Primerica Inc (PRI) 2013 Q2 法說會逐字稿

Good morning, and welcome to the Primerica Second Quarter 2013 Financial Results Conference Call. All participants will be in listen-only mode

(Operator Instructions)

Please also note this event is been recorded. I would now like to turn the conference over to Kathryn Kieser, Senior Vice President of Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining us today as we discuss Primerica's results for the second quarter of 2013. Yesterday afternoon, we issued our press release reporting financial results for the quarter ended June 30, 2013. 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 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 provision of the Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may project, indicate, or imply future results, events, performance, or achievements, and may contain words such as expect, intend, plan, anticipate, estimate, and believe, or similar words derived from those words. They are not guarantees, and such statements involve risk and uncertainties that could cause actual results to differ material 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 31, 2012.

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

Thank you Kathryn, and good morning, everyone. As you can see on page 4, during the second quarter of 2013 our operating revenues grew 4%, and net operating income declined by $4.1 million, while operating income per diluted share of $0.71 was consistent with the prior year, reflecting share repurchases. Strong investment and savings product performance, and higher term life net premiums, drove revenue growth in the quarter. Net investment income declined $2.6 million year over year. $1.6 million of the decline reflects a negative return on the deposit asset backing the 10% re-insurance agreement with Citigroup, due to the impact of sharply rising interest rates on bond values. Share repurchases over the past 12 months, as well as lower yields related to both the higher cash balances during the period and the run-off book yield in the low-rate environment also contributed to the decline.

Second-quarter results were also pressured by higher expenses, including $1.6 million related to the move to our new headquarters. Legal fees and expenses associated with the Florida retirement system arbitrations were $3.3 million, and impacted net operating earnings by $0.04 per diluted share in the second quarter. We believe these cases are without merit, and are vigorously defending them. During the second quarter, we were pleased to elect Gary Crittinden to our Board of Directors. As the former Chief Financial Officer of Citigroup, Gary was instrumental in Primerica's path to becoming a public Company. His financial acumen, incredible knowledge of our Company and the financial services industry will be an asset to our Board.

Shareholder value was enhanced in the quarter with the retirement of $155 million of common stock and warrants in June. This capital transaction positively impacted net operating income return on adjusted stockholders' equity, which increased from the first quarter of 2013 to 14.6% at the end of the second quarter. Over the course of the next 12 to 18 months, return on equity should be around 14% to 15% without another redundant reserve transaction. As our recurring income accumulates and stockholder equity builds, ROE will experience downward pressure until capital is redeployed. Another reserve financing transaction will generate upside to this range as the capital is redeployed.

To date we have efficiently executed our strategy to enhance shareholder value through share repurchases from concentrated holders, as well as gradual dividend increases. We have retired almost 21 million shares of Primerica's common stock, or approximately 28% of our outstanding shares since the IPO without impacted our relatively thin flow. Having completed our share repurchases or 2013, we are in the process of developing a multi-year capital strategy as we continue to manage the business for long-term success. Allison will walk you through the details in a minute, but we anticipate being able to return approximately $150 million of capital to shareholders annually.

Now turning to segment results, in the second quarter term life net premium increased -- continued to increase. Term life insurance policies issued were down 5% from the year-ago period, and up 14% from the seasonally lower first quarter. Productivity in the second quarter of 0.21 policies issued per life-licensed representative per month slightly declined from 0.22 in the prior-year period, when life sales benefited from strong recruiting results achieved in the first quarter of 2012. Sequentially, productivity increased from the seasonally lower 0.18 policies issued per life-licensed representative per month in the first quarter of 2013.

The average annualized issued premium per policy was $797 in the second quarter, which is consistent with both the first quarter of 2013 and the second quarter of last year. Year-over-year investment and savings product sales increased 10%, primarily reflecting 23% growth in retail mutual fund sales. Variable annuity sales growth experienced downward pressure compared to the second quarter a year ago, when sales benefited from an elevated level of clients transferring their older variable annuity contracts to current products. Without the prior-year elevated transactions, total ISP sales would have increased 17% year over year. High levels of variable annuity transfers in the third and fourth quarters of 2012 will make year-over-year comparisons challenging.

In the second quarter, managed account client assets continued to grow to $827 million, from $375 million at the end of the second quarter a year ago. Client asset values at the end of the second quarter reached an all-time high of $40.2 billion, up 14% from June 30, 2012. Sequentially, investment and savings products sales were down 3% in the first quarter of 2013, primarily reflecting strong mutual fund and fixed-index annuity sales in the second quarter, but lower Canadian segregated fund sales than in the first quarter's RRSP season. Total asset values were consistent with the end of the first quarter. Now John will discuss distribution results.

Thanks Rick, and good morning everyone. I will start by spending a few minutes talking about our convention, and then go into some of the sales force dynamics in the second quarter. During the second quarter, we hosted two big events. First was the ribbon-cutting ceremony in our new international headquarters in May, and then our biannual convention at the Georgia Dome in June. The convention has historically increased the energy level, excitement, and sense of team within the sales force, and this convention continued that tradition. The energetic environment, paired with the product, technology, and incentive announcements, created an excitement level that has increased post-convention activity.

As you can see on page 5, this year's convention at the Georgia Dome had approximately 35,000 attendees from the US, Canada, and Puerto Rico. It took over 1,000 people to coordinate this event. Over the course of three days, reps attended 12 half-day workshops, including training based on each reps level, as well as a technology initiatives. 41 exhibits of internal departments, as well as external product providers, were staffed with hundreds of exhibitors, who promoted recent initiatives and answered questions. Over 40 senior sales force leaders hosted team meetings, attended by anywhere from 200 to 4,000 reps at each meeting. At these meetings, they recognize teammates, providing training and challenged their team to grow. The convention culminated in the Georgia Dome, where motivational speeches were given and success was celebrated, as reps crossed the stage and received over 1,600 awards.

During the event, we launched a website for our life insurance clients, enabling them to make payments and provide updated account information online. The launch of the new variable annuity and proprietary fixed indexed annuity offering through Lincoln National generated a lot of enthusiasm from our top investment producers. Our life insurance licensed representatives were also interested in learning about how to use the new Success Now licensing system to obtain a mutual fund license.

As part of our strategy to adapt with the changing mobile world, we showcased several new technology enhancements, including a more streamlined web-based financial needs analysis. The sales force was very excited about the new Primerica app for the iPhone and Android that has a number of functions, including a contact manager, mobile FNA, quick quote, and financial calculators. Our new representatives were eager to learn about receiving their own personalized Primerica website. A new mobile app that uses gamification to quickly engage new representatives in the first 90 days in the business also piqued their interest. This app is a 90-day online challenge where new reps compete with other reps to earn points and virtual badges and trophies as they do what it takes to get trained and become life-insurance licensed.

As you may recall, at our convention two years ago we announced a short-term promotion lowering the cost of our independent business application licensing fee. We learned a lot from the results of that initiative. This year on the last night of the convention, we announced a short-term incentive aimed at driving sustainable recruiting and sales growth, rather than a short-term spike in recruiting. July results were positive, with growth in recruiting, licensing of new representatives, and product sales. We expect the size of our sales force to increase slightly by the end of the third quarter.

Last month we were at the Breakers resort in Palm Beach, Florida, with our top 230 ISP producers that qualified for this incentive trip. At the event, we recognized their accomplishments, discussed initiatives, and explained our strategy to expand the ISP business. This event was also an opportunity to showcase to them the new Lincoln variable annuity we rolled out on July 1. This product, which includes the unique living benefit, will give our clients more options and will complement our current offerings through MetLife. We continue to have conversations with other product providers about additional investment products.

Moving to second-quarter results, recruiting of new representatives increased 3%, while the number of new representatives obtaining a life license declined 9% year over year. This was largely due to the recruiting levels in the first quarter. These results were impacted by not having an incentive trip contest in the first quarter of 2013. Fewer non-renewals positively impacted the size of the sales force year over year. On a sequential basis, recruiting of new representatives increased 9%, and new life insurance licenses increased 24%, in line with typical seasonality. The size of our life-licensed sales force increased both sequentially and year over year to 92,227 in the second quarter. We are encouraged by the post-convention activity level, and must build on that momentum to generate growth in the second half of 2013. We remain very focused on supporting and building our sales force to drive continued positive financial results.

With that, I will turn it over to Allison.

Thank you, John. Good morning everyone. My comments today will focus on our segment operating results, as well as company-wide investment asset performance, and insurance and operating expenses. I will conclude with a discussion of our future sources of distributable capital. Starting with the term life segment on slide 6, in the second quarter term life net premiums increased 5%, and operating revenues increased 4% compared to the prior-year period. 2012 second-quarter results reflects the re-processing of certain re-insurance transactions that resulted in an increase in net premiums, and a corresponding increase in claims, for a net improvement to pre-tax operating income of less than $1 million. Excluding this re-processing, net premiums increased 10%, and operating revenues increased 9% year over year.

Allocated net investment income increased by 5%, as the growth in required statutory assets allocated to term life was partially offset by lower book yields. Incurred claims were in line with historical experience, but higher than the favorable results in the second quarter of 2012 by about $2 million, resulting in a 14% increase in benefit and claims, excluding the 2012 re-processed re-insurance transactions. Looking at the term life sub-segment, new term profit margins continue to expand with the leveraging of our fixed expense base as the block of business builds. Benefits and claims grew in line with net premiums, while back amortization grew faster due to increased commission deferrals in recent periods, and fluctuations in persistency. Partially offsetting this trend is that non-deferred insurance commissions continue to be lower than 2012 levels, due to changes in certain agent bonus programs, as discussed in previous earnings calls.

Legacy pre-tax operating income was 7.1% of direct premium during the current quarter, improving from 6.7% in the previous quarter, but decreasing from 8.1% in the prior-year period. We expect quarterly fluctuations in profit margins for mortality, persistency, and expenses, and volatility of up to 0.5% on a sequential quarter basis is considered normal. For the second quarter, most of the variance to comparative periods was driven by mortality, which was better than the first-quarter experience, but not as favorable as the prior-year period. As we've noted in the past, we expect legacy profit margins to decrease over time, mainly due to lower margins on post-end-of-term conversions and renewals. Barring any unusual experience, we expect the full-year margin to be in the low 7% range this year, falling to the high 6% range in 2014. This range is slightly lower than previous guidance, due to the reclassification of the deposit asset, and its related marked-to-market estimate, from legacy term life to the corporate and other segments, retrospectively, in the second quarter.

As described in our financial supplement, this asset is associated with an IPO-related co-insurance agreement with Citi that does not satisfy US GAAP [with] transfer rules, and therefore is accounted for under the deposit accounting method, with marked-to-market adjustment reflected in net investment income. Given our legacy margin expectations, we expect to see annualized run off in direct premium of 3% to 5%, and an operating income of 8% to 10%. The 16% decline in pre-tax operating income in the second quarter versus the prior period is largely attributable to favorable incurred claims, and the impact of re-insurance reprocessing prior-year period. On a sequential basis, operating income before income taxes increased 15%, benefiting from continued growth in net premiums and lower back amortization, related to seasonally higher persistency compared with the first quarter. Incurred claims were lower, while insurance expenses were in line with the first quarter of 2013.

On slide 7, you will see our investment and savings products operating revenue increase 10%, and operating income before income taxes declined 7% year over year. Excluding the legal fees and expenses relating to the FRS matter that Rick previously discussed, ISP operating income before income taxes would have increased 5% to $30.8 million year over year. Our 10% sales growth over the prior-year period was driven largely by retail mutual funds, resulting in a 10% increase in sales-based revenue. Active-based revenue grew 13% over the prior-year period, in line with a 13% increase in average current asset value. Sales-based and asset-based commission expense grew consistently with growth in the related revenue.

As we've noted in the past, we recognize asset-based revenues on Canadian-segregated funds of Canadian commission expense associated with this product are recognized over time as amortization of DAC. Each quarter we adjust DAC amortization to reflect our anticipated future revenues based our current client asset value. Canadian-segregated fund DAC amortization increased by $1 million, compared to the second quarter of 2012, as Canadian equity in fixed-income markets under-performed in relation to our return assumption. On a sequential basis, both ISP revenues and operating income before income taxes increased 4% compared with the first quarter. Results reflects sales-based and asset-based revenue growth, partially offset by higher Canadian segregated fund DAC amortization.

On slide 8, you can see that corporate and other distributed products operating revenues decline $4.8 million from the prior-year period, and the operating loss before income taxes increased $5.4 million. Results reflect lower net investment income, and $1.6 million of one-time expenses related to the move to our new headquarters, partially offset by favorable claims experience in the non-term insurance products underwritten by our New York subsidiary.

Allocated net investment income in this segment declined $3.4 million versus the prior-year period. The steep rise in interest rates and the corresponding decline in fixed-income market values resulted in a $1.1-million negative marked-to-market adjustment on a deposit asset this period, compared with a $0.6-million gain in the prior-year period. The remainder of the decrease is driven by the higher allocation of assets to the term life segment, elevated cash balances for much of the quarter, and the run-off of assets with book yields higher than those currently available in the market. Notwithstanding the recent upward movement in interest rates, we expect to continue to see modest downward pressure on the average book yield of our portfolio, since over the next 12 months about 13% of our portfolio will be maturing, with an average book yield of approximately 5.8%.

As we've mentioned in prior periods, our operating results are somewhat insulated from fluctuations in interest rates, as less than 10% of our operating revenues come from investment income. Rising interest rates will alleviate re-investment [rev], but will also put near-term pressure on the co-insurance deposit asset return, as seen this quarter. Maintaining a short-term bias in this portfolio will help to keep the marked-to-market exposure manageable.

Turning to slide 9, our investments in cash were $1.88 billion as of June 30, 2013, down from $2.12 billion at March 31, primarily due to the retirement of shares and warrants, and the reduction in market value caused by the rising interest rates during the quarter. Our net unrealized portfolio gains fell from $175.4 million at March 31 to $112.8 million at the end of this quarter. The level of gross unrealized losses remains low, at $15.7 million. The average book yield of investments, including cash at quarter and was 5.29%, consistent with the end of the first quarter. Asset purchases for the quarter were minimal, and had an average new money rate of 2.91%, with purchases on the life company in the mid-3% range. The liquidity profile of our holding company continued to be strong. As of June 30, the holding company had invested assets and cash of $43.1 million.

Now let's look at trends in insurance and operating expenses on slide 10. As was the case in the first quarter, year-over-year expenses increased, largely due to additions of $2 million of employee compensation and related costs, half of which comes from the third and final layer of management stock compensation and awards, as well as $1.6 million of growth-related expenses due to growth at our new term business and our securities businesses. Legal fees and expenses associated with the Florida retirement system matter was $3.3 million this quarter, and we incurred $1.6 million of one-time costs directly related to the move into our new headquarters.

On an ongoing basis, we expect to incur roughly $500,000 of incremental occupancy costs per quarter associated with our new facility. Total insurance and operating expenses of $73 million were in line with the guidance provided on last quarter's earnings call. As we look towards the third quarter, we expect insurance and operating expenses to continue and adapt to be come in about the same level as 2Q. This projection assumes FRS-related legal expense, fees and expenses continue to be incurred in the $3 million to $4 million range per quarter.

Let me conclude by providing framework for future sources of distributable capital. From our businesses other than the US term life, we expect to generate distributable capital for PRI in the range of $40 million annually in excess of shareholder dividends. Our US term life business also generates distributable capital, as statutory earnings emerge over the life of the policy. The redundant reserve financing we executed on policies issued through 2010 accelerated the distribution of the future statutory process on this block.

While enough capital remains in the life company to fund future new business streams at targeted RBC levels, there will be no distributable capital available until future new business becomes accretive to RBC, which may take several years. Our plan, however, is to execute another financing transaction in the latter part of 2014 that will include some or all of the full-year issue blocks since 2010. This is of course subject to regulatory approval. We expect to use the accelerated profits generated by this transaction to fund PRI capital actions over the course of the next two to three years. As Rick mentioned, our current expectation is to be able to return capital to shareholders in the range of $150 million per year near term. Now I'll turn it back over to Rick.

Thank you, Allison. Second-quarter results reflect our focus on driving long-term organic growth. Our recurring life insurance revenues, coupled with positive investment in savings products performance reflect the strong position of our core businesses. The ability to generate significant distributable earnings on annual basis underscores the strength of our franchise. The convention provided the environment and platform to launch our new products, technology initiatives, and incentive programs, and we are encouraged by the post-convention activity level. We must now build on that momentum to generate organic growth in order to positively impact future earnings and enhance shareholder value. With that, we will open it up for questions.

(Operator Instructions)

Jeff Schuman, KBW.

Thanks, good morning. Alison, I was just wondering if we could follow up a little bit on the comment you just made about the capital management. Outside of the $40 million that originates from non-life activities, it sounds like distributable cash flow from the life is largely dependent on the reserve refinancings. If the next one's scheduled for late 2014, does that essentially mean we shouldn't look for much in the way of capital management until late 2014? Is that the right way to think about it?

I think Rick may have mentioned earlier in his comments that we believe for 2013 our capital actions are complete with this recent transaction that we did. Our expectation is to be able to execute, assuming we get regulatory approval, another triple-X transaction sometime mid-year 2014, in which case I'd say for the latter part of 2014, you should expect to see us trying to return that or re-deploying that capital.

Okay. But given that would be sort of a multi-year catch up transaction, would the thought be that you would re-deploy all of that in a fairly short order, or would some of that be meted out over the next -- I think you said something about meting it out over the next two to three years,? Is that correct?

The idea would be to use whatever we were able to free up, if you will, to fund capital transactions over the course of the next several years. Rick had mentioned earlier, and I'll let him fill in any gaps in what I say, but one of the things is, obviously we now have completed our taking out our major concentrated shareholders. What we would look to do is create a strategy that is a little more consistent and ongoing in nature, I'll say more predictable, if you will, than our start-and-stop approach we've used historically since the IPO, especially given the fact that we no longer have those two specific concentrated shareholders.

Additionally, as I'm sure you're very well aware, around 2016 we do expect to see principle base reserve come into play. Obviously, there's a lot subject to change, including who will and will not approve principle-based reserve. With that said, our current estimates do have us with a different financial profile under PBR. We are looking to build a game plan that will fund us, if you will, through that period. Then we'll be able to re-assess what our ongoing needs will be through financing at that lower reserve level through PBR.

Okay. Can you help us at all with the ballpark of what that 2014 refinancing might be?

I think what we can share for you is we would expect to be able to re-deploy the $150 million in 2014, and be able to maintain that general level over the course of the next several years.

Okay, that's very helpful. Thank you.

Steven Schwartz, Raymond James and Associates.

I have a couple on the convention. Alison, I don't think you said it, how much were the costs associated with the convention, and how were they allocated?

Yes, I don't think we actually disclose the specific cost of the convention. What I will say, and you don't ever see it pop up in a given quarter, because we have -- whether it be our incentive trips or the convention, or the various meetings that we do throughout the year -- we actually expense those ratably throughout the year under the concept that they match the premiums that are being generated. So you won't see a spike in perhaps the second quarter. I don't believe we've actually disclosed that specific amount. What I will say is, it generally is the offset of doing a second incentive trip in non-convention years. The amount we spend year to year is consistent.

Okay, that's cool. John, maybe you can talk about -- I will call it the theory of the convention? If I remember currently you've got 35,000 people attending, I think that was way down from two years ago?

Two years ago we were at about 40,000, and it's 35,000. The difference, Steven, was not in -- the difference was we were big recruiting heading into the convention in 2011, so there were more unlicensed recruits there than there were at this event, okay? The difference was the recruiting. It really was not a significant difference. There was really no difference in the crowd of licensed representatives that you had in the room, who are actually the people who can really go out and do something.

Okay. Are you willing to go a little bit deeper into what this short-term incentive is that you were talking about?

What we did -- I'll talk a little bit about that and the momentum that we saw coming out of the event, and try to answer your question. When we did 2011, which I think you were at the event, we did crazy John went insane, slammed the car hood, and did a two-for-one recruiting -- it's $50 IBA recruit humanity. We did recruit humanity. We didn't see, in all honesty as we talked about in the composition change conversations we had, the pull-through and the licensing rate out of that -- although it did lead to good life insurance sales. It wasn't like -- I mean -- it wasn't something you went oh my God, what a disaster, okay? But you certainly looked at it, and that was what led us to go -- we got to focus on more on licensing, if we really want to long-term grow the size of the sales force.

This incentive was for July only, versus that incentive went July and August. It was much more focused on recruiting and premium, and being able to earn some additional income. It wasn't like a slash in the rate or whatever. In July we had what we feel was very good production. Recruiting was up double digits, licensing double digits. Insurance sales were up, as well as security sales. It was a kind of walk-and-chew-gum month, where it wasn't just one thing jumped, things moved. Now, we did not run the incentive into August this time, and last August we had a very strong recruiting August, okay?

As we look at the comparables going forward in the month, we don't see July carrying forward through the entire quarter. But Steven what we're trying to accomplish is kind of organic real growth in the field, and it not being crazy-John-went-insane incentives spiking things. Coming out of the July month end, today, John, feels good. Okay? August, we will see how John feels at the end of the month, but today John feels good seeing the healthy trends that I'm seeing in what's going on in the sales force. That was a very rambling typical John answer, but I hope it at least got toward what you wanted to know.

I appreciate it, thanks everybody.

Sean Dargan, Macquarie.

Specific about your capital deployment in 2014 onward, you do have a limited flow. Your stock is trading at 2 times book. It seems to me that the -- I guess the desirability of repurchasing your stock on the open market is perhaps less than it is for other life insurers. I'm wondering what your appetite for M&A is, and whether the regulators have of you as to that deployment of capital versus share repurchase, and if there's anything out there culturally that would fit within Primerica?

Yes, this is Rick. When we did the IPO, at the time we said we did not believe M&A was a viable strategy, and we still feel that way. Over time we may re-assess that. It is very difficult to find businesses that do fit into our culture in the same way. We are generating a lot of capital, and we do believe that share repurchases at this point are the appropriate way of doing -- obviously that is something that you asses when the capital is available, and we will do so. But right now we still believe that's the right way of re-deploying the excess capital.

Okay, thank you. That's all I had.

Dan Bergman, UBS.

Great. I actually just wanted to follow up on your earlier remarks. I think a couple quarters ago, you'd set a quarterly recruiting level around the 48,000, 49,000 level that you had seen in the second and third quarters last year. This quarter, new recruits came in a little bit above that level. I want to see if you had any updated thoughts around where new recruits may trend going forward? Specifically, was there any kind of one-time benefit from the convention in these numbers? Would you view that 50,000 level as a sustainable level following the July incentive deal?

That's a very good question. First to answer was there a benefit in the quarter? No, there wasn't. June was not a great recruiting month, because we had everybody on buses to Atlanta. If anything, there was a dampening to the quarter on recruiting. As I said, we had a very good July -- not a crazy John went insane July, but a good healthy July. I think we still feel good about that range that we said, but we're actually optimistic that we may do better than that. That is kind of where we are right now.

In complete candor, which is always my 100% goal with all of you guys who are very good in your following of us, is we had a good incentive for July, not a crazy incentive, and we had good results in July that we all feel very good about the health of the numbers, and how they look. We don't have that running in August, and we want to see how that shapes out and stuff. But I think we still feel very comfortable with that estimate, but if anything, we feel comfortable that we may do a little better than that estimate.

Great, that is very helpful. Actually I wanted to switch gears a little bit. I was hoping you could provide a little more color on how you might expect variable annuity sales to trend going forward, given the recent movements with the expirations of the Met exclusive, and the introduction of the new Lincoln product this summer?

Sure, let me just talk about that. As you noted, Met has changed the income benefits on their products, making them a little bit less attractive for people who are looking for the income benefit. They still do have the open architecture, so we think the product's very appropriate for people who are looking to do -- looking towards not the income benefit, but the investment options on it. The Lincoln introduction of their choice-plus product really does fill that hole, and then some, for people who are looking for the income benefit dynamic. We actually think we have a better core product portfolio depth and offering than we had previously.

The one thing that I mentioned in my comments was last year we did have significant transfers of clients from older contracts into newer contracts. That will be somewhat of a head wind for the third quarter. But overall, we feel good relative to VA volume. The other dynamic that you do see is with the continuing improvement in the equity markets, the guarantees in variable annuities are a little bit less desirable, and people are moving into the mutual fund business. That's a lot of what's been driving the mutual fund sales.

Very helpful, thank you.

Mark Hughes, SunTrust.

Hi, this legal spending expected to be at the same level in Q3. Any judgment on how long that is going to continue?

Sure. Let me just comment about where we are on that. Currently there are 22 pending arbitrations. We've completed three this year, we have six more scheduled for this year. At present, we have five scheduled for 2014, with probably more to be scheduled. The likelihood is that the spending will continue at about this rate through 2014.

Is there any chance some judge somewhere may toss out this whole case, or these cases?

Well it's not up to a judge to toss it out. They are arbitrations. We have completed three arbitrations -- in two, the public employee received no monetary award; in the third they received a small monetary award that really was inconsequential to the Company, and considerably less than what they had experienced. We are just taking them one at a time.

Okay. Then the legacy term preeming seems to be persisting pretty well. Is this better than you expected? Should we look at this persistency, at least that we've seen here lately, as a good rate going forward?

I think what I said in my prepared comments was we expected the direct premium to be 3% to 5%, and I believe we were well within that range. This is very much within what our expectations would be.

Okay. Then non-renewals, you've done very well with that measure lately. John, any reason to think that will change, go back to the more historically normal level?

I will let Rick speak for a second to you guys about the rate of terminations and stuff. We believe that the reason for that is -- the same reason mutual fund sales are up. Middle-income market has a little more confident about things. The biggest hit we believe we took on non-renewals during the great recession was people had to pay money to renew their license, and if they haven't made a sale lately, they go, eh --that's one thing I could not do. We believe that it's kind of at the rate, but with seasonality related to it. Rick, why don't you talk to him a second to give him a little bit more guidance.

I do think if you look at the rate of the determinations and non-renewals as a percentage of the beginning sales force for the second quarter, it was 8.3%. I believe it's going to sort of bounce around between 8.5% and 9%. You might see some seasonal fluctuation in that. Given what happened, hopefully we will be at the lower end of that range, but we will see it unfold.

Thank you.

All right, okay. If there are no other questions, thank you very much, have a good day.

Have a great day, everybody.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.