Primerica Inc (PRI) 2013 Q4 法說會逐字稿

Good morning and welcome to the Primerica fourth quarter 2013 financial results conference call. (Operator Instructions). I would now like to Kathryn Kieser. Please go ahead.

Thank you, Amy. Good morning, everyone. Thank you for joining us as we discuss Primerica's results for the fourth quarter of 2013. Yesterday afternoon, we issued our press release reporting financial results for the quarter ended December 31, 2013.

A copy of the press release is available on the Investor Relations section of our websites at www.investors.primerica.com. With us on the call this morning are Rick Williams our Chairman and Co-CEO, John Addison, our Chairman of Primerica Distribution and co-CEO, and Alison Rand our CFO. We reference certain non-GAAP financial measures in our press release and on this call. These non-GAAP measures are provided because management uses them 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 report. These non-GAAP measures have limitations and reconciliations between non-GAAP and GAAP financial measures are attached to our press release. You can see our GAAP results on page three of the presentation.

On today's call , we will make Forward-looking statements in accordance with the Safe Harbor Provision of the Securities Litigation Reform Act of 1995. Forward-looking statements include any statements that may project, indicate, or imply future results, events, performance, or achievement and may contain words such as expect, intend, plan, anticipate, estimate, and believeor 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 Risk Factors contained in our Form 10-K for the year ended December 31st, 2012. This morning's call is being records and webcast live on the Internet. The webcast and corresponding slides will be available on the Investor Relations section of our websites 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 will turn the call over to Rick.

Thank you, Kathryn, and good morning, everyone. Welcome to Primerica's fourth quarter 2013 earnings call. In 2013, we delivered shareholder value by focusing on initiatives to drive long-term sales and earnings growth while actively deploying capital. Beginning on slide four, you can see operating revenues for the full year 2013 increased 7% to $1.26 billion driven by term life net premium growth of 10% and strong investment and savings products performance compared to 2012.

Positive market conditions as well as enhancements to our ISP product offerings led to and 11% increase in I SP sales and a 20% increase in client asset values at the end of 2013 versus the year-ago period. Net operating income was $171 million, down $3.5 million in 2013 compared to 2012 partially reflecting a $12.1 million year-over-year decline in net investment income related to lower yield on invested assets as well as lower invested asset base following the repurchase of common stock in March.

The lower net operating income also reflects a $28.1 million increase in insurance and operating expenses due to higher growth related and employee-related expenses, expenses associated with the move to our new headquarters and $11.4 million of legal fees and expenses related to the quarter retirement system matter which impacted operating earnings-per-share by $0.13 in 2013.

Although FRS expenses put downward pressure on 2013 results, active capital deployment drove a 9% increase in net operating earnings per diluted share to $2.97 compared with $2.72 in 2012 andROE increased 70 basis points to 15% in 2013 and 14.3% in 2012.

Due to the high cost -- the high defense cost and the risk associated with continued litigation, we entered into a memorandum of understanding to settle the FRS matter in January. A successful litigation of these matters was a substantial factor in reducing the potential cost of the settlement. In the fourth quarter of 2013, we established $9.3 million reserve based on our best estimate of the total settlement amount for up to 238 claimants and a $6.4 million reserve was established for awards related to prior arbitrations, other potential settlements, and the payments attorneys fees and expenses.

Claimant benefits will be in the form of future payments beginning in 2024. The claimants' law firms are recommending the settlement as being in the best interest of their clients. Under the terms of the agreement, a minimum percentage of claimants must agree to settle their claims before we are committed to a settlement. Claimants' counsel has a period of 90 days to meet the client participation thresholds although this timetable can be extended by agreement. At this stage, we cannot determine the likelihood that these thresholds will be met nor can we accurately determine the likelihood that most of the claimants will settle their claims.

With any settlement there is a always chance of residual litigation, but we believe that our prior successes in the litigation and the structure of this settlement make the chance of future FRS claims less likely. Turning back to full year performance in 2013, Primerica returned over 100% of operating earnings to shareholders through $25.1 million of shareholder dividends and $154.7 million of common stock and warrant repurchases.

These transactions retired all warrants and 5% of Primerica's common stock outstanding as of December 31st, 2012. In less than four years since the IPO, we have retired 29% of Primerica's common stock outstanding. Primerica's total shareholder return of 44.7% included dividends -- including dividends significantly outpaced the S&P 500 in 2013.

In 2013, we increased shareholder dividends to $0.11 per share or $0.44 for the full year 2013 compared with $0.24 in 2012maintaining our 1% dividend yield. In January of 2014, our shareholder dividend was increased to $0.12.

For the fourth quarter of 2013, net operating income increased 12%, $46.8 million and operating income per diluted share increased 22% to $0.84 and ROE expanded to 16.4%.

We expect ROE to remain in the 15% to 16% range near-term with potential expansion beyond 2014. On a quarterly basis, ROE will fluctuate with income and timing of capital deployment. For example, there will be downward pressure on our ROE in the first quarter of 2014 due to timing of employee-related expenses and the build-up of equity in advance of more significant share repurchases in the second half of the year.

Our Board of Directors has authorized a share repurchase program, and we expect to repurchase up to $150 million of common stock in 2014. Approximately one-third of these repurchases will happen in the first half of 2014 and the other two-thirds will happen in the second half of the year after the approval of a redundant reserve financing transaction. Following the financing transaction, Primerica Life Insurance Company will dividend approximately $110 million to the holding company and our RBC ratio which was estimated to be in excess of 490 % at year-end will increase significantly and then decrease over time as new policies are issued and ordinary dividends are declared. As to fourth quarter of 2014 demonstrated, earnings growth in ROE expansion is achievable when key drivers of our diversify business including sales volumes, market performance, persistency and mortality are strong we are improving, and capital redeployment remains a focus.

Alison will walk through more fourth quarter financial results in a minute. Let me give you a brief overview of production results for the quarter. In our term life business issued policies were consistent with the prior-year period, the number of policies issued per life license represented per month remained in historical productivity range. In the fourth quarter, our average annualized premium per issued policy increased 4% to $826 compared with $796 year-ago period an increase from $813 in the third quarter of 2013.

Our investment and savings product sales increased 3% in the fourth quarter compared with the year-ago quarter. The year-over-year sales growth was relatively strong when compared to the fourth quarter of 2012 which benefited from a significant increase in fixed in indexed annuity sales prior to our product change. Managed account client assets went year over year from $582 million at the end of last year to $1.1 billion at the end of this year.

Sequentially investment savings product sales increased 2% in the third quarter. Growth in our total client asset values at the end of the fourth quarter was in line with the US and Canadian markets, up 20% to1 $44.99 billion from the prior-year period and increased 7% from September 30, 2013. In January of 2014, two changes were made to our Board of Directors.

First, Dan Silverman has resigned due to his recent relocation to London. Dan has been a valued member of the Board since our IPO when he was designated by Warburg Pinkos to be one of Primerica's directors. In January, we were pleased to elect Cynthia Day to our Board of Directors.

As the President, Chief Executive Officer of Citizen's Bank Shares Corporation and Citizens Trust Bank, Cynthia understands the needs of middle income households and financial challenges they face. Her experience and expertise in the financial services industry will be and asset to our Board. Now, John will discuss distribution results.

Thank you, Rick, and good morning everybody. We are trying to make it through another snow jam here in Atlanta. The incentive and enhancements made to our business opportunity product portfolio and client experience in 2013 drove a 3% increase in the size of our life insurance license sales force and an 11% increase in ISP sales in 2013 versus 2012.

Our average annualized issued premium and base amount of life insurance policies both increased year-over-year, and we experienced a healthy 6% growth in the number of our regional vice presidents which represent new distribution outlets across North America. Our mid-year biennial convention created some downward pressure on distribution results in the first half of the year. Typically recruiting and life insurance sales trends lower in the first half of a convention year because we do not run and incentive trip, and after the convention, there is a lift in production.

As we have said in the past in the first half of 2013, our sales force was still adjusting to the significant change made to life insurance compensation in late 2012. This resulted in a 10% decline in recruiting and a 7% decline in policies issued compared with the first half of 2012. In our June convention we announced new product offerings, technology enhancements, and incentives that drove a significant improvement in distribution results. Recruiting of new representatives increased 6%, new life insurance licenses grew 7%, and life insurance policies issued increased 1% in the second half of 2013 compared with the second half of 2012.

Our investment and savings products business hit and all-time record in both sales and client asset bays 2013 due to expanded product offerings and platform enhancements as well as positive market performance. We also made progress in growing the size of our life insurance license sales force through increased licensing ratios and lower non renewal rates. We believe the vast middle income market opportunity will enable us to continue to grow the size of our sales force in 2014 and believe the sales force can grow in the mid-single-digit on and annualized basis.

Keep in mind a sequential basis the size of our life insurance license sales force may slightly decline in the first quarter of 2014 due to seasonally low new life insurance licenses following the lower recruiting levels typical of the fourth quarter. A sequential decline in the first quarter of 2014 would be significantly less than the sequential decline in the first quarter of 2013. We began 2014 with a two day event attended by 300 of our most senior sales force leaders that culture that culminated with a Company-wide webcast to kick off the new year. These events were followed by 17 group meetings with our regional Vice Presidents at their offices across the US and Canada.

At these meetings, we talked about the efforts to build long-term distribution growth including the importance of developing new recruits and focusing on new leaders promotions in order to grow future regional Vice Presidents. We also highlighted the improvements we made to the business opportunity and how we are proactively working on incentive programs and technology. This forum provided the opportunity to explain some refinements we have made to our incentive program qualifications to focus more on developing new productive life insurance licensed representatives. We also promoted the incentive trip we launched in December where we will be taking 1500 couples to LaCosta Resort in California in August of 2014.

Next week, we will be in Waikiki out of the snow with 1500 qualifiers of the Hawaiian incentive trip where we will continue to emphasize these messages. Our sales force responded positively to the January events, and our RVPs now have a clear understanding of our 2014 priorities. Primerica's business fundamentals are strong, and we plan to build on 2013 achievements to generate growth in 2014. Now, I will turn it over to Alison to go through our financial results.

Thank you, John. Good morning, everyone. Earlier in the call, Rick highlighted key aspects of our full year 2013 results.

Let me now take you through the results for the fourth quarter (technical difficulty) to 15% reflecting improved persistency and modest expense growth in relations to the building of enforced block. In legacy, pretax operating income was 7.2% of direct premiums during the current quarter which was in line with the previous quarter and the prior year period. The fourth quarter benefited from about a $1 million reversal of previously amortized commissions that positively impacted legacy-DAC amortizations.

Additionally, a premium tax refund benefited legacy insurance expenses in the quarter. As I have mentioned in the past, in 2014 we expect the legacy premium as a percentage of direct premiums to declineto the mid 6% range, with quarterly fluctuation for mortality and persistency levels and any unusual expense items.

On a sequential basis, term life income remained consistent with the third quarter primarily reflecting growth in premium offset by seasonally lower persistency. Fourth quarter persistency experience is typically the least favorable of the year with DAC amortization expected to grow faster than net premiums compared with other quarters. As I mentioned, the seasonal persistency impact was somewhat offset by the reversal of previously amortized commissions this quarter.

On slide eight, you will see our investment and savings product operating revenues increased 10% versus the prior-year period reflecting growth in sales and average client asset value. Operating income before income taxes grew 13% year-over-year as Canadian segregated fund market performance exceeded DAC amortization assumptions resulting in lower DAC amortization in the fourth quarter of 2013. Year-over-year comparisons of DAC amortization was particularly strong when also considering the weak market performance in the fourth quarter of last year at accelerated DAC amortization in that period.

Operating expenses -- operating expense growth year-over-year was moderate. During the fourth quarter, ISP revenue generating sales increased 4% while sales-based revenues grew 8% reflecting strong fully commissioned variable annuity sales in the quarter versus an elevated level of variable annuity internal transfers that generate lower commissions in the prior-year period. The year-ago period benefited from a volume related variable annuity incentive payment that was not received in 2013 due to our switch to a multi-provider platform.

ISP asset related -- asset based revenue and income dynamics are driven by the underlying performance of both the US and Canadian markets as well as specific product performance. Versus the prior-year period, average clients assets grew 19% and asset-based revenue increased 15% while active-based commissions grew 24% in the fourth quarter of 2013. Canadian segregated fund average clients asset values declined slightly from the year-ago period creating mild pressure on product revenue mix due to their high relative rate of revenue generation than other sources of asset-based revenue.

As we have noted in the past, we recognize asset-based revenue on Canadian segregated funds, but commission expenses associated with this product are recognized over time as amortization of DAC and insurance commissions. Asset-base revenue and asset-based commission growth are more closely aligned if Canadian segregated funds are removed from the asset-base revenue in the comparison. On a sequential basis, ISP revenues increased 5% and operating income before income taxes increased 12% compared with the third quarter. These results reflect 5% growth in asset-based revenue, lower Canadian segregated fund DAC amortization, and slightly lower expenses.

On slide nine, you can see that corporate and other distributed products operating revenues declined $3.7 million and the operating loss before income taxes increased $1..6 million from the prior-year period. Net investment income allocated to corporate and other declined $2.7 million primarily due to growth in term life acquired assets, lower yield on invested assets, and continued capital optimization for share repurchases. Net investment income in the segment will continue to decline both as term life required assets increase and as capital is deployed to enhance shareholder value.

In our New York subsidiary, benefits and claims improved by $1..8 million primarily as a result of favorable claims experience. Turning to slide ten, our investment in cash were $1.98 million as of December 31st, 2013 with about $74 million held at the holding company level.

Our net unrealized gain was $100 million, down from $113 million at September 30th reflecting generally higher rates at year-end. The average book yield of investments excluding cash at quarter end was 4.93%, down from 5.19% at September 30th as higher-yielding securities matured and were replaced with lower yielding securities reflecting current market yield. During the quarter, we saw an average yield on maturing and called securities of almost 8%.

This compared to and average yield on purchases of around 3% for the quarter. This new money rate was down from the third quarter due to a higher proportion of purchases during the quarter being shorter-term investments made by our non-life companies and holding company. While the general increase in interest rate since the first part of 2013 has allowed us to modestly increase the yield on purchases, we do not expect to be able to replace the yield on our maturities given current market rates and, therefore, will continue to experience downward pressure on the yield of our portfolio.

Over the next 12 months, approximately 14% or $227 million of our portfolio will mature with an effective yield of about 4.5%. On slide eleven, you can see the adjusted stockholders' equity roll we added to our supplemental financial information this quarter. Most of the line items are self-explanatory, but let me explain the three primary components of other net. Other net -- the other net line item includes the annual management equity grant that are typically issued in the first quarter and are variably expensed throughout the three year vesting period. Also running through this line are the quarterly sales force equity grant for sales and distribution growth which are expensed and generally DACed in the quarter granted .The third component of the other net line item are the tax adjustments made due to the difference in market value of equity awards at the grant date versus the date the awards are fully vested and delivered.

The tax-adjusted component was most prevalent in the second quarter of the past three years as the IPO grants vested. On a go-forward basis, we expect equity increases through other net to be in the $7 million range per quarter subject to fluctuations in our stock price as well as changes in our equity award program. The first quarter will generally also include a larger tax adjustment due to the annual vesting of management equity grants.

Now let us look at trends in insurance an operating expenses on slide twelve. Expenses for the quarter came in at $68 million at the lower end of the range provided last quarter largely due to the FRS-related defense costs coming in at $2.3 million combined with a premium tax refund and rate adjustment. Compared to the fourth quarter of 2012, expenses grew by $2.1 million primarily from employee compensation including the third layer of stock awards to match the three year vesting period.

Occupancy related expenses were slightly higher due to the move to our new corporate headquarters. These expenses were partially offset by lower FRS-related defense costs. Our normal increase in growth related expenses was offset by the $0.9 million premium tax refund previously mentioned and certain other premium tax weight adjustments and releases.

In the first quarter of 2014, we anticipate total insurance and operating expenses in the $71 million to $73 million range. In addition to volume related expense growth, expenses are typically higher in Q1 as payroll taxes on employee salaries are reset for the new year and our annual merit increases begin. Expenses will also increase due to certain one-time adjustments recorded in the fourth quarter of 2013 primarily the premium tax refund and rate adjustments I previously mentioned. These increases will be partially offset by lower FRS related legal fees and expense.

We currently expect these expenses to be approximately $1 million for the full quarter due to the stay in litigation of these matters through April 2014. Now I will turn it back over to Rick.

Fourth quarter results were marked by solid core performance across the business segments. A recurring income base, and positive investment savings product performance, coupled with the prior share repurchases continued to drive expansion of operating earnings per share and ROE underscoring the strength of our franchise. As we look to the future, we will continue to execute initiatives to grow distribution capabilities, increase earnings, and redeploy capital in order to draw long-term shareholder value. Now we will open it up to questions.

(Operator Instructions). Our first question comes from Mark Finkelstein at Evercore.

Good morning.

Morning.

Morning, Mark.

A few questions. I guess the first question is just on the ROE update is that purely due to the FSR possible settlement or are there any other factors that drove the higher ROEs and outlook going forward?

You mean the perspective ROEs going forward?

Correct.

Well, obviously, without the FRS expenses the 15% that we did in 2013 would be higher, and as I indicated, beyond 2014, we do see some possibility for expansion above thatas the business grows with the lettering on the life insurance business and as our ISP business gross.

Okay. I guess a question on ISP. You have added products, you have had good sales in that area, but the flow story has not really turned the corner in terms of adding to the flows. When do we hit that point where whether it is Canadian SEG funds or what have you starts to moderate - - you start to see the growth given the higher sales volumes?

You mean the growth in net sales -- sales less redemptions?

Yes. Net flows.

Yes. I mean it did improve year-over-year from $270 million to $384 million and that will continue to improve as sales improve. I mean our redemption rates are relatively flat as a percentage of AUMs and as our sales grow that will continue to improve as long as sales do from the level in 2013.

Okay. And then just one final question on the new term, the DAC number. Was that -- was the higher sequential DAC purely due to the seasonality factor in the lower persistency or was there anything else going on in the DAC amortization in the fourth quarter? I am talking about new DACor new terms.

New terms.

Yes.

Specifically with new terms it is a combination. It is really three things, but on a sequential basis it is the seasonality, and it was slightly more favorable than we would have expected because of data persistency. We saw a lot of that persistency the third quarter also. So you do not see that much of a difference on a sequential basis. Year-over-year, we saw a more are dramatic improvement because of persistency, but you also had general growth because of growing the size of the business, the growing of the premium base.

Okay. thank you.

Our next question comes from Steven Schwartz at Raymond James.

Hello. Good morning everybody. John, I have no pity for you for the snow.

I tell you what , but in Chicago at least you have sand and salt trucks.

That' is true. But I do want to ask about weather and given kind of your - - you do have some territoriality I guess if the horrible weather might be affecting 1Q sales results.

I think there is a possibility -- I mean January's recruiting was a little less than what we had hoped it would be and -- but we actually feel good about the things we are doing, and then, hopefully, coming out of Hawaii with a serious momentum of things, but that said this is pure anecdotal here. Having talked in the last week with a bunch of our senior leaders in the Midwest and the Northeast, and in all honesty including down in here, our business is driving to homes and driving to meetings. So I think it will have an effect. There is no like panicky effect with our field or whatever, but I do think, Steven, it will have and effect because Primerica is business that is - - as one of our guys describes it is in the car driving and talking, and so we think it will have and effects, but I don't think it will have a dramatic effect.

Okay. Just to be ready for the possibility. Rick, on FRS.

Yes.

If this does not happen, I mean do you - - it goes back to the way it was and you just fight this out case by case ?

Yes. If it doesn't happen, that is what happens. It goes back to a case by case basis with the expenses being elevated like they were in 2012 but - - 2013 rather. I am hopeful that it will be resolved, though. So we will see in a few months.

Okay. And, Alison, a couple questions for you. The premium tax adjustment that you cited a couple of times how much was that in the quarter?

The refund itself was just under $1 million, and then we had a couple hundred thousand dollars worth of rate adjustments associated with that. So we basically toed up our accrual rates as well based on the things that we found we were able to get refunds for.

Okay.

About a million three in the aggregate.

$1.3 million pre-tax. Okay. And then there was a -- I didn't catch it. I apologize. There was a reference to 6% reference with regards to I think it was legacy premium. What was that?

That was the legacy sometimes we call it margin, but technically it is in our financial supplement as operating income as percentage of direct premiums. That ratio was 7.2 for this quarter it was a little elevated because of some of that premium tax adjustment as well as what I mentioned with the commission amortization reversal.

Right. Yes.

In legacy. And I was highlighting that as we said in the past, we expect that rate to get down into the mid sixes this year.

Okay. Great. All right. Thank you, guys.

Thank you.

Thank you Steven.

Our next question comes from Jeff Schuman at KBW.

Thanks, good morning.

Morning.

I just want you to know that unlike Steven, I feel terrible about your weather. Bring me along to Hawaii. We do talk about that.

Hey Jeff, I took a assure with a flashlight this morning. Power is out in Clermont, Georgia. So this -- we do not handle -- southerners do not do weather well.

I am glad you made it into the call. So a couple questions. John, you have given us some perspective on kind of the sales force count maybe sort of end of the first quarter and then kind of a normalized view of the growth potential. I was wondering if we could talk about a couple other factors that also end up impacting sales.

One would be productivity which for the quarter and the year was very much within historical ranges, but a little bit I think down from last year. So maybe a little perspective on where that might go, and then a new trend the last couple of quarters have been notable increases in the average premium per policy. I am wondering what is driving that. Is it face amount? is it age? What is going on there?

Okay. First, on the productivity. One of the things that we said in the script, and that you notice in our is that non-renewals have been better as well as our licensing rate better. Now, there is good news and bad news mainly good news, but I mean there is kind of a yen and yang to non-renewals being higher because the people that renew -- the marginal renewals I think speaks to that people feel better, the economy is better.

If you remember a couple three years ago, we were talking about renewals being lower because people have to pay to renew their license, and if they have not made a sale in a while, if the economy is bad they do not renew. Well, that has gotten better, and we are having more people renew their license, but the people that make that decision at the edge are the more marginal producers. And that has -- that is one of the reasons that productivity is down a little bit or whatever is that, you know, fortunately size of the sales force is up, but a piece of that is because of less marginal non-renewals leaving and more staying. But, again, within our historical range, the goal is to grow recruiting and grow the new licenses which when people come in the front door is when they are at their most productive component of it, and then also on the average size, the average size had gotten to a - - it was much higher prior to the collapse in 2008 and stuff like that, and it seems to be moving back in a very positive direction.

I think a piece of that is we have improved technology at point of distribution on our insurance sales. We have implemented a new web-based financial needs analysis which leads people to sell more to the needs of the person at the kitchen table, and we are very positive about the fact that is moving in the right direction, and our goal is to keep it moving backup. So I guess net-net I would say there are underlying health trends to everything we see, and as I am preparing to go to Hawaii, John's message is for - - our goal is to get a recruiting improvement, to getting recruiting to really move up, but to maintain all of the healthy things that we have done on the underlying mechanisms of the business to grow the new licenses. That is kind of the an on those two things.

Okay. That is very helpful. And one for Alison just to make sure I got this right. So in the investment portfolio, 2014 maturities sort of coming out at 4.5%, which is still north of the new money rate, but much closer than the stuff that is been coming out recently was much higher. Is that correct, that is correct?

That is correct. Obviously, when you are looking at a calendar year's earnings, you have to consider what has come out in the recent past, but on a futuristic looking basis or going forward basis that would be definitely the case.

All right. Thank you.

Our next question comes from Dan Bergman at UBS.

Hello. Good morning.

Good morning.

Hello Dan.

Hey. Just a follow-on Mark's earlier question. I wanted today see if you could provide any thoughts on the outlook for investment of savings product sales. Specifically, I guess it looks like the growth in mutual funds has been a key driver the recent sales trend. Given the market volatility we have seen so far in 2014 I wanted to see if you would expect any pressure on mutual funds sales going forwards and just in general that I thoughts on the sales outlook. would be much appreciated. Thank you.

Why don't you go first and then I will --

Yes. I mean obviously the volatility and the negative aspect in the market in the first part of January does have some impact on sales and so January sales were not as strong as we had liked as John mentioned really the same way with recruiting. But overall I do think our marketplace has a strong need for the product, and we have -- as John talked about, we have been improving our tools for reaching the marketplace. So we are expecting growth in year-over-year investment sales. Maybe not as high as 2013, but still a good year.

And just to add in, you know, January -- it depends on what the market does over the next few months or whatever. Our business on a negative basis reacts to a real market kind of sustained correction, a sort of one time down, one month, is not -- does not pull through in the trends of our production or whatever long-term . So it really -- the market -- it really depends on how the market does over the next few months as to how it will effect sales of our funds.

Okay. Great. Very helpful. Then just switching gears, so there are $2.3 million of the retirement system legal fees in the quarter and assuming a potential settlement is finalized I would assume this would decline going forward, but any color on the outlook for legal expenses following the $1 million you expect in the first quarter would be very helpful. I guess just generally would this go to zero at some point in the near median term or remain near that $1 million quarterly level for a while? Any thoughts on that would be very helpful.

Yes. It is hard hard to answer that question because it really does depend upon what the number of opt outs are. If you had no opt outs, obviously, the number goes to zero. More than likely there will be some, but we are not sure. So we l really cannot answer that until we understand how many people do sign up for the settlement itself.

Okay. Understand.

Sorry.

Thank you

Our next question comes from Sean Dargan at Macquarie .

Thank you and good morning. I have a question about share repurchase. I think Rick was describing share repurchase in 2014 starting earlier and inaggregate being larger than I think some people were thinking about. Is that a reflection of the Massachusetts regulators getting more comfortable with your capital or just your outlook on FRS or what is kind of driving that change?

We -- the $150 million that we have been talking about is a consistent number. We have mentioned it I think for the last two quarters, but very specifically the timing of the transactions and where -- or the repurchases and where the funds would actually be driven from has a lot to do with if and when we get regulatory approval from Massachusetts. So I do not think anything has really change in our outlook there. Really the vast majority, $110 million of the $150 million we do anticipate coming from the life company. Based on our performance on the statutory basis this year or 2013, we believe all of the money that we need will be able to be extracted on and ordinary dividend basis, but we do need to wait for that transaction to be finalized and approved before we can take any action.

Okay. And just your strategy for share repurchase. Do you see in the future maybe giving more significant share awards to employees and using share repurchase as way to diffuse dilution or -- I mean is this going to be a material driver of your ROE expansion?

No. We -- relative to employees and sales force equity we really intend to hold those programs roughly at the same level they are. So that there will be not expansion from that perspective. And we do see it driving earnings per share and ROE as we are repurchasing capital, you know, between dividends and share repurchases we will be giving back to the shareholders a large percentage of the earnings, annual earnings of the Company and as earnings grow you get expansion in earnings per share and ROE.

Okay. Thank you.

Our next question comes from Mark Hughes at SunTrust.

Thank you. Good morning.

Good morning.

It is still pretty clear here in Buckhead, but we will see how the day goes.

It is not so clear up here. Gwinnett County is not doing well. So it is coming your way, buddy.

All right. Well, we will look forward to it. The persistency in the legacy block seems like that has been very good. Is there any reason why that would changeover the next couple of years? Is the age or the profile of that block does that lead to a little more loss of policies or is this a good persistency for the foreseeable future?

I believe that is a good persistency. Again, as we have mentioned in the past, we do have seasonality for some quarters. We tend to see higher lapsation, but if you are looking at and annualized basis this is a very good ratio to be looking at. In general that is a pretty stable block of business.

Obviously, the longer a term life policy stays in force the more likely it is to continue to stay in force. So we see a I more stable, more predictable level of persistency here than we would say in new term with the businesses a lot of it's in the first and second duration where we obviously see our highest optimization. So I think it is a good rate. You do need to keep in mind on a quarter to quarter basis the seasonality that we normally experience.

And then on the expense allowances in the legacy block I think you have given some guidance about the pre-tax margin maybe going to the mid sixes there. The legacy block -- or the allowance this quarter was a little higher than usual. I do notknow if you touched on that, but is that part of why you would expect that to moderate a little bit? Is that going to come back to more normal levels?

The allowances really was not a key driver to what we experienced this quarter. That will fluctuate a bit. It is largely driven by two things. One is the city allowances. That is the biggest piece of it, but we to still have some allowances on the older business that was co-insured with third-party re-insurers way back in the 80's and early 90's. So there is a little bit of volatility there. So I don't think you saw -- we did not see anything notable in allowances this quarter. Again, the real drivers of the return this quarter in legacy were obviously the overall performance of the block as well as some of the mortality standpoint as well as the two items I called out, one some of that premium tax adjustment went to legacy and then also the reversal of previously amortized commissioning about a $900,000 there.

Thank you.

Very good. Thank you shall everybody.

Stay warm.

Have a nice day. See you.

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