Primerica Inc (PRI) 2012 Q2 法說會逐字稿

Good morning, everyone, thank you for joining today's as we discuss America's results for the second quarter 2012. Yesterday afternoon we issued a press release reporting financial results for the quarter ended June 30, 2012. 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-cap 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 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 3 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 materially from these statements. For a discussion of these risks, please see the risk factors contained in our Form 10-K for the year ended December 30, 2011.

This morning's call is being recorded and webcast live on the Internet. The webcast and corresponding slides will be available on 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 will turn the call over to Rick.

Thank you, Kathryn, and good morning, everyone. Welcome to Primerica's second quarter 2012 earnings call. Beginning on slide 4, you can see our strong second-quarter results. Operating revenues increased by 9% to $296.2 million and net operating income increased 18% to $45.5 million over the prior year period.

Net operating income per diluted share increased 40% to $0.71 from a year ago reflecting strong performance in the terms segment, lower insurance and operating expense levels due to prior year items, the execution of our first redundant reserve financing and lower invested assets following our recent share repurchases.

Net operating income return on adjusted stockholders' equity increased to 14.8% from 11.6% in the year ago period and was up from 13.5% at the end of the first quarter. This quarter's return on equity is the highest we have achieved since becoming a public company in 2010.

Our investment and savings products sales levels were consistent with the first quarter of 2012. Sales increased 5% in the second quarter from the year ago quarter primarily reflecting new product sales growth including $103 million of fixed indexed annuity sales and $40 million of managed account sales in the second quarter. Managed accounts clients' asset values were $375 million at the end of the second quarter.

Variable annuity sales continue to benefit from a slightly elevated rate of clients transferring their older variable annuity contracts to the current (inaudible) for variable annuity that offers an attractive living benefit, although client transfers were down from a year ago. Our total client asset values declined 2% to $35.3 billion relative to a year ago, in line with the US Canadian markets.

Sequentially Investment and Savings Products sales were flat with the first quarter reflecting strong prior quarter retirement savings sales typical of the first-quarter trends during the IRA and [RR SD] seasons. Total client asset values declined 3% from the end of the first-quarter primarily reflecting market conditions.

In our term life business life insurance issued policies increased by 1% in the second quarter. Sequentially Term Life insurance policies issued increased 8% compared with the first quarter of 2012 largely reflecting typical seasonality. Our average policy issued premium of $790 in the second quarter remained consistent with both the first quarter of 2012 and the second quarter of last year.

In the second quarter we further enhanced shareholder value by repurchasing 5.7 million shares of our common stock for $150 million. This repurchase completed the redeployment of $350 million of extraordinary dividends from the life company, much of which was approved in conjunction with our recent redundant reserve financing. During the quarter we also increased our stockholder dividend to $0.05 per share as part of a longer-term goal to increase our dividend yields to be more in line with our peers.

In July we were able to complete another step in our capital plan by successfully executing a $375 million inaugural debt offering of 10 year senior notes at an annual interest rate of 4.75%. The majority of the proceeds were used to repay the $300 million Citi note. The remaining proceeds are expected to be used for the share repurchase program announced yesterday commencing later this month. Based on our current average daily trading volume we anticipate the 75 million share repurchase program to be completed in about four to six months.

As of June 30 our debt to capital ratio remained low at 19%. If the offering had been completed as of June 30 our debt to capital ratio would have been 22.7%. As we look at other opportunities to enhance returns, Primerica Life's statutory risk-based capital ratio is estimated to be in excess of 570% at June 30. This elevated surplus level combined with our 2012 anticipated statutory income will allow for an ordinary dividend payment in 2013.

Although the Life business is not yet generating free capital due to the layering of new term business, we believe Primerica Life will be able to pay an ordinary dividend of between $130 million and $160 million in 2013 and still remain well-capitalized on future business.

We do not anticipate taking an additional ordinary dividend from the Life company for several years thereafter due to the new business capital strain and our desire to have a longer-term RBC ratio in the 350% range. However, we could package another redundant reserve financing at some point in the future which would free up a significant amount of capital that could be extracted from the Life company. Now John will walk you through our distribution results.

Thanks, Rick, and good morning, everyone. We feel good about the positive distribution results of the second quarter. As you can see on slide 5, the size of our Life licensed insurance sales force stabilized and grew to 90,868 at the end of the second quarter. This was an increase from both the first quarter of 2012 and the second quarter of a year ago.

Growth in the size of the sales force was primarily driven by an increase in new Life licenses which grew 21% from the second quarter a year ago and increased 28% from the first quarter of this year. Sales force numbers also benefited from fewer non-renewals and terminations than occurred in both the first quarter and the prior year period. Recruiting in the second-quarter decline 25% compared with the second quarter a year ago and was down 16% from the first quarter of 2012. There are a couple of things that lead to these results.

First we have worked to balance our emphasis on recruiting and licensing by recalibrating our messaging and incentive programs to put additional focus on getting new representatives licensed. We have also introduced a streamlined life licensing process for new recruits.

Over the years we have developed a series of licensing aids to help reps at various stages of the licensing process. However, there were so many tools available that it actually made the licensing process more complex. So with the help of our sales force leaders we identified the most effective tools and created one simplified licensing system for all new recruits to follow.

As part of the initiative we also refocused our licensing instructors on helping new representatives through the licensing process and our RVPs in tracking and mentoring new recruits through the licensing process. These recent licensing initiatives have helped stabilize the size of the sales force but have also impacted recruiting. We estimate approximately two-thirds of the recruiting decline in the second quarter on a year-to-year basis was attributable to more focus on licensing and less focus on month-to-month recruiting incentives.

Another dynamic impact -- another dynamic impacting the year over year recruiting variance was last year's post-convention recruiting surge that was primarily driven by the $50 independent business application fee promotion in June and July.

Approximately 5,000 of the incremental recruits in the second quarter of 2011 were a result of the convention incentives. We attributed a total of 30,000 incremental recruits to the post-convention surge in the second and third quarters of 2011 with 25,000 of those incremental recruits occurring in the third quarter of 2011.

The leads generated by the recruiting surge also drove life insurance productivity in the third quarter above our historical range. Productivity has since returned to our normal historical range and we anticipate it will remain there.

Last year's record recruiting results and the associated new licenses generated will be a challenging comparison next quarter. But with the positive momentum we are seeing and licensing we should be able to maintain the size of the sales force in the third quarter so that it will remain at a comparable level with the second quarter.

As I have mentioned before, we have been evaluating and adjusting messaging and incentive programs to produce positive results. Last week we rolled out a new compensation program for our sales force after working closely with senior sales force leaders on the new program for over a year.

There are a lot of moving parts to the change, but basically we moved approximately 35% of the total payout from monthly production bonuses to commissions. The new program places more emphasis on developing new leaders and ultimately building distribution and less emphasis on short-term premium hurdles. We are hopeful the change will drive promotions and ultimately produce more regional vice presidents which are our distribution outlets across North America.

As we drive towards 2013 we are working on initiatives and business enhancements focused on supporting our sales force and building long-term distribution growth to drive strong financial results. Now Alison will walk you through our financial results.

Thank you, John, good morning, everyone. My remarks today will begin with a discussion of segment operating results followed by a review of companywide operating expenses, invested assets and net investment income.

As Rick mentioned, we had a strong quarter with the growth in net operating income driven primarily by Term Life results. On slide 6 you can see that Term Life operating revenues grew 24% year over year led by an increase in net premiums. 22% of the 28% total increase in net premiums results from growth in the new term business and the corresponding impact on ceded premiums.

With each successive block of business issued the weighting of our premium base continues to shift towards new term and away from the business ceded Citi. Ceded premiums for the new term block are less than 20% of direct premiums.

Because the new term block is subject only to (inaudible) reinsurance programs its ceded premiums are only reflective of expected claims costs in a given period. Conversely ceded premiums for the block we insured with Citi are more than 80% of direct premiums, consistent with the underlying current insurance contracts which essentially share profits with Citi.

With regard to the year over year growth in net premiums, 6% of the increase is associated with reprocessed reinsurance transactions during the quarter. Over the normal course of business we reprocess a very small portion of our reinsurance transactions that are either miss-processed or intentionally not processed on an automated basis due to system constraints.

During the second quarter the reprocessing of certain transactions resulted in a $6 million increase in net premiums that was substantially offset by a corresponding increase in claims and cumulatively was an immaterial increase to earnings.

While I will discuss net investment income in the aggregate shortly, net investment income allocated to Term Life in the second quarter increased 6% year over year, consistent with the growth in assets allocated to support the Term Life business.

Operating income before income taxes increased by 44% over the prior year period. In addition to the strong (inaudible) life line growth just described, the increase also reflects higher deferrals of commissions consistent with incentive program changes as well as new product launch expenses and convention related expenses both specific to the prior year.

Interest expense increased in the quarter as expected due to the redundant reserve financing executed in March. Persistency and incurred claims experience were both consistent with the prior year period and did not significantly contribute to year over year trends.

In comparison to the first-quarter, operating income before income taxes increased by 17% reflecting continued premium growth, seasonally higher persistency and lower incurred claims in the second quarter of 2012. As I just described, net premiums and claims are both elevated by $6 million as a result of reinsurance transactions that were reprocessed.

In the second-quarter we also incurred higher interest expense associated with our redundant reserve financing and higher growth related licensing expenses.

On slide 7 you will see our Investment and Savings Products segment. Operating revenues declined 2% and operating income before income taxes declined 3% in the second quarter compared with the second quarter a year ago. Sales trends remained positive with sales-based revenues increasing by 5% driven largely by fixed indexed annuities.

We experienced a modest shift in sales mix towards managed accounts which provide ongoing asset-based revenues rather than point of sale based revenues. Asset-based revenues declined 4%, similar to the decline in average client asset values which is reflective of market conditions in Canada and the US.

Account-based revenues declined $2.3 million year over year from a pricing structure change but is substantially offset by lower expenses as well as fees received in conjunction with a fund merger in the prior year period.

DAC amortization declined year over year as market returns on the invested assets underlying our Canadian segregated funds showed some improvement from the market losses experienced in the prior year.

In comparison to the first-quarter, Investment and Savings Products' revenues increased by 3% and operating income before income taxes increased 2%, generally in line with trends in sales and average client asset values.

On slide 8 you can see that Corporate and Other Distributed Products' operating revenues decreased $6.3 million and the operating losses for income taxes increased $3.9 million year over year. The revenue decline is largely driven by a $4.6 million decrease in net investment income associated with the $350 million cumulative share repurchases that have occurred since the second quarter of 2011.

As we continue to optimize our balance sheet invested assets allocated to the Corporate and Other segment should decline along with the corresponding net investment income.

Segment results also reflect lower incurred claims on our short-term disability product and refinements in our student life product policy estimates that increased DAC amortization. Both of these products are underwritten by our New York insurance subsidiary. Other sequential quarter and year over year trends are consistent.

Now turning to insurance and operating expenses. On slide 9 you will see we had a $4.9 million year over year expense reduction related to various 2011 convention initiatives and product launches combined with the cost of our capital management actions in the prior year. An additional $1.4 million expense reduction relates to the record-keeping fee structure pricing changes that are fully offset by the revenue reduction I mentioned in the ISP segment.

Absent these activities you will see our ongoing expense base increased $2.2 million related to employee merit increases, an additional year of management stock compensation awards, plus another $1.7 million of premium related taxes and growth in our new term -- and growth in our new term and allowance runoff in our legacy business. In comparison to the first-quarter our expenses have increased about $1 million primarily due to higher Life licensing related expenses.

While we are changing the way commissions and bonuses will be distributed to the sales force, the new compensation program John discussed will use essentially the same aggregate dollars as the predecessor program and will remain deferrable. To aid in the transition to the new compensation system we have instituted a short-term transition program that is also fully deferrable and in the aggregate will not be material to our results.

Turning to page 11, investments in cash totaled $2.02 billion as of June 30, 2012 down from $2.17 billion at March 31 as we closed the $150 million stock repurchase during the quarter. The impact of the repurchase on the portfolio composition was negligible, with the average credit weighting of our fixed-income portfolio remaining single A and 94% of the portfolio rated industrial grade.

We continue to have minimal direct exposure to euro zone periphery countries with less than 0.2% of our investment in either financial companies or sovereign debt of these countries.

The average book yield of investments excluding cash at quarter end was 5.48%, up slightly from 5.46% at March 30. The new money [weight] on our purchases for the quarter was 3.46%, up from 2.69% in the first quarter. Our purchases had an average credit quality of A-minus, duration of six and a half years and consisted primarily of new corporate issues.

The liquidity profile of our holding company continues to be very good. As of June 30, 2012 the holding company had invested assets and cash of nearly $64 million, more than ample to cover its modest cash needs.

I would like to take a moment to support our view that PRI's exposure to the prevailing interest rate environment is relatively low and manageable. The factors to consider are the impact of interest rates on our Term Life profitability, our ability to maintain portfolio yields at the current levels and the overall extent to which we rely on net investment income to support our earnings.

In our Term Life business results are not materially impacted by changes in actual interest rates. First let me discuss the impact of the assumed interest rate which, like other policy assumptions, is locked in at the time of issue. The interest rate assumption for each issue year is based on the then prevailing rates in the market.

Given that we launched our TermNow product series in 2011, the interest rates assumed when we initially priced the product series is reflective of the current low interest rate environment. Changes in actual investment yields will not impact DAC or reserve liabilities. While lower interest rates may gradually increase the statutory reserve requirement on future policies issued over time, they do not result in any near-term additional capital requirements.

Our ALM analysis shows that the existing book of business is expected to provide significant prospective statutory profit even if the current low interest rate environment continues.

While DAC and reserve changes are not impacted by actual investment yields over time, the amount we can earn on our invested assets clearly is. Unlike most insurers, our reliance on investment returns is relatively low with invested assets and cash, the stockholders equity a low 1.6 times and net investment income representing only 8% of our operating revenue.

For the remainder of 2012 we do not expect to see a notable impact of lower reinvestment rates on net investment income. During 2013 approximately 12% of our portfolio will mature with an average yield of around 6%. If one were to assume we reinvested these 2013 maturities at our second quarter new money yield of 3.46% we would expect investment income to be approximately $2 million lower with the same level of assets on an annualized pre-tax basis and if we were able to replace their current book yields.

This impact will be mitigated by the incremental investment of operating cash flows during the year. As stated in the past, we do not anticipate making substantial changes to the overall credit quality, asset allocation or targeted duration of the portfolio to counteract this decline. With that I will turn it back over to Rick.

Thanks, Alison. Our solid net operating income, (inaudible) EPS growth, return on equity expansion demonstrate that our simple product portfolio paired with our extensive distribution capability, disciplined approach to managing the business provide a stable earnings base with opportunities for long-term growth. With that I will open it up for questions.

(Operator Instructions). Paul Sarran, Evercore Partners.

I guess first of all, can you comment on agent termination trends? They were a little bit lower in the quarter than they have been running, which helped the overall agent count. Is there anything unusual or about that or do you expect them to stay at this level?

I will let Rick comment also. One of the things that -- probably it is the economy -- I mean, in all honesty the economy and the fact of non-renewals being a little bit lower than normal. Understand with our guys, most are part-time and they pay to renew their license.

And one of the things that had been a challenge the last few years was less people renewing at the end of the period, paying that fee to renew to the states and that improved. So hopefully economic trends continue in a positive direction and we believe that is the single biggest reason for that.

Yes. Just sort of adding on to that, as you know, the terminations improved about 1,200 in the second quarter from second quarter of last year. Breaking that down a little bit, about half of that is what we believe is what John described, what's going on with the economy. The other half, about 600, does relate to a change that we've made in the way that we terminate nonrenewals.

Very simply is we are giving agents more time to renew their license and do not terminate them. If they've written a bad policy we give them more time to write a good policy to recover -- offset that. So that is about 600 of the 1,200. The other 600 is just better renewals.

And then the shift of 35% of comp spent from bonuses to commissions, is that above and beyond the incentive changes that drove higher licenses and lower recruits this quarter? So should we expect that trend to continue going forward?

What growth drove higher licenses and lower recruits relates to incentives relating to our contest trips, whether we give extra credit for recruiting or how we do that. That really is not an economic change at all, it is just incentives based on the underlying compensation component.

Relating to the compensation change where we move money from bonuses to the core commissions, as John talked about, that really was done with the objective of incenting the sales force to focus on distribution growth and more specifically on promotions within the hierarchy itself. So the message is the same, but the change in compensation was not part of the second-quarter results.

Okay and then one last one. You mentioned XXX reserve financing -- or reserve financing as a possible way to free up capital next year. Can you comment on how much capital you could potentially free up or maybe how much in redundant reserves [create] with each year of new business?

Sure. And generally speaking we think we probably need to package about two years of issued business in order to have enough of a size that is worthwhile for the amount of time and effort that goes into putting together one of these structures. So realistically this is something we could look at every say two years or so.

I would expect that the size of -- the amount of capital that we would free up associated with this transaction would be somewhat lower than what we freed up with the last transaction but still sizable in nature, and that would be in combination with the release of capital that Rick was already mentioning, the ordinary dividend that we anticipate during next year.

And in that context it would either be 2013 or 2014 depending, as Alison said, upon the amount and sizing that we want to group together. So it is sometime toward the end of 2013 or 2014.

Correct.

Jeff Schuman, KBW.

Just wanted to make sure that I understood Rick's earlier comments correctly. So, Rick, the expectation is that you would pay an ordinary dividend in 2013? And then did I hear you say that you expect not to pay an ordinary dividend for several years thereafter?

Yes, that is correct. Although we would have the ability to pay an ordinary dividend given the new business strain targeting a 350% RBC ratio after the $130 million to $160 million that we are talking about in 2013. We would anticipate that we would not pay a dividend from the life company for a couple of years thereafter, other than any amounts from another redundant reserve financing.

Is the right way to think about it when you get to sort of 2014, 2015 that maybe at that point consolidated net premiums are growing kind of low double digits and that you are sort of self funding at that point and that you kind of mature from there to kind of high single-digit growth and then you would have more ability to pay more of a dividend, is that the right way to think about it?

Well, the one thing I caution you on, Jeff, there is you're sort of mixing statutory and GAAP results to some degree. But I would expect that once you get out to about the 2015 mark you are going to see growth in premiums that are in I would say the lower double digits.

And that probably by that point, I would say maybe a year or so after that, our book of business on a statutory basis will be substantial enough that the profits and cash flows that it produces will be enough to offset the strain. So you may -- you'll see us probably beginning to emerge with a normal ordinary dividend capacity stream sometime towards the late 2015, 2018, something in that range.

Okay, that's helpful. And then I'm trying to a little bit understand the dynamic of moving from less deferrable to more deferrable commissions and how that is impacting the P&L.

If we look at the second quarter, is the right way to think about it that maybe new term margins in the second quarter are unusually high in that you had more capitalization but yet not so much amortization because you have been expensing commissions and that going forward you will have higher margins than we've seen historically because you will be deferring, but you will also have some more amortization as DAC builds. Is that kind of the right way to think about it?

I think that is not the best way to look at it. This is a little bit less of a phenomenon of the DAC change itself and how much we are now amortizing, etc., because of say changes in the DAC balance on the balance sheet. Specifically what you see happening in this quarter is that -- and I mentioned this when I was talking about what I anticipated the impact of the DAC change to be your over year, was that last year leading into the convention we were still running this Fast Start Fast Track bonus.

And when under the current deferrable rules the nature of that program was largely not deferrable. We, subsequent to that -- subsequent to the convention replaced that program and now under the compensation program that John just mentioned, under the soon-to-be or the now current program, a larger portion of the same dollar spend is now deferrable.

So your over year in this quarter is why you see about a $3 million change. That will start to phase out by the time to get into the third, fourth quarter as we phase out that predecessor program. So I think the current rates on an absolute basis will look consistent. But on a year over year basis you won't see as much of a pickup as you saw in the second quarter.

Another thing that you would see happening in the second quarter is just we do -- have historically seen very strong seasonal persistency in the second quarter. So, on a sequential quarter basis we don't expect that to be the case next quarter. Year over year it is not as dramatic of an impact, but do remember that we are really growing that new term business which is where the DAC is building.

And favorable persistency has a lot stronger impact on DAC than it does on reserves with such a young block of business. So that is another phenomenon you are seeing as we grow the new term block. That will continue year over year, although in and of itself I don't think that is that dramatic.

Okay, that is all very helpful. Thanks a lot.

Steven Schwartz, Raymond James.

I have got a few here. First, Alison, can we do some accounting for this reprocessing of the reinsurance? My assumption is that that went through the legacy block of business. What line items to that effect? Did that affect the ceded premium?

That is correct. It would have impacted ceded premium and it would have impacted the benefits and claims lines.

So it lowered both -- it lowered both lines, is that accurate?

It lowered both -- no, I think it actually increased both.

Increased both.

Yes.

Okay.

I will have to look and see. I'm sorry, I have to look -- I will look at the numbers as you keep asking your questions. But the impact was de minimis on a net basis.

Right, okay. No, that is good. But yes, just for modeling purposes. If I could we will give Alison a break here while she looks that up. I honestly don't remember if you guys said the New York sub or not. Obviously you do have a captive, so I'm wondering if there is any -- anything you can say about the New York Department. And in that vein, if there is anything coming up at the NAIC meeting next week in Atlanta that you are particularly paying attention to one way or another?

Yes, we do have a New York sub, National Benefit Life and we were one of the 80 companies that the department did request information from. But the rest of the industry is relatively comfortable with what is going on on reserve -- the way reserve financings are done. So we don't have any expectation that longer-term they will be a problem. But we will wait and see.

Okay. And anything at next week's meetings?

No.

Okay. And then if I may, John, should we be thinking about recruiting staying at these levels for a while given what you are doing?

Steven, running this Company is an aim and a just business. Let me just kind of give you sort of a -- more of a shotgun approach to that answer. That when we -- after the convention a year ago, and we did the crazy John went insane, it's 2-for-1 recruiting for those two summer months. One of the things we saw in those numbers was while it helped with life insurance productivity and we did get some growth in the sales force from it, we did not see a significant enough licensing out of that component.

And so, one of the things that we changed this year was we would run -- I would every month if we were running a contest announce this month is double recruit credit, triple recruit credit, it's crazy April, those kind of things. We took that out of the system, okay, and focused very strongly on licensing.

Also on the compensation system change, which just occurred, we -- our big focus there was instead of people being focused on -- as much focused on monthly production hurdles to get a bonus, a monthly bonus, they have been more focused on building long-term distribution within their organization. My message to people was build a business not build a month.

And so, we've -- in many ways we kind of -- we refocused, recalibrated, had very positive improvement in licensing. But then now as I have announced the compensation change we've announced a very strong incentive toward recruiting. So our goal is to grow recruiting.

I mean our goal is to walk and chew chewing gum at the same time, not to just say recruiting is no longer important, but to have it be healthy recruiting based upon getting more people licensed and growing the size of the licensed sales force. So the goal is to grow recruiting, okay. But clearly not to the level we were at when we did two-for-one promotion at the end of (multiple speakers).

Yes, just to -- in July we continued with no promotions on recruiting. As John just said, with the new comp we did have a recruiting incentive for the month of August, but it is toned down from what we historically have run. The objective is to grow recruiting --

Sequentially.

-- sequentially, not in the big steps that we have done it in the past where you see a very large number then back down. It's to have a strong, high level of recruiting all month. So we are stepping into it.

Okay. I guess what I am not getting here is that you have moved compensation from bonuses monthly production targets, right?

Into the commission grid.

And in -- what does that have to do with recruiting? Is it just that if you get more people the commissions going up line are going to be greater?

From a standpoint of recruiting it really is not -- and it is not a -- it has more to do with the licensing, okay. Because if we did have a system where for a regional vice president trying to qualify for their monthly bonus there were several different levels you could get in the bonus and it was triggered not based on recruiting, we don't pay for recruiting, we pay for premium. It was based upon the amount of premium that came out of your organization or out of your base shop out of your office location.

One of the things that we saw, Steven, particularly -- and it was a -- Primerica's attributing any single cost of things or whatever, you will inevitably be wrong if you try to make it a simple little answer. But one of the things we saw with the economy and a lot of the challenges that people went through when kind of the economy tanked and stuff is that we saw a deterioration in licensing.

And when you looked underneath the covers, one of the answers to that was that when people were recruiting a new person -- and really, like I said, the surge of recruiting last year truly highlighted it for me as I was stepping back and analyzing it. That that new person sitting in the meeting that you are going to train to get in the business really became more a source of a lead to get premium than a source to get a license.

And this new system for that person producing at the front, a significant more of the compensation is now just in their points, that you automatically get paid running your organization, you don't have to hit a production threshold to get it, it's based upon the sale of an insurance application.

So the goal both in the messaging, the training and the system is that those new people sitting in my audience I am viewing more as a potential license and a potential person to get promoted to district leader and hopefully ultimately a regional vice president than a source of a lead to just get a sale next month so that I hit my production total to get a bonus, okay.

I got you.

So that is very much the messaging of it. And Rick mentioned July and stuff. One of the things we saw there, we had no real incentive on recruiting. And in our business change -- when we are changing something like compensation people are talking about what is that change going to be, what is it going to be and all this stuff. We have now removed the -- what is the mystery of what is going to be launched and come forth with it in a big way for our guys, been very positively received.

And as Rick said, then now we are trying to refocus things a little bit toward -- more towards the recruiting again, but not, in all honesty, to the level that we did when we really pushed the accelerator through the floor last year.

Okay. And one more if I may. The ordinary dividend for next year, what would be the timing of that.

Probably in the second quarter range.

Okay, all right. Thank you very much.

And to answer your other question, it's a little tricky because there is a negative in there. But basically it is a decrease in ceded premiums, which because it is a negative to revenue results in an increase to net premiums and also an increase to benefits and claims.

Okay, thank you, Alison.

Mark Hughes, SunTrust.

That reprocessing effect, does that carry over into Q3?

No.

Okay. And then the $6 million, was that 1 for 1 in benefits and claims. But it seems like that is a pretty high ratio of benefits to that extra premium (technical difficulty).

Because it was mostly from YRT programs, so if you think about how YRT pricing worked, it is meant to match your claim cost.

Okay. The higher DAC in the corporate I guess related to the student life policies, will that persist into future periods?

I do not believe so. This was somewhat of us moving over to a new system and there were some catch-ups associated with that.

And then the insurance commissions and I think we probably touched on this a bit. But if we think about the insurance commission line in the new term segment, would that be sustained at a low level here or should that -- should we think about that moving up in subsequent periods?

That -- and as I mentioned earlier, if you are looking at things sequentially I do believe this is an appropriate run rate. Year over year you will not see such a big variance because we had to change over on the fast track to a different program last year. But our new compensation system is meant to maintain about the same amount of our current -- of the cash or the amount paid out to be deferrable as it is today.

Right, so insurance commissions on an absolute basis, maybe as a percentage of premium, ought to hold steady here?

It should -- as you see it layering in this way, yes.

Yes, okay. All right, great, thank you very much.

Dan Bergman, UBS.

I just had a question on the outlook and potential market for the new fixed index annuity product given the $100 million plus production in the quarter, just the first one was offered. I just wanted to see if I could get a sense how to compare it to your initial expectations for the product and also kind of what the outlook for sales of this product is and where you think it might settle out eventually?

Versus initial expectations it is above our initial expectations, it was accepted very rapidly in the field. We have about 14,000 agents that have taken the criteria or done the criteria so that they can sell it and we do expect that that will expand over time but slowly I think.

As to whether the second quarter was a good run rate or not, quite frankly we are not sure. I'm not sure how much of that was built off demand versus ongoing demand. But we feel very good about where we are on it.

Lincoln has worked very hard and done a good job working with us on the rollout of the product. And they did a very good job of assembling their wholesaling staff with a lot of people that had worked with our sales force in the past in other products and things and have done a very good job of -- for a new channel penetrating Primerica can be a little difficult because we are different and they have done a very good job of that.

Okay, great. And then I apologize if I missed this, but I was hoping you could provide a little bit more color on your overall ROE outlook. I think on the third quarter of 2011 call you guys said that there would be downward pressure [on your] terms as equity grows but longer-term kind of a 14% rate would be achievable. I just wanted to see if you have any updated thoughts on this given the higher current turns and kind of subsequent capital management actions?

I think you -- what we said back then still does apply. We -- as is obvious, we generate a lot of capital, have the ability to generate a lot of capital. And what will happen is you will see as we retain that capital the ROE will trend down. Then as we deploy it it takes a jump -- a step up. I think -- if you are asking me do I want to raise the 14 to 15, I will say not at the present time. How is that?

Very helpful, thank you.

Sean Dargan, Macquarie.

Most of my questions have been asked, but I was just trying to think of the RBC progression. You have talked about a 350% target. About how long would it take to get there?

Assuming that -- the two things to consider are -- one, that we plan to take out the $150 million-ish whatever range it is that Rick quoted next year, that will take it down. Also as I think I mentioned last quarter where we are in the LOC, we are going to have to start -- that will start coming down so we will have to be replacing stats with hard assets.

This block of business, which is a little bit unusual when you see a XXX transaction. But since so much of it was from historical in-force business we were nearly at the peak when we entered into the transaction. So the LC itself will start coming down, we'll have to start replacing the LC with hard assets so that will bring down the RBC as well. So we do expect it, given those items, to get to about $350 million over the course of the next couple of years.

In the 2016 range.

Okay, thank you, that's helpful. And just as we are modeling out 2013, are you going to be expensing things associated with the convention differently than you have in the past?

Given that we went back and retrospectively applied the DAC rules, the answer to that would be no.

Okay.

On a retrospective basis, no.

Okay, thank you very much.

This concludes our question and answer session. I would like to turn the conference back over to Rick Williams for any closing remarks.

Thank you very much, we appreciate your time. Have a good day.