Primerica Inc (PRI) 2014 Q1 法說會逐字稿

Good morning, and welcome to the Primerica First Quarter 2014 Earnings Conference Call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Kathryn Kieser, Senior Vice President of Investor Relations. Please go ahead.

Thank you Laura, good morning, everyone. Thank you for joining us today as we discuss Primerica's results for the first quarter 2014. Yesterday afternoon, we issued our press release reporting financial results for the quarter ended March 31, 2014. 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.

In the first quarter of 2014, Primerica sold its New York insurance subsidiary short-term disability insurance business, which was distributed through non-core distribution channels. Results from these operations have been reported in discontinued operations which are excluded from non-GAAP results for all periods presented. 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 as such, statements involve risks and uncertainties that could cause actual results to differ materially from these statements.

For discussion of these risks, please see the risk factors contained in our Form 10-K for the year-ended December 31, 2013.

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'll turn the call over to Rick.

Thank you Kathryn, and good morning, everyone. As you can see on slide 4, during the first quarter of 2014, our operating revenues grew 9% to $324.1 million, driven by the continued growth in term life premiums and solid investment and savings products performance, and an operating income increase of 12% to $43.3 million year-over-year coupled with share repurchases in prior periods drove a 20% increase in net operating income per diluted share to $0.77 in the first quarter compared with $0.64 in the prior year period.

Other factors impacting first quarter's year-over-year results include a $1.6 million decline in net investment income, highly-correlated to our stock repurchases throughout 2013, and a lower yield on invested assets.

We also saw insurance and operating expenses increase with growth in our business while legal fees and expenses associated with barter retirement systems, where our (technical difficulty) matter were significantly less than the prior year period. We have substantially resolved the FRS matter with over 95% of the claimants accepting the settlement, satisfying the participation threshold set by our agreement. We intend to defend any claim pursued by the opt-outs, and believe the potential exposure to these particular opt-outs is unlikely to be material.

Net operating income return on adjusted stockholders' equity was 14.9% as of March 31, 2014, up from 13.1% in the year-ago period. Return on equity declined from year-end primarily due to seasonally-higher expenses in the first quarter as well as favorable items in the fourth quarter. Return on equity should expand with more significant share repurchases in the second half of the year, subject to the completion of a redundant reserve financing transaction that we are diligently working on.

In the first quarter we began executing our plans to deploy $150 million of capital in 2014 by repurchasing 13 million of Primerica's common stock. We anticipate the majority of 2014's repurchases will happen in the second half of the year after the approval of the redundant reserve financing transaction.

Now turning to production results, term life average issued premium per policy increased 2% in the first quarter of 2014 while term life insurance policies issued declined 2% from the year-ago period.

Total estimated annualized issued term life premium increased 2% compared with the prior year quarter. In four of the last five years, first quarter productivity has ranged from 0.175 to 0.184 policies issued per life license representative per month. In the first quarter of 2014, productivity of 0.173 policies per life licensed representative per month was slightly lower than the 0.184 in both the prior year and sequential quarter, we believe due to the severe weather during the quarter.

Sequentially, term life insurance policies issued were 6% lower than the fourth quarter, largely reflecting fewer applications submitted during the typically slower holiday season.

Our investment and savings product sales increased 3% compared with the first (technical difficulty) 2013. Year-over-year retail mutual fund sales grew 15%, partially reflecting a product rotation from heavily-weighted, fixed-income Canadian seg funds which declined 34% to primarily equity-based mutual funds.

Managed account sales increased 11% and managed account asset values grew to $1.1 billion at the end of the first quarter 2014. During the quarter, variable annuity and other sales declined 6% from the prior year period. Client asset values at the end of the first quarter reached an all-time high of $45.8 billion, up 15% from March 31, 2013.

Sequentially, investment and savings product sales increased 10% from the fourth quarter of 2013. Strong retail mutual funds and Canadian segregated fund sales reflect typically higher retirement savings sales in the first quarter during the retirement plan season. Sales of new fixed-indexed annuity products defined from the fourth quarter as clients appear more comfortable accepting investment risk in the current market environment.

Going forward, we expect quarterly fixed-index annuity sales to be more in line with current quarter sales levels. Total client asset values were up 2% from year-end 2013. Now, John will discuss distribution results.

Thanks Rick, and good morning, everybody. Turning to slide 5, we kicked off 2014 by engaging in activities and launching initiatives that built on the momentum generated in the second half of 2013. As I told you in February we started the year with 22 regional vice president meetings. At these meetings, we talked about efforts to build long-term distribution growth, highlighted improvements made to our business opportunity, and promoted current incentive and technology initiatives.

We also encouraged the 75 to 100 attendees at each meeting to discuss those positive and challenging areas of their business. This dialogue helped us identify opportunities and potential enhancements including the new term life training we launched early this year.

The incentive and messaging adjustments we have implemented over the past few months resulted in a 4% increase in both recruiting of new representatives and the number of new representatives obtaining a life insurance license compared to the year-ago period. The rate of non-renewals and terminations also improved year-over-year, although we continue to expect this ratio to be in the 8% to 9% range near-term.

The size of the life insurance license sales force grew 5% to 95,382 compared with the first quarter of last year. On a sequential basis and in line with the seasonality of our business, the recruiting of new representatives increased and the number of new representatives obtaining a life insurance license declined primarily due to the slower recruiting levels of the fourth quarter.

As we indicated last quarter, the size of the sales force remained relatively flat for the fourth quarter as the new license change at the end of the first quarter of 2014 improved significantly from the same periods of 2013 and 2012.

We believe the size of our sales force will slightly increase at the end of the second quarter. The changes we have made to incentives and compensation have focused our sales force on growing their insurance license representatives as well as building their investment and savings products business.

Over the past two years, these enhancements have manifested themselves in both improving life-licensing ratios and higher ISP sales. This year, we continue to enhance our ISP business with new product offerings including the addition of a variable annuity product underwritten by AXA and by expanding our managed account product with the addition of five new portfolios.

Over the next few months, we are hosting eight ISP sales and product training meetings across the US and Canada that will be attended by 8,000 to 10,000 representatives. We are also currently running an incentive trip competition to the Greenbrier Resort for our more seasoned ISP licensed representatives.

Our goal continues to be growing the size of the sales force in a sustainable way. As we head into the second half of 2014, our plan is to deliver tangible enhancements to our business opportunity, product portfolio and client experience in order to build long-term distribution growth. With that, I'll turn it over to Alison.

Thank you, John, and good morning everyone. My comments today will cover the earnings results for each of our segments, followed by a company-wide review of insurance and operating expenses and invested assets.

Starting with term life on slide 6, year-over-year operating revenues grew 9% driven by a 11% increase in net premium. While the percentage of our invested assets allocated to term life continues to grow, the associated increase in allocated net investment income was largely offset by a lower effective portfolio yield. These revenue trends, when combined with increases in both insurance expenses and the rate of DAC amortization, resulted in term life operating income before income taxes increasing 5% over the prior-year period.

For the segment as a whole, policy persistency was stable and consistent with the prior year period, and incurred claims were in line with historical experience.

On a sequential quarter basis, term life operating income before income taxes declined 6%, primarily due to positive items in the prior period including income from called securities, a premium tax refund and the reversal of previously-amortized commissions as well as slightly-lower-incurred claims in the fourth quarter.

You've likely noticed that DAC amortization did not decline sequentially as would be expected shifting from the fourth quarter with seasonally poor persistency to the first quarter with generally average policy persistency.

This trend was driven by several factors. As we've mentioned in the past, in recent years we have shifted the composition of our ongoing sales force bonus incentive plans towards more deferrable programs, thereby changing expense recognition from immediate insurance commissions to ongoing DAC amortization. Average quarterly insurance commission expense has declined from $4.8 million in 2011 to $2.4 million in 2012 and $1.1 million in 2013, which is generally where we expect the 2014 average to be as well.

Since our overall spend has remained relatively constant, the offset to these declines will generally be recognized and as an increased DAC amortization ratio over time. The increased DAC amortization associated with the shift was largely offset in 2013 as the general improvements in persistency experience for the last several years offset the increases that would have otherwise occurred.

Persistency trends between 2013 and 2014 have thus far been stable, maintaining recent improvements, so the impact is more apparent this quarter. We believe this trend will continue throughout 2014 and if persistency remains consistent with the prior year, will stabilize in 2015 with DAC amortization specifically in new term growing more in line with direct premium.

Throughout 2014, barring shifts in persistency, we expect DAC amortization growth to exceed the growth rate in net premiums by about $1 million per quarter.

There are three other noteworthy items impacting DAC amortization trends this quarter. First, in the fourth quarter of 2013, we had a $1 million reversal of previously-amortized commissions that lowered DAC amortization in that period. Second, in the first quarter we changed the timing of certain incentive accruals, essentially adding a month of deferrals and the related amortization to the year.

You can see the increased deferrals on the DAC roll-forward in the financial supplement and the related amortization was about $400,000. This will go back to normal next quarter.

Finally, during the quarter we began recognizing about $500,000 in commissions on one of our policy riders in the DAC amortization line instead of the insurance commission line. You do not see the corresponding decline in insurance commissions this quarter as we ran a short-term, non-deferrable incentive program for roughly the same amount. We do not believe that any of these three items have an ongoing economic impact to the segment's resolve.

Now, let's look at the term life subsegment. Legacy and new term profit margins which we define as pre-tax operating income as a percentage of direct premium continue to move in opposite directions. New term profit margins had generally increased year-over-year as the in-force block has grown and effectively leveraged the fixed costs within our expense [state].

Legacy profit margins have generally decreased due to the lower margins on post-end-of-term conversions and renewals. Margins for both subsegments also experienced quarterly fluctuations from mortality, persistency and expenses. In the quarter, new term profit margins were consistent with the prior-year period as the continued leveraging of fixed costs was offset by higher DAC amortization as a percentage of premiums as just discussed. We expect this trend to continue throughout the year but still anticipate new term profit margins to generally improve in the future.

Claims for the subsegment were slightly elevated from the prior year period but given the limited size and age of the block such fluctuations are not unexpected.

In legacy, profit margins declined from the prior year period to 6.5% but were modestly assisted by favorable incurred claims in the quarter in contrast to negative claims experience in the year-ago period. The drop from 7.2% in the fourth quarter was driven by the favorable fourth-quarter items I previously mentioned. We expect this ratio to remain in the low to mid 6% range near-term.

Moving now to our investment savings product segment on slide 7, you'll see our ISP operating revenue grew 13% year-over-year, driven by growth in both product sales and average client asset values. When combined with slightly-favorable DAC amortization and significantly lower FRS-related expenses of $600,000 versus $3.9 million in the prior year period, operating income before income taxes increased 29%.

On a sequential quarter basis, ISP operating revenue increased 2% and operating income before income taxes declined 4% compared with the fourth quarter. Fluctuations in the mix of both product sales and client asset values more than offset the sequential growth in sales and assets. Sequential results were also impacted by seasonally-lower custodial fees in the first quarter and higher miscellaneous revenue items in the fourth quarter.

Canadian segregated fund DAC amortization was favorable in the fourth quarter and returned to a more normalized level in the first quarter. During the quarter, there was a disconnect between the rate at which sales-based, and to a far lesser extent asset-based revenues grew, and the rate at which product sales and average client assets grew respectively.

While the long-term and economics are generally similar across our ISP products, each has a different level of sales and asset-based earnings and changes in mix can drive period-to-period fluctuations and revenue and earnings patterns. To better understand the ISP income dynamics, on slide 8 you can see ISP products categorize into three groups.

First, the products that generate no sales-based revenue but relatively higher asset-based revenue, such as Canadian segregated funds and managed accounts. Second, the products that generate mid-range levels of both sales and asset-based revenues such as mutual funds. And finally, products that generate higher sales-based and relatively lower asset-based revenues such as annuities.

Sales and asset mix can also create differences in the rate at which commission expenses grow versus revenue. While we have a stated payout to our sales force of 80% for sales commissions and asset-based trail commissions, some products have other sources of sales and asset-based revenues that are retained by the Company and will impact the rate of commission expense growth in relation to revenue growth.

Also recall that sales commissions associated with segregated funds are recognized over the future profit stream as amortization of DAC or to a lesser extent, as insurance commissions for level asset-based trails and are therefore not reflected in sales or asset-based commission expenses.

First quarter results demonstrate many of these dynamics. For example, total ISP sales increased 3% but sales-based revenue increased 17% year-over-year, largely due to mix. Segregated fund sales, which generate no sales-based revenue, were down 34% while retail mutual funds were up 15% and generate mid-range sales-based revenue. Also, virtually all of this quarter's variable annuity sales were fully-commissionable whereas about $50 million of variable annuity sales in the prior-year period were internal transfers that generated significantly lower sales-based revenue.

Likewise, a sequential quarter shift to retail mutual fund sales from annuities largely due to individual retirement account season highlighted how sales mix can cause differences in revenue expense growth rate, with net revenue as a percentage of sales declining from 1.38% to 1.29% sequentially.

Moving to the corporate and other distributive products segment, on slide 9 you can see that operating revenue declined $1.8 million from the prior year period due to a $1.7 million decline in allocated net investment income from higher term life allocations with growth in its required asset, higher capital deployment and a lower portfolio yield. This decline combined with a $1.2 million increase in insurance and operating expense that I will discuss momentarily resulted in a $3 million increase in the operating loss before income taxes.

In the first quarter, we sold our short term statutory disability insurance business distributed through a non-core distribution channel managed by our New York insurance subsidiary. Prior period results have been reclassified from corporate and other distributed products to discontinued operations.

Slide 10 provides a more detailed review of insurance and operating expenses. You see that year-over-year operating expenses grew by approximately $1.1 million to $69.3 million in the first quarter of 2013. Given that we did not incur an estimated $1.5 million of expenses related to DBL operations, actual expenses came in at the low end of the range we indicated last quarter. Year-over-year, cost of living adjustments to salaries and related items led to an increase of about $2 million. Expenses increased $1 million for premium and growth-related expenses coming from growth in our new-term business as well as growth in our managed accounts and other ISP products.

Infrastructure, sales support and other initiatives added about $1.4 million. FRS-related expenses were $0.6 million or $3.3 million lower than the prior year period. Compared to the fourth quarter of 2013, expenses increased by $2.7 million. $2.4 million of the increase came from employee-related costs, mostly driven by payroll taxes, employee benefit costs that taper off later in the year, and cost-of-living adjustments to salaries that occur annually in March.

Increases due to unique prior-quarter adjustments were generally offset by lower FRS-related expenses. We expect our second quarter insurance and other operating expenses to be anywhere up to $2 million higher in first quarter levels, driven mainly by business buy-ins as well as other initiatives.

Turning to slide 11, our investments in cash totaled $2.01 billion as of March 31, 2014, up from $1.98 billion at December 31, 2013. The average credit rating of our fixed income portfolio continues to be single-A and 95% of the portfolio was rated investment-grade. The average book yield of investments excluding cash at quarter-end was 4.87% down slightly from 4.93% at year-end. The new money rate on our purchases for the quarter was 3.61% up from 3.01% in the fourth quarter, reflecting a higher weighting of purchases in our light insurance companies which typically invest in longer-duration assets.

We continue to expect downward pressure on investment income going forward, given the low interest rate environment, and our plans to continue to return capital to shareholders. Over the next 12 months, approximately 11% of our portfolio or $185 million will mature with an average book yield of 4.6%.

The liquidity profile of our holding company continues to be very strong. As of March 31, 2014, the holding company had invested assets in cash of $56.9 million, down from $73.8 million at year-end 2013, primarily as a result of share repurchases, stockholder dividends and debt service partially offset by dividends on subsidiaries.

With that, I'll turn it back over to Rick.

Thanks, Alison. The first quarter was marked by solid performance across business segments. Our recurring-term life income base and positive investment and savings products performance coupled with share repurchases will continue to drive expansion of operating income, earnings per share, and return on equity, underscoring the strength of our franchise.

As we look to the future, our focus is on driving organic earnings growth and deploying capital in order to drive meaningful, long-term shareholder value. With that, we'll open it up for questions.

(Operator instructions) Our first question today comes from Sean Dargan of Macquarie.

Thanks, and good morning. I don't think the impact of mortality was called out at all, and it's a theme we've seen across life companies that have reported first-quarter earnings. I realize you reinsure most of that risk away, but was -- would you be able to quantify what the impact of adverse mortality was?

Actually, and you know, it's interesting. When we do all these comparisons, you have to look at what it was really this period, and then you have to also consider what it was in the period we're comparing it to. So, let me go ahead and give you some better information or more detailed information for the quarter itself.

If you look overall for the portfolio of term life, our first quarter experience really was spot-on with what our historical averages were, so our incurred claims were not adverse at all. We did see a little bit of a shift with the subsegments, specifically new-term looked a little bit negative. But again, that's a very, very small block and so you tend to see a little bit more variability there because it really hasn't matured out, and offsetting that legacy was a little bit favorable.

So again, in the aggregate, term life was very much in line with what we would've expected based on historical experience, with a little bit of noise between the subsegments.

When you're looking at comparisons, really the thing to note was the first quarter of last year was actually a particularly bad quarter from a mortality experience, so the year-over-year comparisons actually look quite favorable.

Okay thank you, that's helpful. And then, just as we're thinking of productivity in terms of policies, pro life license, representative, you called out severe weather. Have you tried to figure out what percentage of the drop-off or have you tried to quantify what the impact of severe weather was on productivity?

No, we haven't gone that far. What we do know is that January and February started out slow, coinciding with the weather, the bad weather, and then towards the end of February and March there were stronger months. We have not quantified -- as I say, I mean, the actual number is not far off from what we've done in other quarters, first quarters over the time period. So, I mean, it's a slight impact, not a large impact.

All right, and just as we think about that metric, is -- is that something that is as important in terms of how we're thinking of you growing the book as maybe you know, you present it at the time of the IPO?

We still believe that productivity will be within sort of the ranges that we had described at the IPO, and don't see any reason for that to be different. As I say, it did drop in the first quarter. Below that, the first quarter's always a low quarter anyway, so we see no reason to change what we said at the time of the IPO today.

Okay great, thank you.

And our next question comes from Dan Bergman of UBS.

It looked like the sales force non-renewal rate came in quite strong again. I was calculating 8% which is the low end of your prior kind of 8% to 9% quarterly guidance. Despite my expectation of non-renewals, my understanding was they're typically elevated in the first quarter due to year-end processes. I just want to see if there's any color you can provide on the non-renewals in the quarter and the outlook for that going forward, and whether we should still be thinking of that 8% to 9% as a good range to expect, or do you think that could trend lower?

I do think the 8% to 9% is still a good number. It actually has been trending for the last five quarters on the low end of that, and as we said or as you highlighted, the first quarter usually is elevated relative -- because of just renewal cycles and [states], and in this quarter it was not. We're gratified to see that it wasn't, but we still think 8% to 9% is a good range and hopefully it'll continue to come in at the very low end of that range.

Okay great, and then just switching gears, I believe you'd mentioned some new product offerings in an investments products division this year including I think a new annuity offering. I just want to see if there's any more color you can provide on the new products, when they're expected to roll out, and how much of an impact you think they could have on sales in 2014 and beyond.

Let me go first, I'll let Rick talk about kind of the specifics of the actual rollout. What we're wanting to do is to build out our investment and savings portfolio so that we can deliver a very broad range of products to main street middle income families. And our view is that the bread and butter is going to continue to be mutual fund sales, because the typical family that we see needs to be systematically investing in an individual retirement account with mutual funds.

But for our higher-end and larger producers, they need a more broad product portfolio so our view is that we want to continue to build the product portfolio so that we're able to deliver more to main street families but we don't want to become a flea market of products. We want to be very intelligent in what we do because in our business, it's very easy to get attracted to your distractions and that if you're not careful you can get people focused on extraneous products and you need to make sure that you stay focused on the [core knitting].

We do believe it will lead to growth, okay, in our business, and we hope that it will lead to growth more importantly in licensed representatives in that business, because our first goal is always to build distribution so that we're growing the people that can go see families to -- to what Rick, to just add a little color to what Rick said to you on the weather is, you've got to always understand, Primerica -- our business is people getting in cars and going to homes or going to meetings. They don't sit in their office and conduct business by the phone. So, we haven't quantified it, but when the entire northeast down to the southeast -- I mean, this is the first time I can ever remember our home office shut down for a number of days in Atlanta. When people can't get in cars and drive, that's a bad thing for Primerica.

So, anyway Rick, and I'll let you add color on the AXA.

The AXA product, cornerstone product, it became available on May 1 from a rollout perspective. It does have, if you're familiar with the product, it does have a feature that allows clients to choose how much they want to put into the income rider versus the open architecture rider. They can make a choice as the percentage of their funds they put in each side of the investment, so it has characteristics of our MetLife product and it has characteristics of the Lincoln product. Obviously some of the sales that are currently going in either Met or Lincoln would move to the AXA product, but we also think because of the differentiation that it will help us expand our overall VA sales as well.

Great, that's very helpful, thank you.

Thank you.

And our next question will come from Steven Schwartz of Raymond James.

Hey, good morning everybody.

Good morning, Steven.

How you doing?

I'm doing awesome. How about you, buddy?

Spring is coming.

Good, yes. You were a part of that weather.

Yes. Hey Alison, on the guidance that you gave on the DAC amortization of growth in net premium plus a million for 2014, was that just on new term or was that for the entire term business?

So, what I specifically was speaking to is about new term. The million dollars is in the aggregate, but realistically given that the legacy block is closed and the fact that we seated 80% of it off to [Citi], you don't see quite as much variability there. You know, there can always be one-time adjustments like we had in the fourth quarter, but we reversed some old amortization. But realistically that's a fairly locked-in number, and so probably the better thing you want to correlate to is what's current commissions, current activity versus current sales premium.

And so, the $1 million -- ultimately if you start looking on into the future, the rate for new-term of growth in DAC amortization will be consistent with the growth in direct premiums. In the near term we think it could be as much as about $1 million higher per quarter throughout 2014.

So, I think the million dollars is the right number in the aggregate, but the real correlation you're looking for is in new term.

Okay, and that's -- you said direct, so that's relative to direct, not to net?

On the new term, yes. I mean, over time that will shift, but given the newness of that business, the use of that business, our YRT premiums are relatively low. Direct premiums are a better proxy. On the aggregate business, net premium would be obviously because we see so much of the legacy [to city].

Okay, got you. Okay, good. And then you know, there was a lot of stuff on ISP and I honestly couldn't get it all so I'll look for the transcript, but the net of this is basically you're saying that there's really no change in the profitability of any of the products? It's really mix and maybe some timing?

That's exactly what it is. You know, we -- when we were originally creating our segmentation that was obviously something we looked at with these ISP products to say, ultimately, does it make sense to put them all in one segment. And we concluded yes, because ultimately we are fairly indifferent over whether we sell one product versus the other, on a long-term basis. But, we saw some pretty dramatic shifts from the fourth to the first quarter, in some of the products that had the most distinctively different timing of earnings, most specifically the seg funds which again has no sales based earnings and our highest relative asset based earnings, and there was a 34% drop in seg funds.

So, on a period-to-period basis, you see that creates some anomalies, but ultimately from how's the business doing, are we happy with the results, is there anything to be concerned about -- the answer is, very happy with the results and not anything to be concerned about. Ultimately there are all very -- new profitable products in the same relative range, and what you should see is some of this emerging over time.

And then last one Rick, anything, anything to be said new on the DOL?

No, not at all. Nothing has changed at all, and I think we mentioned last time the DOL said that they will not re-propose until at least August of this year, and we're hearing that that's probably optimistic on their part. We know nothing more about the content of what they're talking about.

Okay, all right, thank you everybody.

Good talking to you, Steven.

Take care, guys. Actually, I'll get back in line probably.

Next we have a question from Mark Finkelstein of Evercore.

Hi, good morning.

Hey, Mark.

Most of my questions have been answered but Alison, one quick question on new term insurance expenses. Anything out of the ordinary there? They were just a little higher than we had modeled.

Yes, and I am looking, I'm trying to think through. I don't think there's anything other than the fact that new term would've gotten, I mentioned to you some things about that happened in the first quarter specifically on employee-related, meaning where we have because of the bonuses all happening in the first quarter, we have a lot higher payroll taxes that tends to run off towards the end -- later in the year. A lot of that would have been weighted towards our term segment, because a large number of our employees are really term-oriented.

But other than that, there was nothing really specific in term life. You had a little bit with growth in premium taxes. Remember -- now that you're talking about new term, so that was in legacy last quarter. So, now actually the numbers were very much in line with our expectations.

Okay. John, maybe a high level question. Over time you've made some structural incentive changes to kind of the sales force, the agent force. How satisfied are you generally with the actions taken, the progress in growing the aging count, and you know, the investment licenses as an example?

Okay, great question. I'm one of these people that's never satisfied, so I'm pleased that we made a significant -- the compensation change we made was the most significant compensation change in two decades. And it was because we saw that we needed to focus on long-term growth versus short-term, month-to-month premium pushes. And so, any time you make a significant change, there's always a downside risk. And we made a significant change and we've actually grown the sales force count, so that's a positive.

As Alison talked about so well in her comments, we improved persistency. I mean, the quality of our business improved, which was one of the goals of it also. It also led to a significant focus on our ISP product portfolio and that we had -- you know, and we've had very good growth there. We had a recent training program for our new regional vice presidents. As I stood in front of them it was probably the best group of younger RVPs. One of the things we didn't talk about in the thing is, we have a very significant focus in our marketing area right now led by Glenn Williams, our President, on the millennial market. Of trying to make financial services distribution cool for people in their 20s and 30s which is really hard to do as you might imagine, because if you go to a financial services meeting it's a bunch of people who need to leave their walkers outside at the door when they go in.

As I look at all those things, I'm very pleased, okay? On the other side of it, I will say that as you look -- besides -- I genuinely believe and know that the biggest downside we had on life productivity this quarter was the weather, but as I've said many times to you all, Primerica is kind of a whack-a-mole meaning you hit one thing down and another thing pops up. If anything, I think right now which what we're trying to do is focus on life insurance and doing training and stuff to drive more life insurance sales.

So, Primerica, you're constantly aiming and adjusting, okay? That said, given some of my middle-of-the-night worries when we made those changes, I'll say now looking about two years in, I'm pretty darn pleased with where we are and what we've been able to accomplish given what our goals were going into it.

Okay, that's very complete. Thank you.

And our next question comes from Mark Hughes of SunTrust.

Thank you, good morning.

Hey, Mark.

Hey Alison, you had talked about the margin outlook for the legacy business as a percentage of direct premium and I think you suggested low-to-mid 6%'s. Am I right in thinking last quarter in times past when you've talked about that, you've talked about mid-6's? Is there any difference there or is that something that we would expect to trend down over time?

Well, I want to give you kudos because you clearly listen to what I say, so kudos to you. We have historically said mid. I still think mid is appropriate. We've dropped it a little bit to mid-to-low, and that largely has to do with investment income. We are just not seeing -- obviously if you look at the assets backing our term life business, most of them are in legacy right now. And we, you know, you've heard us talking about pressure on our portfolio. We just haven't quite seen us turning the corner, there, and so we had been making some a little bit more optimistic assumptions. We haven't greatly changed them but just taking a little bit more conservative or latitude, if you will, in saying low-to-mid. But again, it's really a function of the investment income more than anything, and remember, there you have a net -- growing net liability so your investment income can have a greater -- the credited rate, if you will, can have a greater impact on your portfolio, on your results, excuse me.

Right, that's helpful, thank you. And then, in terms of the new term business, you've got the DAC issues at least for 2014 and then it'll stabilize in 2015. Where is term going? I don't know if you've ever expressed the goal about the -- we think it will reach you know, some level at some point in the future, and if not an absolute number, kind of the pacing for improvement. How do we think about that as we look at 2015 and beyond?

Sure, and if you look in the financial supplement, and unfortunately we don't give you a whole lot of history here, but hopefully you have it from the past documents we've given you. You can see that -- how the pace has slowed down quite a bit, but it's still fairly strong in what our growth rate has been. So, right now we are at -- and where I'm really looking at -- is that right now we're right around 15%. It will fluctuate, like you will see most likely next quarter when persistency with the second quarter is generally better, you'll see it pop up. But so, it's hard to look at on a quarterly basis.

If you look at it on more of an annualized basis, I do think that number will continue to grow. I think at the time of the IPO, we said long-term that should be closer to the 20-ish some-odd percent. But, I think that will still take a considerable amount of time to get to, and I think that on top of that you will see a lot of noise quarter-to-quarter, largely driven by persistency.

So, this is one of those numbers that you kind of have to step back and look at more on an annual basis, and I think we continue to see reasonable growth and would expect to see maybe a percentage point increase, again, a year. Although I'd say after 2014, because 2014 we do have some of this nuance with the DAC amortization like I was just describing.

We can put some pen to paper and do a little bit more looking at that, but really what it is, is it's the benefit and expense ratio should be fairly stable, and it's really -- should mostly come from the leveraging of fixed costs as the block continues to grow.

You know, we didn't see a whole lot of growth in the block this quarter from new business, per se, so to the extent we can get new sales growing as well, that will help grow that number. It's really a fixed expense play.

Thank you, and I am hanging on your every word.

Thank you, thank you.

And our next question is a follow-up from Steven Schwartz of Raymond James.

Hey, one more. Could you talk about the sale of the New York disability business and maybe what proceeds were, and what you took in?

Sale of the disability business.

Oh sure, I'm sorry, I didn't hear the full question. I think it's disclosed, we have some more details in the financial supplement. We did sell that block with a gain of just under $3 million. It was $2.5 million-plus net of some one-time expenses. Really, that business -- and we did go ahead and show you the historicals in the financial supplement -- last year it had a good year because we did, we had an unusual item of almost $3 million but realistically, if you look back in previous years, this block is made on anywhere from zero to $1 million or so a year. So, we felt like getting out of that with a multiple of a couple times earnings was reasonable.

Oh okay, so a multiple of a couple of times. Okay.

Yes, honestly it was not a -- it had some weird -- it had some stronger performance quite frankly in 2013 because claims were relatively low, although we clearly believed that they were going to move back up to a more normalized level over time. And then also, we had a premium tax type of item that we were able to release because we didn't feel like it was going to be ever spent, and a lot of that had to do with the fact that we knew we were disposing of this particular business.

But it's just -- I mean, really what it boils down to, this was much less of an economic decision. It was much more of a -- this is a business that is not core to us, it's not sold by our sales force, it's only sold in New York and New Jersey. Really in New York, it's a New York product, and it just really didn't fit our business model. So, if anything I'd say it was more about management attention than economics, so when we found a buyer that was willing to buy it -- and quite frankly take over all of our employees which was very important to us. They took over all of the employees, and really very few terminations were brought on by this. It made sense. But again, it really wasn't driven from an economic perspective.

Okay, all right, thanks.

Very good. I believe that's all the questions. Thank you very much, everyone have a good rest of the morning.

Have a great month.

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