Primerica Inc (PRI) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Primerica Earnings Conference Call. My name is Brian and I will be the operator on today's conference. At this time, all participant lines are muted and in listen only mode, however, we will be facilitating a question and answer session towards the end of today's call and additional instructions will be provided at that time. As a reminder, this call is being recorded for replay purposes.

(Operator Instructions)

I would like to now turn the call over to Ms. Kathryn Kieser, Senior Vice President of Investor Relations. Please proceed.

Good morning, everyone. Thank you for joining us today as we discuss Primerica's results for the third quarter of 2011. Yesterday afternoon, we issued our press release reporting financial results for the quarter ended September 30, 2011. A copy of the press release is available on 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 in making 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 period 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 four of the presentation. On today's call, we will make forward-looking statements in accordance with the Safe Harbor Provision of the Securities Litigation Reform Act of 1995. Forward-looking statements include any statements that may project, indicate or imply future results, events, performance or achievements, and may contain words such as expect, intend, plan, anticipate, estimate, and believe, or similar words derived from those words.

They are not guarantees, and such statements involve risks and uncertainties that could cause actual results to differ material from these statements. Please see the risk factors contained in our Form K for the year ended December 31, 2010, as modified by the exhibit of 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 the 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 Third Quarter 2011 Earnings Call. Yesterday, we were pleased to announce plans to redeploy excess capital to repurchase 8.9 million shares of Primerica common stock from Citi. The Massachusetts Division of Insurance has approved Primerica Life Insurance Company's request to dividend $200 million to Primerica Inc. The $200 million share repurchase from Citi will be an accretive transaction, earnings per share and ROE that will allow us to cancel approximately 12% of total shares outstanding. It is an attractive valuation on a price per adjusted-book-value basis of 1.12 times. To put this in context, the average price per adjusted book value has been 1.20 times over the last 12 months and 1.24 times since the IPO.

As we've told you in the past, our Life company was overcapitalized at the time of the IPO. This was in part to help regulators get comfortable with the significant capital extraction from the business at the time of the public offering by ensuring future capital infusions would not be necessary to fund business growth.

Now, 18 months later, we have exceeded surplus-level expectations by approximately $100 million. Our regulators have approved a $200 million dividend, allowing us to operate at a more normalized capital level. We believe our remaining surplus should be sufficient to support future life-insurance growth and maintain our ratings.

On past calls, we've talked about working towards a XXX financing solution. We are continuing to work with the Massachusetts Division of Insurance to obtain approval for a XXX transaction. The $200 million dividend from the Life company will not affect the potential size of the XXX transaction because the block of business that would be included in the transaction, the size of the letter of credit available, would not change.

Consistent with our original plan and what we have discussed with the regulators, we still anticipate redeploying capital in the total range of $300 million, including the $200 million dividend from the Life company and an additional $150 million post-execution of a XXX.

Now, I'd like to move to operating results. Beginning on slide five, you can see our operating revenues increased 15% for the third quarter to $276 million compared to the year-ago quarter. Net operating income for the third quarter grew 5% to $42.8 million, or $0.56 per diluted share, reflecting growth in new term premium and strong investment and savings-product sales, as well as higher average client asset values offset by a higher expense base.

Net operating income return on adjusted stockholders' equity declined in the third quarter to 11.7% from 12.7% in the second quarter, reflecting growing equity and a sequential decline in Investment and Savings Products' performance.

After giving effect to the $200 million share repurchase, we estimate that our pro forma operating return on equity and net operating income per diluted share for the third quarter would have been 13.1% and $0.61, respectively. ROE will continue to experience downward pressure as equity grows, but we still believe longer-term ROEs in the 14% range are achievable as we execute our capital strategy.

Our Investment and Savings Product sales were up 29% year over year in the third quarter, primarily driven by a 51% increase in variable annuity sales. During the third quarter, variable annuity sales continued to be positively impacted by clients redeeming older contracts and not incurring surrender charges in order to purchase our current PrimElite IV product that has an attractive living benefit that provides guaranteed lifetime income.

We anticipate this type of variable annuity sales to return to a more normalized level by the end of the year. Without these variable annuity transactions, total Investment and Savings Product sales would have grown 16% in the third quarter.

Year over year, client asset values declined 3% to $31.62 billion at September 30, 2011. Sequentially, they declined 12% compared with June 30, 2011, while average client assets decreased 6% compared with the second quarter. We have seen client asset values improve with market conditions in October.

In the third quarter, our life-insurance-issue policies increased 20% compared with a year ago, and were up 9% sequentially. This increase was driven by strong sales of our Term Now product and the post-convention recruiting surge. The elevated level of new recruits generated more market referrals and sales opportunities as new recruits set appointments with their field trainers to begin the sales-training process by observing kitchen-table presentations.

Our New Term product uses prescription databases rather than oral fluids to begin the underwriting process. So Term Now policies are issued faster than previous products, which has led to an increase in issued policies and a slight acceleration in policies issued in the first full quarter following the launch. As a result, productivity was higher than our historical range in third quarter as the insurance policies issued per average representative increased 27% compared with the third quarter of 2010. Productivity should return to the historical range going forward.

Term Now also accounted for a higher proportion of our issued policies during the quarter compared with historical oral-fluid underwritten business. The average premium per issued policy declined to $771 from $811 in third quarter a year ago and from $794 last quarter. The decline was primarily related to the increase in product mix to the Term Now product, which is predominantly sold at smaller face amounts. Although the average premium per policy decreased from new policies, total annualized premium issued, which is the ultimate driver of revenue and income, increased 14% year over year and 5% sequentially. In other words, the increase in the number of policies sold exceeded the decrease in average size in third quarter. With that, I'll turn it over to John.

Thanks, Rick. Good morning, everybody. Third quarter was a solid production quarter for us. I'm going to spend a few minutes talking about some of the dynamics that drove results and where we go from here. In the third quarter, recruiting was up 43% over the same period a year ago. As we said last quarter, the increase in recruiting in June and July was driven by new products and initiatives announced at our June convention. This included lowering our new-recruit fee to $50 through July month-end. After July, recruiting returned to more normalized levels.

We are pleased to see a 10% increase in new licenses compared to a year ago and a 28% increase from the second quarter. Historically, our licensing pull-through rate has declined following a recruiting surge, and this time is no different. As anticipated, we saw the biggest license increases in the states with shorter average licensing times. And in the fourth quarter, we expect to see a few more licenses from the recruiting surge, especially in states with longer average licensing times.

At the end of the day, licensing growth in the quarter led to the size of our licensed sales force growing 2% by quarter end. The economy continues to impact the rate at which part-timers choose to renew or not renew their licenses, and we expect that trend to continue near term. Also, many states conduct their license renewals at the end of the year, so our non-renewal rate is typically higher in the fourth quarter.

As Rick discussed, it is important to always realize that because of our warm market approach, recruiting leads to new markets and life-insurance sales. We are pleased with the field's adoption of Term Now and believe that the recruiting increase coupled with the exciting new product led to the 20% increase in issued life policies over the prior year.

We continue to aim and adjust our incentive programs to deliver improved results. In October, we changed our Fast Start Bonus to something we now call the Distribution Builders Bonus. After analyzing the results, we do not believe that the Fast Start Bonus sufficiently focused the regional Vice President and the new recruit on licensing and building a productive new representative. This Distribution Builders Bonus is simple and, in sense, what we are focused on -- training and licensing new representatives. The key change is that now 90% of the bonus requires a new rep to get a license and produce their first sale.

As part of the technology initiatives we announced this summer, we are improving our financial-needs analysis, what we call the FNA by streamlining the data-entry process and moving it to a Web-based platform -- by streamlining data entry and moving it to Web-based.

The FNA is a powerful sales tool that our reps have used for years to help families understand what they need to do to become financially secure. Previously, a rep had to gather FNA data on a piece of paper in the client's home; go to the office to input the data in the computer; and then print out a customized FNA document to review with the client on the second appointment.

We are currently beta-testing a process where data entry is real-time at the client's kitchen table using a laptop or tablet device, allowing the rep to immediately review the customized FNA results with the client and complete an online application, all in one appointment. Furthermore, now rather than being a static document, the new process generates a dynamic FNA document that can change as the client's financial information changes.

Our Incentive Trip Contest to take 1,500 qualifiers to Orlando in February 2012 will end during the fourth quarter. One night during the trip, Primerica will take over all of Universal Studios and turn it into Primerica Studios, open only to qualified Primerica sales representatives. We are pleased that the initiatives announced and the excitement generated by our convention led to positive growth in recruiting and licensing in the third quarter. Our business runs in cycles. Right now, we're working on initiatives and announcements that will be made at our January kickoff, as well as at our Orlando Incentive Trip in February.

As we drive towards 2012, we remain focused on supporting and building our sales force to drive continued positive financial results. With that, I'll turn it over to Alison to go through the third-quarter financial details.

Thank you, John, and good morning, everyone. Since the interest-rate environment and ASU 2010-26 are hot topics right now, I'll start my comments by providing an overview of Primerica's exposure to these items, and then move into earnings drivers for the quarter.

While not immune to changes in interest rates, we believe our exposure is relatively small and manageable. With over $2 billion in fixed-income securities, we are likely to see lower reinvestment rates on maturities and operating cash flows. Over the next 12 months, approximately 12% of our portfolio, with an average yield of 4%, will mature. We do not expect to make changes in the overall credit quality, asset allocation, or targeted duration of the portfolio at this time.

In our Term Life business, DAC amortization and reserve requirements on our existing book of business are not impacted by changes in interest rates since assumptions are locked in at the time of issue and we believe our DAC will remain fully recoverable. The interest-rate assumption for term policies issued this year already reflects the current low-interest-rate environment.

While lower interest rates may gradually increase statutory reserve requirements on future policies issued over time, they do not result in any immediate additional capital requirements. Our asset-liability-matching analysis shows that the existing book of business is expected to provide significant prospective statutory profits even if the current low-interest-rate environment continues.

Our term-life product margins are also only minimally impacted by interest-rate fluctuations. As an example, a 100-basis-point decrease in interest rates impacts our term-life profit margins slightly less than 0.5% and internal rate of returns slightly less than 0.75%, assuming no XXX financing. The IRR impact would be even smaller if we finance the excess reserve. Also note that our Term Now product, rolled out at our June convention, was priced reflecting the current interest-rate environment. We do not anticipate the need to increase any future premiums to be required.

We are now one quarter away from implementing the DAC changes required by ASU 2010-26, which will reduce our future policy-acquisition expense deferrals beginning next year. To better understand this impact, let's discuss our year-to-date DAC roll-forward on slide seven. Through September 30, 2011, we have deferred a total of $239.7 million. $193.3 million, or 81% of the total amount deferred, relates to agent compensation, and we do not anticipate a significant change to these deferrals in the future.

Within the General Expenses Deferred heading, we have deferred approximately $8.9 million through September 30th related to the convention and incentive trip, as well as $37.5 million primarily relating to underwriting and processing. We believe that the convention and incentive-trip expenses fall under the definition of Indirect Activities, and will no longer be deferred beginning in 2012. Of the remaining $37.5 million of deferrals, approximately half are third-party underwriting costs, of which we believe approximately 72% to 74% are attributable to successful policy acquisitions.

We are continuing to analyze the remaining amounts to determine what portions directly relates to successful policy acquisition. Portions that are indirect or are attributable to unsuccessful efforts to acquire policies will be expenses incurred beginning in 2012. Many other costs such as marketing, licensing, field technology, field supervision, print materials and so forth are already currently expensed and, therefore, will not be impacted by this change.

We intend to adopt ASU 2010-26 retrospectively and will reduce DAC and retained earnings accordingly. Recall that in April of 2010, we ceded a substantial portion of our DAC to Citi; we therefore believe the impact to opening equity will be at the lower end of the general industry ranges being observed. Likewise, the future benefits derived from reduced DAC amortization will also be lower relative to our industry peers.

The growth in our in-force net premiums reflects the rate of expansion of our in-force block of business following the April 2010 Citi co-insurance transactions. With net-premium growth more reflective of a startup company and the relatively small reduction in DAC amortization from retrospective adoption, we anticipate our ongoing EPS impact to be higher than many of our peers. However, we believe the decrease in earnings combined with the decrease in stockholders' equity will have only a marginal impact on our return on equity.

It is important to remember that this accounting change impacts only the timing of expense recognition and certain balance-sheet items. It has no impact on our cash flow, statutory capital or the economic returns of our business. We plan to provide a specific range of the anticipated accounting adjustments when we announce our fourth-quarter earnings.

Now, let's move to our earnings discussion for the quarter. Before we get into our segment performance, I'll begin with an overview of consolidated expenses. On slide seven, you'll see insurance and operating expenses increased $6.8 million, or 14%, year over year, to $55.1 million. This variance includes $1.7 million for our $50 IBA-licensing-fee promotion that ended July 31st, as well as a $2.7 million charge for the elimination of print inventories as the materials we produce are now predominantly used for internal consumption.

In Term Life, the runoff of legacy expense allowances continues to have a negative impact on our insurance expenses. It's important to note that economically we replace these expense allowances with increasing premiums in our New Term business which provide for policy-maintenance expenses. Premium taxes also continue to merge with the growth in our New Term business.

Looking to IFP -- certain operating expenses are variable with volumes in our Investment and Savings Products business and will fluctuate accordingly. Other increases in our general-expense space this quarter were largely offset by prior-year expenses related to our IPO and Citi expense allocations.

Turning to the segment-results discussion, you can see on page eight that operating revenues in our Term Life insurance segment grew by 22% in the third quarter of 2011 compared with the same period a year ago. Operating income before income taxes increased by 13% over the prior-year period, primarily reflecting incremental New Term premiums partially offset by anticipated runoff of Legacy Term premiums and the higher-expense basis I just discussed.

Mortality experience was slightly unfavorable, while persistency improved slightly during the third quarter of 2011 versus the year-ago period. On a sequential basis, operating income before income taxes increased by 5% due to New Term premium growth and $3.3 million of lower expenses due to the write-off of medical testing materials in the second quarter. Persistency was slightly lower in the third quarter compared with a seasonally strong second quarter. Mortality was also unfavorable compared with favorable mortality in the previous quarter.

New Term operating income before income taxes continued to be profitable at $9.1 million in the third quarter, as premium revenues have grown to cover the largely mature expense base. Turning to page nine, you'll see the results for our Investment and Savings Products segment. Operating revenues increased 16% to $97.5 million, driven by higher sales and higher average client-asset values. Sales-based revenue was up 28% to $42.2 million and asset-based revenue was up 12% to $42 million -- both consistent with sales and asset growth from the third quarter compared with a year ago.

While operating revenues were up, operating income before income taxes of $26.7 million was flat compared to the year-ago period due to a $2.7 million increase in Canadian segregated-fund DAC amortization. This increase was primarily driven by negative equity returns in interest-rate trends during the third quarter versus positive returns in the third quarter of 2010.

Sequentially, operating revenues decreased by 7%, or $7.1 million. And operating income before income taxes decreased 12%, or $3.7 million, reflecting seasonally higher sales in the second quarter and a decline in average client-asset values related to market conditions in the third quarter.

On page ten, you can see that Corporate and Other Distributed Products' operating revenues were down 9% to $36.8 million year over year, largely reflecting lower loan volumes. Operating losses before income taxes were $7.5 million in the third quarter of 2011, compared with $5.2 million loss in the same period of 2010, and reflects the previously discussed $2.7 million print-inventory charge partially offset by IPO-related costs and Citi expense allocations from the prior year.

Segment results also reflect higher claims on short-term-disability insurance products underwritten by our New York Insurance subsidiary compared with a year ago. This claims experience has improved from the second quarter, and we expect the block to return to normal loss levels over the next year, as premium-rate increases continue to be put into effect.

Turning to page 11, Investments and Cash totaled $2.32 billion as of September 30, 2011. We had very little change in the composition of our portfolio over the past quarter. The average credit rating of our fixed-income portfolio continues to be single-A, and 93% of the portfolio was rated Investment Grade. The average book yield of investments, excluding cash, at quarter end was 5.33%, down slightly from 5.38% at June 30th.

The new money rate on our purchases for the quarter was 2.42%, down from 4.45% in the second quarter. Our purchases were almost exclusively investment-grade securities, and the average duration of purchases was a little over three years. The duration in yields of these purchases were driven by the very low supply of new issuances during the quarter, which provided less opportunity to invest in what would have been our typical arena -- corporate credits in the ten-year part of the curve. Our desire to maintain good liquidity as a potential for a dividend from Primerica Life and the share repurchase began to gain traction -- also played into our investment-purchase decisions during the quarter.

Turning now to page 12, we continue to maintain a conservative balance sheet with a strong capital position. As Rick described, we will execute a $200 million dividend from Primerica Life to Primerica Inc. to fund the stock repurchase. This dividend will be funded through a combination of available cash liquidity and sales of primarily shorter-term, lower-yielding investments. The resulting residual portfolio at Primerica Life will therefore have a modestly higher book yield and lower cash concentration than our September 30th metrics. However, we have structured our dividend-funding plan such that we don't expect to have a significant change in asset mix, duration, or credit quality in the portfolio.

Following the stock repurchase, our low debt-to-capital ratio of 15% in the quarter will be closer to 18%, which will continue to be conservative. We've mentioned in the past that at the time of the IPO, we intentionally overcapitalized the Life Company to fund new-business-surplus strain.

At this point, our statutory surplus is higher than expected due to ceded premium recoveries and favorable expenses in past periods combined with a favorable impact from our admitted statutory deferred-tax asset. Thus, our risk-based-capital ratio continues to be estimated in excess of 600% at September 30, 2011. After the $200 million dividend, RBC is estimated to be in excess of 420%, still providing sufficient capital to support existing operations and fund future growth. The capital deployment brings us closer to our longer-term objective of 300% to 350% RBC. With that, I'll turn the call back over to Rick.

Thanks, Alison. We delivered solid operating results in the third quarter. Our financial strength and conservative balance sheet position us well to execute our strategy for growth and improving returns on capital. Now, I'll open the call for questions.

(Operator Instructions)

And your first question comes from the line of Jeffrey Schuman from KBW. Please proceed.

Good morning. I was wondering if we could first talk a little bit more about the XXX financing solution. Has the proposed transaction been downsized to $150 million, or is it still going to be $300 million, but only $150 million of it is likely to be redeployed in the near term?

Right -- excellent question, Jeff; and it's a common question. But to remember -- the XXX transaction itself is really based on the block of business that we choose to finance. And so all of the decisions we've made on redeployment of capital hasn't changed that decision. We still are intending to put the 2010 and prior business into the block. And so the amount of reserves that will be subject to financing won't change, nor will the magnitude of the letter of credit. So that in itself is unchanged.

When you look at how we are taking capital out of the Company, I think of this more as a sequencing or a timing activity. When we first met with Massachusetts about the securitization, we discussed the idea of a $350 million capital extraction from Primerica Life. We are sticking to that original request with Massachusetts, and have worked out a relationship or arrangement where we can take the $200 million out now, because the Division is comfortable with our capital position even without a XXX solution. And to the extent we can get a XXX solution executed, we would then proceed with taking out an additional $150 million.

The thing to recall here is -- what that will do is -- I mentioned earlier in my comments that RBC right now is going to be about 420% give or take. To the extent we execute the same size solution we've discussed in the past and extract $150 million, our RBC will actually go back up to closer to the 600% range -- somewhere in the high 500% -- that it is prior to the distribution today. And so while we're not requesting an additional dividend from Massachusetts at this time, we do believe that it does provide an opportunity for us to seek additional distribution in the future.

Can you give us an update on the regulatory-approval process, please?

Sure. And it's pretty much unchanged from when we last spoke at your conference. As everybody is probably aware, the NAIC has raised -- or pushed to a subcommittee -- the discussion of the use of captive or special-purpose types of companies in order to move reserves off of a company's book -- a domestic company or a producer's books.

The cap that was meant to be discussed -- or initially meant to be discussed -- back in the August meeting, which was of course canceled due to Hurricane Katrina -- and then -- it is now on the agenda to be discussed on the November meeting.

Wrong hurricane -- wrong hurricane.

Wrong hurricane -- but some hurricane.

But the one that hit New York.

The one that hit you guys up there. I was thinking -- Katrina was New Orleans.

Yes, yes. The wrong --

So anyways, sorry about that. Anyway the hurricane -- your hurricane -- anyway, the topic is again scheduled to be discussed at the November meeting, I think, which is next week.

And, really, at this point, what Massachusetts continues to say is that they will ultimately make a decision on approval or disapproval of the transaction based on the merits of what we have proposed. They have been through the financial due diligence. They've been through the documents. So I think we're very far along in that regard.

That said -- and we do understand they do want to hear what is discussed at the NAIC level -- to start getting perspective as to what the questions are. And so we do intend to reconvene with Massachusetts later this month or early in December to see if we can push the process along.

Okay. That's all very helpful. I'll get back in the queue. Thanks a lot.

You bet.

And your next question comes from the line of Steven Schwartz of Raymond James & Associates. Please proceed.

Hey, good morning, everybody.

I got a few. I'll just take them in random order.

Alison, I was trying to do quick numbers while you were talking about 2010-26 -- sounded to me like maybe something like 15% of the total expenses that get deferred would not be deferred. Am I in the right ballpark there?

I would speculate that you're a little bit high, but you're not too far off. I do think it's going to be a little bit lower than that. And it's largely because of the fact that so much of what's deferred today is agent-compensation related and we're not really anticipating significant changes in that bucket of expense.

Okay, and then -- continue with you for just a second. You talked about how you've got 12% of the portfolio that's going to turn over next year.

Yes.

I think you said that the rate on that was 4%.

Correct.

That's not -- even in today's environment, that's not an outrageously high rate. Are you going to be able to roll that over at a similar rate, or do you expect that would be lower?

And my answer to that changes by the day.

Sure.

But where we are, looking at the market right now, I would anticipate -- to the extent supply is available -- and that is a big if -- we saw, for most of the third quarter, that there was very limited supply. Supply did really pick up in September. But to the extent there is supply available, we do think we can replace that without having to take on any undue risk or extending duration beyond what we've already discussed which is really kind of targeting the 10-year point on the curve.

Okay. All right, that's good info.

And then I guess I'll do one more and then get back in line. I guess I'm a little bit confused on the discussion of productivity. Term Now is obviously cheaper. It's faster. I guess I don't understand why productivity wouldn't be higher when you're looking at the number of policies sold per agent -- why it would go back down. It just seems to me it's an easier sell -- that productivity is going to be higher.

Okay. First, just to reiterate what happened in the third quarter -- the third quarter, you had three different dynamics. One is -- just because of the recruiting surge, there were more warm-market leads that generated a higher volume than is normal relative to Life applications.

The second dynamic that happened was that -- because Term Now is issued faster than the old oral-fluid -- and with the change to Term Now, we accelerated policies that would have taken longer to issue into the third quarter, which bumped up the amount as well.

And then the third thing that happened was that Term Now, as a percentage of the total increased versus what we had in oral fluid, which also, because it's issued faster, accelerated issued policies in the third quarter.

On an ongoing basis, once that sort of normalizes out so that you're on a normal run-rate basis, there's no reason to think productivity would change beyond sort of normal levels. Again, we've always talked about "There is a range of productivity that the sales force operates in." The third quarter jumped outside of that range. And what we're just saying is, we'll jump back into the range beginning in the fourth quarter.

Okay. If I could follow up, Rick, just on that -- the first point that you made about the leads -- I mean we're talking just -- you got a whole bunch of new people so you've got a whole bunch of new friends and family.

Yes.

And that's an easier sell?

That's correct. I mean -- John here. I'm sure you can tell by the accent.

But recruiting -- a lot of people -- recruiting is two things. It is access to a market, because I'm going to take someone out of the field and go see their friends and family. And it's also potential licenses. So recruiting is two good things. It's the way our people get to the market, because our number-one goal is a warm-market referral, not a cold phone call out of a phone book saying, you want to buy some life insurance? So a piece of it was the significant increase and recruiting was more people for our people to see.

Okay. Thanks, guys.

And your next question comes from the line of Andy Kligerman of UBS. Please proceed.

Yes, it's Andrew Kligerman.

And the question around sales -- you're kind of moving from -- the fee back to $99. There was kind of the pull-thorough issue where licensing was up only 10% versus the robust recruiting. And I guess -- you're also mentioning the potential drop-off in productivity. So I guess as I look out to 2012, given how robust the last two quarters have been -- and they've been really robust -- what can I -- can you give a little guidance or a little bit of an outlook as to what we can expect in terms of sales-growth potential next year and recruiting potential next year given the robustness we've seen this year?

Okay. I'll take a cut at that and then let Rick kind of fill in color commentary on it. So we'll kind of swap roles, here.

By the way, good to talk to you again, Andy.

Likewise.

As an organization, we don't give guidance. So with that said, let me kind of give you sort of the feel or whatever -- the feel is -- Andy, as you talked about licensing pull-through rate or whatever -- whenever you have something -- and, in truth, the surge we had coming out of the convention was a historic-level surge. So it's one of those where it's kind of like a wave that hits once a century -- what's your forecast on that. But in truth, it looks like the recruit increase on there -- the percentage getting licensed -- of the increase -- was about half the level of a normal recruiting -- a normal recruiting cycle.

And as I've said many times, ours is a business of cycles and it is a business of aiming and adjusting. Just to give you the example that I gave in my script, one of the things we did was to shift the Fast Start Bonus to the Distribution Builder Bonus. The Fast Start Bonus was very focused on someone very quickly getting a check for going out into the field. And what we saw when we studied that after the effect -- I mean another example I've given you guys is -- running things here sometimes is a little bit like Whack-a-Mole -- you pop down on something and then, oops, something else popped up over there.

There was not enough incentive to get that person beyond just moving out into the field, but moving into the licensing process. Remember, to get somebody a license -- most states, they've got to sit in a class a couple of weekends and listen to some not-so-very-interesting things. It's not like the first thing you go, wow. This weekend, I get to spend ten hours a day, two days, listening to somebody talk about non-forfeiture options.

So we adjusted that bonus to be very focused -- A, very simple, easy-to-explain; B, whereby just getting in the field real quick, they can get the refund of the IBA fee very quickly; but then, to have a significant bonus at the end of the process for them to get licensed and productive.

So I feel very good about the things we're doing. And our intention is to take the foot on the accelerator and keep things moving. And I feel very good about how our sales force is receiving all the things we're working on. I will say the economy continues to be, in Main Street America, tough.

We're not setting up recruiting booths outside of Zuccotti Park right now. I mean these are extraordinary times that we're operating in as an organization. But I feel very good about the directional things we're doing, and what we're going to do to drive those things as we head into 2012. And in 2012, our message is going to be, we're going to own Main Street distribution. While everybody else runs around and slams into one another, we're going to be very focused on building, growing and owning Main Street distribution and controlling the things we can control; and then saying a prayer someone else figures out all the other messed up things in the world and get them better for us. So --

But, John, it sounds like you're pretty intent on keeping the growth going --

We are intent on -- intent and intense -- not tense, but intense -- on keeping that going. And these are challenging times. I mean this is -- this is one -- I mean you guys probably have to walk by it every day, going to your office. This is a crazy world. Our view is when things are that way, hit the accelerator, because a boat sitting still in stormy seas gets swamped. One that's got a lot of movement keeps moving and gets through it.

And we are very intent on that. And I can tell you personally I'm playing at a level of intensity that is above my normal level of intensity, which is pretty high. And so right now I mean -- right now, you've got to be the loudest voice in people's heads because otherwise they're going to hear a bunch of noise happening in the world, and that's what we're focused on.

Excellent. And then, just one for Alison -- once you kind of settle in on the XXX securitization, where would you like your -- now, debt to capital is about 18%; RBC 420%. But then you've got the XXX securitization coming down the road. Where would you like your debt-to-capital and RBC ratios to settle in once all that's said and done?

Sure. Well, from a debt-to-cap ratio, we obviously look at where the peer group operates as well as what we believe would be net (inaudible) or the proper range to maintain our current ratings. So with those being the two areas that we would focus on, we think it would make sense to go up as high as, say, 25% to the extent there was a need to do so or opportunities in some of our -- to do so. So that's probably the range I would focus on as a long-term target.

On RBC -- I think we've been pretty consistent in the past that given where things are today -- and I'll always caveat it that the world changes, obviously, from time to time -- but given our view of things today, both with our discussions with our regulator -- and we're [variably] comfortable -- as well as, again, what the rating agencies would view as appropriate for our levels of ratings -- we think a ratio of 300% to 350% -- somewhere in that range -- is appropriate on a long-term basis.

Okay. Thanks a lot.

Yep.

Good talking to you, buddy.

Likewise.

And your next question comes from the line of Mark Hughes of SunTrust. Please proceed.

Thank you very much. The increase in policies issued this quarter -- any sense of what that might have been, other than the kind of unusual item with the Term Now productivity that didn't seem to pull in the -- perhaps -- or speed up some of those approvals -- what would the growth have been otherwise?

The acceleration relative to the speed-to-issue and the mix probably added about 5%, 6% to the growth in the quarter. And then, as we said, part of the other growth is just related to the surge itself, or a portion of that.

Right, so the productivity -- not a huge contributor to it?

Well, 5%, 6%.

5%, 6% -- it's significant. And the other thing I think, beyond those two, is just the adoption by the sales force of -- which, I've got to tell you all -- I mean I'm a -- I am, by nature, intense, focus-driven and jumping up and down and always focused on positives. And then when I close the door and go in my room, I worry about things.

It was a significant change where we were going to a product delivered in a way that we had not done before. Okay -- the whole very fast, get-it-through underwriting, hope-everything-works kind of thing. And so as we left that dome, that was my worry. And the field adopted it. I'm very proud of our sales force on so many fronts.

I would just say I mean I'm incredibly proud of our sales-force leaders. It's a tough world they're operating in. They adopted -- made that change not only seamlessly, but did it incredibly smoothly. And so that is a piece of it also. Because it would have been easy to have been explaining why things didn't exactly happen right and --but we feel good about it now -- because that was a significant change for them that they adopted to very quickly.

Right. The $2.7 million DAC amortization for the Canadian funds -- a little more detail on what drives that -- what conditions in the future would we be more likely to see extra expense like that?

And we do have this -- I talk about it pretty much every quarter because the number does jump around all over, given what's going on in the equity markets and interest-rate markets. Remember, here, this is a little bit different than what you'd see in your typical [VA] with guaranteed-minimum interest rates and the like. It's a very conservative product structured in Canada. And so the way we amortize our DAC is obviously in proportion to gross profit margins. And when you look at what our gross profit margins are for this particular product, it's not -- there's no spread component to it. It is comprised of management fees and surrender charges as well as general returns that we assume as we price the product.

So to the extent that redemption rates on the product or the market returns are different than what we assume in our amortization structure, we have to unlock because this is a FAS-97 type product -- we have to unlock and go back and restate DAC retrospectively, if you will. So it's really a function of those two components -- redemption rates and market returns. But, again -- very important distinction and why our numbers don't -- aren't as significant as you see otherwise -- is that a portion of our profits is not a component of spread. That's not a portion of our profits. So you tend to see in other companies -- that's where they're getting their biggest hit.

Right.

So, again, these numbers -- and the number itself was probably about $1 million or so for the quarter. It just so happens that last year in the third quarter we had a very positive return. So net -- when you do a year-over-year delta -- is why you had the $2.7 million.

Right. And then maybe more important, is that Universal Studios event opened to qualified analysts as well?

Only if we like you.

You got to get your distribution bonus to qualify, buddy. So listen, I've got -- somebody will give you a call with an IBA when we're done here.

All right.

For you, absolutely.

Yes, you guys -- absolutely.

Only if you ride the rollercoaster with me.

Hulk is going to be awesome.

And your next question comes from the line of Jeffrey Schuman as a follow-up, from KBW. Please proceed.

Thank you. I was wondering if we could talk a little bit more about the new DAC rule. First, an observation -- I guess the reason why there will be some earnings drag is because you grow and you have more capitalization than amortization.

So my question is, given the structure of the reinsurance agreement and kind of the built-in maturation that will occur over a period of a few years -- I mean is there a point not too far down the road when you get to more of a steady state and some of this reverses, or is that pretty far out?

Well, the -- and I want to try to make sure I answer the right question. I'm going to back-step for a second. Again, because -- there's two components of why we think our earnings are going to be more greatly impacted than perhaps some of our peers. One is we are going to have a, relatively speaking, smaller write-down of our existing DAC balance which, of course, equates to a smaller benefit, if you will, from lower fees for amortization. And that is because of the cession back to Citi -- in 2010. And, really, when you bifurcate that to what's going to happen going forward -- if you step back and look at us, we do look more like a startup company because we ceded so much of our back book of business and we are really replenishing the in-force back to more of a steady state.

So as that happens -- you are right -- at some point down the road, we do get to that steady state. And it would be a relatively small impact versus where it's going to be now. But because our premium level is really growing, the amount of expenses that would be subject to capitalization versus our total earnings base or premium base is relatively high. And so we do feel like we will have a greater hit than, perhaps, the peer group.

Again, it does normalize. But that said -- try to look out at a delta, delta, delta, delta -- and all these years out. So I would say the impact in the first year will obviously be worse than the impact in the second year. But it will be a strain going forward. Does that answer your question?

Yes, it certainly does.

But one follow-up, though -- I mean have you looked at the possibility of actually restructuring some of the expenses and making them expenses that you would experience more on a successful-efforts basis?

We have looked, really, at everything, and have made some changes as we deem them appropriate. When all is said and done, I always have to remind myself and everybody else, that this is an accounting change.

So I don't want to do anything that is detrimental to our business process or the way by which our sales force can actively participate in the business in order to accommodate an accounting change. And so I'll always draw you back to the fact that our economics aren't changing here. And the profitability of the business isn't changing here. It's really a timing of expense recognition.

So a great example is, like I mentioned, our incentive trip. Our incentive trips, we don't believe, fall under these new rules. We think they are really more indirect-type of activities. We could incredibly change how somebody qualifies for it, but that's not really in the best interest of the business. So when all is said and done, we did look at it but we've made the decision that it's appropriate to keep those arrangements -- those programs -- exactly how they are so we can best manage and get the most use and value out of our dollars even if it has a potentially not-as-attractive approach or result from an accounting perspective. So we definitely have looked at all that. But, again, when all is said and done what's most important is that we spend our money wisely and we do things that promote our ability to grow the business.

Okay. That's helpful. And I think we all appreciate that nothing's changed fundamentally. But, then, we also have the practical reality that what you're going to publish next year are GAAP earnings.

Right.

And I don't know that any of us have developed a magical way to kind of adjust that so you're not punished for your growth rates.

Well, we will keep reminding you --

Okay.

-- every quarter that -- not to punish us, but give you valid reasons as to why.

All right. Thanks a lot, Alison.

And your final question comes from the line of Steven Schwartz from Raymond James & Associates. Please proceed.

Hey, again, everybody.

Hello.

A couple of questions on the Investment and Savings product, if I could -- first, with regard to your -- the variable annuity that you sell for -- that you're selling for Met -- Met's made a number of changes over the quarter in its IB product. I understand you sell a WB from them. But have they announced any changes that could affect you?

No.

Okay.

And then just some thoughts, maybe, on the managed accounts -- sales were $11 million, $12 million. I'm wondering if you feel good about that -- and maybe a little bit of disclosure on what's going on in the Indexed Annuity product.

Yes, kind of -- I'll sing lead off and let Rick throw color commentary to it, Steve. It may -- you're the closer today, so that's a big deal. You're the question closer. Yes, we feel good about it. Look, it's -- it is very new. It is totally new. It means getting a Series 65 license. But what we're seeing in the process is a lot of our very serious securities producers -- in our business, in anything you do -- particularly something totally new -- there will be early adopters and then there will be people that follow that.

We're doing -- we're doing the index to do -- I mean doing the managed accounts specifically kind of for a couple of reasons -- number one, to build out our investments-and-savings portfolio for our serious securities people to show them that this is something that probably wouldn't have happened in the old world at Citi, and now we're our own independent business and we're doing that and we're building out something for them.

Secondly, it's good for the client and for a lot of our people who are able to get higher-ticket clients and also have a lot of assets under management today. And it allows them to move a person into an appropriate investment and kind of annuitize their cash-flow stream all for that from a standpoint of our serious securities producers.

We're seeing some early adopters really start doing that. And the wholesalers are in the fields training our people. We're starting to build licenses in it. So I would say it's early. We feel very good about it filling the portion of our business that we're -- that we feel -- that we need to do. And we think it's something that over the next few years will build and build and build into a very significant piece of our business. Rick, you want to talk about the indexed annuity, or kind of where we're at here?

Yes, well, we are proceeding -- we're actually beginning a beta-test in three states beginning next week. And depending upon how that goes, look for a full rollout by the end of the first quarter. So we're making progress on that.

[Lincoln] is very excited about it and wanting to support us in a big way. Interest rates right now aren't great, so it's not probably the perfect time from a standpoint of the returns on the product to roll it. But, in many ways, I think that can be helpful because it gets it out at a time like that -- starts to get people trained.

And so we're working on it -- about to start testing it. And Lincoln, certainly, seems excited about the opportunity with it.

Okay, thanks.

Very good. Well, thank you very much for your questions. And we will talk to you next time.

See you, guys.

Ladies and gentlemen, that concludes today's conference call. You may now disconnect your line. And have a nice day.