to happen out of that. The one thing I can say is we had a historical jump. And the early indicators, which are people registering for class and all that, look good, and that what I've got to do this afternoon is to -- instead of pouring a bucket of cold water on a fire, pour some lighter fluid on it -- and that's the goal at 2 o'clock this afternoon.

Great. Thanks a lot.

Your next question comes from the line of Sean Dargan, Wells Fargo Securities.

Thank you and good morning.

Hey, Sean.

Hi -- a question about the Term Now product. All else being equal, what's the average, I guess, increase in premium over the existing term-life products?

You mean -- the average size that we're currently getting in is about the same as it was to the previous term product on the average size premium per policy.

Okay, but if -- for the same face value -- I mean I imagine it's more expensive, right?

Yes, it is. The way we did it is the Term Now product is slightly more expensive, and the Custom Advantage product, which is the fully -- underwritten with blood -- is less expensive. And roughly -- there was a 5% to 10% price increase on the Term Now and about the equivalent decrease on the Custom Advantage.

And is there a -- I guess, what's the sales pitch then to someone who presumably would pass with flying colors to the fully underwritten product? Why would they choose to buy Term Now?

Understand, number one, we are going to homes that -- typically, insurance companies -- particularly the quote, unquote high-end term companies -- they are very focused on upper incomes in what they're selling. We're going to a lot of younger people's home, younger families' homes that -- if they don't want to get on the Internet or they don't go -- just happen to run into someone -- no one's talking to them about insurance.

And what we believe that has been the genuine excitement -- and, in all honesty, again, to the things that we say -- as I went into the convention -- I said in my script that any change is disruptive, even if it's really good change. And the adoption rate of this by our sales force has been very quick. And so the real answer is you don't have to go get blood testing. You don't have to go through this attenuated process of messing around with this.

People today like -- the younger people are used to, Do this now. Get online, order a book now. Do whatever now. You sit down, you do the presentation -- for example, on an iPad -- show them what we're doing -- a healthy 33-year-old. You take the app -- $240,000 of coverage, when today -- that, by and large, they have zero. You hit Enter. Fifty-four seconds later, they've got everything emailed to them and they're done.

And so it's not a -- the pitch, for lack of a better word, is this is -- number one, This is a great company. This is an awesome company. We do great things. We're sitting with you in your kitchen right now, and we can get you issued now. That's why we call it Term Now. It's not term blood test, drag out, and then hopefully one of these days you get a policy in the mail.

The other thing, just to understand, is the Term Now -- below $150,000, the term now is the only product offered that overlaps between $150,000 and $250,000. And then above $250,000, it is -- you have to go to the Custom Advantage product and Term Now is not available.

So there is an overlap area but there's also face amounts where you have to go one way or the other.

Thanks. That's very helpful. And Alison was talking about receiving some issuer ratings. Can you just remind us -- obviously, you have some debt capacity, but what might be a use of proceeds from any debt issuance?

Yes. The first use of proceeds would probably be the paying off of the Citi note that we -- as part of the IPO transaction, we have a $300 million Citi note. And there is undertakings to repay that at various points in time. Anything raised above that, if we chose to do that, would again go to stock repurchases.

Thank you.

Thank you.

Your next question comes from the line of Colin Devine with Citi.

What's up, Mr. Devine?

Exactly. My name's changed again. Anyway, two questions for you -- one, on recruiting. I was wondering if you could just provide a little more detail on how things are going with the registered reps, because when I think about what really drives a lot of your long-term growth, it's getting those people -- and then also the -- if you like their production trends -- because that stuff's getting to the annuities and the mutual funds and sort of the recurring cash inflows.

Yes.

And then the second thing, so Alison doesn't feel left out -- if we can talk about what the impact changes to DAC accounting may mean for you in terms of sort of how you're running your business and your sales process, and what you think -- if you have any indication now of what you think the adjustment might be.

Okay. On registered representatives, Rick -- from a standpoint of kind of aggregate number or whatever -- just the --

Yes. We had total registered reps of 21,000 at the end of June.

Right. And what we're doing there -- if you look at our business -- and kind of me giving you my sort of view of game plan of what we wanted to do out of the convention -- is first and foremost -- we needed to get a recruiting jump. And that is the aggregate number of people flowing into the business opportunity.

And then the significant amount of our work that's going on within the Company right now, whether it was on managed accounts -- whether it's on improvements in our platform and in everything we do -- are to incent and drive growth of our registered reps -- of getting people through the pipeline and then getting people up to a level in our sales force where it actually makes sense for them to sit down and work toward becoming a registered representative in our business.

We just had a big meeting -- an incentive trip -- at the Breakers a couple of weeks ago where -- it was for our securities producers. I will say that the level -- this is -- as you look at our sales force, these are the people that are more the show me, cerebral, study-the-numbers kind of side of the business. And they were at a level of energy and excitement that I have not seen them at in years coming out of the convention.

And so our approach is we're going to build the platform and build out what we're doing on our securities side of the business, and increase the intensity and focus on creating new licensed people there. But in our business it's -- you've got to be very -- what you -- you've got to be -- this is not a -- something where you can focus on a million things at one time. Our number-one laser focus coming out of the convention was to increase aggregate recruiting on the front end of the business so that we can -- the licensing trends that you guys look at very well -- that we can move our aggregate insurance licenses in the right direction.

All right. So you're going to grow the registered reps organically, and --?

Absolutely. That is -- one of the things that's interesting is -- I think, over time, there are a lot of options and alternatives for us that, as we build out our platform which now, with our first step into managed accounts -- is becoming more and more compelling. As you look out there, there are a lot of people that are kind of disenfranchised with where they're at.

I think there are some opportunities there, but Primerica -- I mean Primerica is organic -- that we view that the best person to build and do business with at Primerica is not somebody who is a mercenary, rolling in for a little bit or whatever. Our business is built with people who become Primerica patriots and grow up here, and we develop ourselves.

So as I would -- I mean our strategy will -- is and will continue to be organic development of the new people that we bring in.

What percentage of your life sales this quarter came from the registered reps and --?

People with a securities license -- I don't know that off the top of my head.

Yes, I don't know that off the top of my head either.

We can --

It'd be helpful just -- because you sort of are running two sales forces and just --

It is -- we're actually running 10 or 12 different sales forces. But I mean there -- trying to say Primerica's all in one nice, little basket -- there are multiple different components of it. But you're right. There are people -- and I was -- like I said, I was just with them -- who gravitate far more to the annuity and the securities side of the business. And they are different, but they develop out of the front end of what we do. With that --

John, you don't want to answer the DAC question?

No, I'll let you.

Come on, John.

Okay. I'd be happy to answer them. So you asked a few different questions, there, Colin. The first part of your question was associated with things along the lines of, are we going to change how we run the business, the things that we do?

And the simple answer to that is no. We don't think that this accounting change in and of itself would drive any significant changes in the method to which we do business or how we really compensate our sales force. We are working through -- with our internal staff as well as our external auditors -- very specific items associated with compensation. Obviously, that's a big component of our deferrable-expense base. And we feel like we're making very good progress there.

With regard to the compensation component, do really believe that the core components of our compensation system will remain deferrable. There may be some pieces on the fringe -- certain special bonuses or things that we do that we may need to no longer defer. But for the vast majority of the expense, we believe that will remain deferrable.

If you look at page four, in the financial supplement, you see the breakdown between general expenses that are deferred and commissions deferred. So a lot of the work is really being done on the general-expense deferrals.

Again, where we see that we will have changes are going to be this -- along the lines of indirect costs, which are currently being deferred, which will no longer be deferred, as well as unsuccessful efforts. I think I've quoted in the past that we think our unsuccessful-effort rate is somewhere in the 25% range. So you will definitely see a haircut along those lines.

With that said, we do feel pretty confident -- although it is not assured yet -- that we will be able to do a retrospective adoption. I do think the numbers are -- it's premature for me to provide numbers. But along the lines of how we feel we'd be impacted vis-a-vis, perhaps, our peer group -- on the actual write-off -- the retrospective adoption -- think that we will be well within or below a range of some of the peers simply because, with the Citi transaction, our DAC balance is relatively small vis-a-vis the peer group in relation to the overall size of the financial statements.

In looking at where we think we'll be on future deferrals -- we have been participating in several industry groups and do think that we will be -- well you will see an increase in our deferrals pretty consistent with what we're hearing from the peers -- somewhere in the 20% to 50% range.

Excuse me. I shouldn't say an increase in our deferrals -- a decrease in our deferrals. And that is specifically on the general expenses. Anyway, I hope that answers your question.

All right, Alison. Unum put out the number today that looks like it's going to be about a 25% reduction to the DAC. Now, I appreciate you said it's premature. But when you're referring to -- since that's the only company that's out there publicly --?

Oh, yes -- no, no, I didn't say a 25% reduction in the DAC. What I -- just to clarify, Colin, what I indicated was that if you look at what we're capitalizing today, and you look at the general-expense component, that has -- the two things that will be hair-cutted there are going to be associated with indirect costs as well as unsuccessful efforts.

So right now -- because right now we defer costs on all efforts like medical underwriting, for example. And what I indicated was 25% of our current efforts are unsuccessful. So that's a component of the haircut you'll see on that specific line. By no means was I referring to a 25% DAC adjustment. It is way too premature for us to provide those numbers.

Okay, thanks.

Thanks, Mr. Devine.

This does conclude the question-and-answer portion of today's event. I'd like to turn the call back over to management for closing remarks.

Thank you, everybody. We appreciate your time and look forward to talking to you again next quarter.

Ladies and gentlemen, this does conclude the presentation and you may now disconnect. Have a great day.