Primerica Inc (PRI) 2016 Q1 法說會逐字稿

Good morning and welcome to the Primerica Q1 2016 Financial Results webcast. (Operator Instructions).

I would now like to turn the conference over to Katherine Kiser, please go ahead.

Good morning, everyone. Welcome to Primerica's first quarter earnings call. A copy of earnings released, financial supplement, presentation and webcast for today's call are available on our website at investors.primerica.com. Glenn Williams, our Chief Executive Officer, and Alison Rand, our Chief Financial Officer, will deliver prepared remarks. Then we'll open it up for questions.

We reference certain non-GAAP financial measures in our press release and on this call. These non-GAAP measures have limitations, and reconciliations between non-GAAP and GAAP financial measures are attached to our press release. We will also make forward-looking statements in accordance with the Safe Harbor provisions of the Securities Litigation Reform Act. The Company will not revise or update these statements to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the Company's 2015 Annual Report on Form 10K, as updated quarterly by our reports on Form 10Q.

Now I'll turn it over to Glenn.

Thanks, Katherine. Good morning, everyone. Today I'll discuss our first quarter performance as well as provide our perspective on the Department of Labor's final fiduciary rule. Beginning on slide three, you can see in the first quarter of 2016 operating revenues increased 6% to $363.7 million and net operating income increased 7% to $45.7 million from the prior year period. Results were driven by 13% growth in term life adjusted direct premiums and a 28% increase in term life operating income before income taxes. Market volatility pressured investment and savings product sales and client asset values, which led to a 10% decline in ISP operating income before income taxes year over year. The lower average Canadian dollar value remained a modest head wind on a year over year basis reducing net operating income by approximately $1 million in the first quarter of 2016.

Solid earnings as well as on-going share repurchases drove a 17% increase in diluted net operating income per share to $0.93, and ROAE expanded 170 basis points to 16.3% from first quarter a year ago. ROAE should be around 18% for the full year 2016 as ROAE in the rest of the year should be significantly above the first quarter, which was impacted by seasonally higher employee related expenses. We repurchased $49.9 million or 1.2 million shares of our common stock in the first quarter of 2016 and expect to deploy another $100 million this year in addition to stockholder dividends.

Now let's turn to sales force results. Growth continued in the first quarter fueled by continued overall business momentum, strong recruiting and licensing trends as well as the disciplined use of incentives. We continue to build on the solid foundation as we execute initiatives to drive organic growth, including new innovative digital sales tools and real time recognition programs that appeal to a broad spectrum of representatives. As you can see on page four, our life licensed sales force grew 10% to 108,220 at the end of the first quarter versus a year ago and was up 1% from the end of the fourth quarter. Year over year recruiting of new representatives increased 19% and new life insurance licenses were 29% higher, indicative of continued strong recruiting levels and licensing focus. On a sequential quarter basis, recruiting increased 30% and new life insurance licenses declined 8%, reflecting seasonally lower recruiting levels in the fourth quarter. We expect that the size of the life insurance sales force will continue to grow in the second quarter of 2016 following current recruiting and licensing trends.

Now let's review sales results in the first quarter. On page five you can see term life issued policies grew 19% in the first quarter and continue to significantly outperform the industry, which reported a 5% increase in life insurance applications year over year according to the MIB life index. Growth in our life insurance license sales force as well as productivity in the high end of our historical range drove the strong growth in issued policies in the first quarter. Productivity increased to 0.21 policies issued per life insurance license representative per month from 0.19 in the first quarter a year ago. On the sequential quarter basis, term life insurance policies issued were 5% lower than the fourth quarter, largely reflecting fewer new life insurance applications submitted during the typically slower holiday season, which leads to a lower level of issued policies in the months following.

Turning to investment and savings products, market volatility and the year over year decline in the Canadian exchange rate pressured ISP results. While net flows in the first quarter were positive $223 million, ISP sales declined 9% to $1.38 billion and average client asset values were down 4% to $46.6 billion from the prior year period. Our larger size sales, which are often in variable annuities and managed accounts, were more impacted than the smaller sales by the recent market volatility. Our redemption rate as a percentage of assets remained in line with historical trends.

Sequentially investments and savings product sales declined 2% from the fourth quarter of 2015. Growth in Canadian mutual funds and segregated fund sales reflected the typically higher retirement savings sales in the first quarter during the retirement plan season. Sales of US variable annuities continued to decline from the fourth quarter, consistent with industry trends. Total average client asset values were 2% lower than the fourth quarter, reflecting market volatility and the lower average value of the Canadian dollar relative to the US dollar.

We continuously analyze opportunities to expand the investment products we offer to our clients. We launched our advisory program in 2011 with a narrow range of managed account products and since then it has grown to $1.6 billion of client asset values as of the end of the first quarter. Late this year and into 2017 we plan to introduce a new advisory platform that will incorporate state of the art technology and significantly expanded product offerings from leading investment strategists. The platform will have both strategic and tactical portfolios constructed with ETFs, mutual funds and other investment products built by some of the leading money managers in the industry. Approximately 2,900 of our 18,000 US mutual fund license representatives are also investment advisor representatives as of year-end 2015. We're actively working on new licensing programs to increase the number of representatives licensed to access this expanded platform. We plan to invest around $2 million this year to launch the advisory program. It will take some time for these products, which generate asset based revenues, to positively impact financial results.

Let's move to the Department of Labor's Fiduciary Rule. In the final rule that was released on April 6, the DOL made changes to the Best Interest Contract Exemption that addressed several of the reasons we were reluctant to use the Exemption as originally proposed. The final version of the Best Interest Contract Exemption, or BICE as it is known, eliminated the more onerous point of sale and post-transaction disclosure obligations. In addition, the DOL removed the representative as a required signatory to the contract and is allowing firms to incorporate the agreement into the standard account opening documents. These changes reduced the administrative burden and associated expenses created by the original proposal. While we have been preparing to use a levelized fee platform in lieu of an exemption, we are now considering whether the use of BICE would provide us with more flexibility. We are currently evaluating what makes the most sense for our clients, the Company and our representatives on a long-term basis. We feel the changes made to the final Rule provide us more options to continue helping middle income families with their financial needs. Alison will provide more color on the financial impact of the Rule in a moment.

Throughout this rule-making process, we've kept our top ISP licensed representatives informed about the DOL developments. We've established working groups with our senior sales force leaders and have solicited their input on possible changes to our business and how to effectively message to our sales force at large. Our communications about the Rule, including the potential changes to our US retirement business, have been well received. Like every company in the industry, we intend to make thoughtful judgments and are using a host of resources available to help us make good decisions.

We're also looking for opportunities throughout this review process. One of those opportunities may be to build new, robust point of sale technology that helps us comply with the Rule while also streamlining the sales process across all investment products, which will be beneficial to the entire ISP business. The extra time afforded to comply with the final Rule allows us to consider all of our options and choose the right path. We remain committed to serving middle income families and we are confident that our simple business model will give us the flexibility necessary to adapt to the new Rule.

Now let me turn the call over to Alison to discuss financial results in more detail.

Thank you, Glenn, and good morning, everyone. My comments today will cover the earnings results for each of our segments in a Company-wide review of insurance and operating expenses. I will conclude by sharing some thoughts on the financial impact of the DOL Fiduciary Rule based on our assessments thus far.

Starting on slide six, our term life segment experienced strong growth compared with the first quarter a year ago. Operating revenues and adjusted direct premiums increased 13%, reflecting the inherent growth trajectory in this segment, as well as strong sales in recent periods. Operating income before income taxes grew 28% year over year and the term life operating margin increased to 17.2% from 15.2% as the segment's employee-related expenses were higher in the prior year period. I will discuss this along with other Company-wide expenses later in the call.

On a sequential quarter basis, the term life operating margin was down slightly, primarily due to seasonally higher employee-related expenses typically experienced in the first quarter for annual merit increases and employee equity award grants. On an annualized basis, we expect the term life operating margin to be in the 18% range and adjusted direct premiums are expected to show attractive growth rate in the low double digits this year. The benefits and claims ratio remain in the expected 59% range for the quarter reflecting incurred claims that were in line with historical levels.

Persistency was also in line with historical levels, but slightly lower than the prior-year period which caused a reduction in the benefits and claims ratio from the first quarter of 2015 due to lower reserve increases. The slightly lower persistency also contributed to the DAC amortization and insurance commission ratio increasing to 15.8%. The insurance expense ratio of 8.5% declined from 10.9% in the prior year period, reflecting higher employee-related expenses in the first quarter of 2015.

On a sequential quarter basis, the DAC amortization ratio declined while the benefits and claims ratio increased primarily due to seasonally lower persistency in the fourth quarter. Insurance expense ratio increased due to seasonally higher employee related expenses.

Moving now to our investment savings product segment on slide seven, you'll see our ISP operating revenues declined 3% while ISP operating income before income taxes was 10% lower than the first quarter a year ago. Market volatility drove lower product sales and average client asset values. The lower average Canadian dollar value also negatively impacted results, decreasing pre-tax operating income by about $1 million. Revenue generating product sales and sales based revenue declined 7% and 6%, respectively, from the first quarter a year ago. The sales based net revenue ratio of 1.28% was lower than the prior year period. The Canadian ratio remained consistent year over year while the US ratio declined to 1.31%, primarily due to the mix of product sales including a 16% decline in variable annuity sales.

Asset based revenues were down 3% year over year, in line with the 4% decline in average client asset value. The asset based net revenue ratio was 0.05%, down from 0.053% in the prior year period. The US ratio remained consistent year over year by the Canadian ratio declined to 0.124% reflecting higher segregated fund DAC amortization. DAC amortization was slightly favorable this quarter, but increased by about $700,000 year over year, given the very favorable segregated fund performance in the prior year period. It also increased by $1.4 million from the fourth quarter due to a downward revision made in that period to assumption for future redemption. Account- based revenues grew 8% year over year, largely reflecting the addition of a mutual fund provider to our record keeping platform in 2015 as well as growth in our managed and retail fund mutual accounts.

On slide 8, you can see the corporate and other distributed product segment operating revenues were $32.4 million and operating losses before income taxes were $6.8 million in the first quarter of 2016. Allocated net investment income remained relatively flat year over year as lower yield on the invested asset portfolio and continued share repurchases were offset by a positive mark to market on the deposit asset backing an IP over weighted reinsurance agreement. The mark to market was about $2 million this quarter, about half of which is portfolio yield and half is change in market value of the underlying assets. Decreasing interest rates and slightly tighter credit spreads during the quarter lead to improvements in fixed income prices and the net unrealized gains on our invested asset portfolio increased from $49.3 million at year end to $74.9 million at quarter end.

During the quarter Swiss Re replaced Prime Re at Primerica Life's reinsurer on the 80% coinsurance agreement that was entered into at the time of the IPO. This arrangement affords us substantially the same, and in some cases better, protections and collateralization as the prior coinsurance agreement. This transaction also allowed us to negotiate a reduction in the annual fee on a separate IPO related reinsurance agreement from 3% to 0.5% which lead to a decline in interest expense of $1.5 million year over year. On a go forward basis, we expect our total insurance interest expense to be relatively consistent with this quarter.

Now I'll move to a discussion of the Company's insurance and other operating expenses. On slide nine, you can see our first quarter expenses of $80.7 million were $1.7 million higher than the first quarter of last year. The year over year change reflects $1.5 million increase in premium and growth related expenses as well as $1.3 million higher spend on technology infrastructure and mobile initiatives.

Employee related expenses were $1 million lower year over year, due to changes in the management structure that occurred in April, 2015, which reduced the total Company employee related expenses. Also we allocated a portion of expenses from term life to the corporate and other distributed product segments. Compared to the fourth quarter of 2015, expenses increased by $8.4 million. About $5 million of the increase relates to the accelerated expense recognition from equity awards granted to retirement eligible employees during the quarter, with the remainder of the increase is primarily due to other employee related costs, including annual merit increases as well as payroll taxes and employee benefit costs that taper off later in the year.

Looking forward, we expect our second quarter insurance and other operating expenses to decrease by approximately $2 million from first quarter levels, reflecting the absence of the equity award expense that occurred at the time of grant in the first quarter, partially offset by the impact of the rising Canadian dollar value, increased technology infrastructure and mobile initiative related costs, as well as the costs associated with our continued evaluation of the DOL Fiduciary Rule. We continue to demonstrate a strong capital position with Primerica Life Insurance Company's statutory risk-based capital ratio, estimated to be around 440%, and holding company liquidity at $85.7 million at the end of the first quarter. We will continue to take out ordinary dividends to the extent available and we expect our RBC ratio to remain in excess of 400% in 2016.

Now turning to the DOL Fiduciary Rule on slide ten, while we continue to diligently work through the nuances of the Rule, our current view largely validates how we were interpreting the financial impact of the draft Rule. Specifically, we believe that the grandfathering provisions in the final Rule allow us to preserve asset based earnings on qualified accounts established prior to the Rule's effective date.

Our understanding is existing client assets are allowed to continue in their historical compensation structure, so long as no new advice is provided. Old recommendations and rebalancing between mutual funds within a complex or variable annuity subaccounts are also covered by the grandfathering provisions. While growth in our asset based earnings will be tied to our ability to generate new sales, as well as market conditions, we believe these earnings will remain largely intact.

With regard to sales-based earnings, the grandfathering provision has clarified that continued, systematic investing for existing accounts can remain under historical compensation structures as well. We estimate that about 15% of our US retirement sales are associated with existing systematic savings plans. The remainder of our US qualified account sales are associated with new investment advice and would fall under the fiduciary standards as set forth in the Rule. As Glenn discussed, we are in the process of determining the best option to allow us to continue to provide important investment education and advice to middle families and grow this component of our business. We will gain a better sense of what the one-time implementation costs will be related to developing any new point of sale technology, training materials and other Rule requirements as decisions are made. We plan to leverage our already robust compliance and administrative infrastructures and expect that on-going expenses may be in the range of $3 million to $5 million per year following implementation.

Now let's open it up for questions.

(Operator Instructions). Your first question comes from Ryan Krueger of KBW, please go ahead.

Hey, good morning. It's Blake Mock on for Ryan Krueger.

Hey, Blake.

Hey, good morning. Thanks for the color on the DOL. I'm just wondering on your discussions with product manufacturers, how is that progressing regarding the level comp structure in case you still are considering going that route?

Yeah, Blake. We appreciate that question. As you're aware, we opened up those lines of communication under the proposed Rule. In pursuit of the level comp structure, we had a welcome reception from our product providers. They certainly were interested in that conversation. I think the conversation is not unique to Primerica, I think the conversation is going on between all distributors and product manufacturers that work under the proposed Rule and that continues under the final Rule.

A lot of detailed work cannot be done until the Rule was made final, so it was kind of sizing the issue early on. We've continued those conversations in the almost a month since the Rule has been released. It's still early, but the lines of communications are open. Those communications are healthy and robust and we're working forward on a number of potential options, both levelized structure as well as some discussions about BICE since it's been modified as well.

Okay, thanks. One follow-up on that understanding that you're not sure at this time if it's best to operate under BICE or not. What would be the difference between sort of your level fiduciary exemption as a part of BICE versus level commission outside of BICE?

Well, again, as we were analyzing the proposed Rule and came up with the perfectly levelized concept-- under the proposed Rule prohibited transactions were created by conflict which is primarily driven by differentiating compensation. Our thought process and what we've been pursuing is that a perfectly levelized compensation would have no conflict, therefore not be a prohibited transaction and need no exemption. So we've been pursuing that and continue to look at that under the final Rule to see how that might have changed from proposed to final.

At the same time, because BICE was given some flexibility in the final Rule that was not in the proposed Rule, we're now reviewing that as well and determining which one might be the best to pursue. I think there are some similarities in the way it operates under both. There are going to be some point of sale similarities, some disclosure recording of your activities, to ensure that you can demonstrate that we were acting within the Rule and so forth. Then, of course, after that the two changes, I think there is less disruption I would say since BICE accommodates or contemplates, at least, differentiated commissions. You could have some differentiation of commission under BICE that couldn't exist under the levelized concept. So as you get down into the details, I think you find out there are some differences, but I think there are also some similarities on the front end. That's exactly what we're evaluating right now.

Okay, thanks very much for the color.

Sure.

The next question comes from Steven Schwartz of Raymond James. Please go ahead.

Good morning, Steven.

Hey, good morning, everybody. Hey. Just a quick follow up. Glenn, I take in context of your comments that you just made that you think at least there may be the technology or the way to limit your legal liability under the new BICE?

Yeah. As you know, Steven, the legal liability was kind of the leading concern under BICE and continues to be a concern that we're evaluating and looking at; although I do think the changes in the final Rule did have some limitations on some of the legal liability. Either way if you make the assumptions that you're operating under BICE, the way you do business will be critical in making sure that you limit that legal exposure.

I think it's both some changes in the final Rule that may have limited some of that legal liability, but it's also discerning how we'll do the business day-to-day to make sure we stay well within the Rule that also limits legal liability, obviously. So it's actually on two fronts, as the changes in the Rule and then it's how we're able to implement under the Rule that drives our evaluation of the amount of that legal liability.

Okay, and then just one more on BICE and then I'll ask another one. The $40 million, this has come up and I didn't know the answer, the $40 million of earnings that are kind of grandfathered in, and I'm thinking here particularly the earnings that come from automatic withdrawal plans, you know $50 a month or whatever it is, for people just staring out?

Right.

Does the BICE get triggered if one of your reps goes back to them to sell them something else?

My understanding is under all the grandfathering considerations is that new advice to an existing account would trigger the Rule.

Okay.

Therefore, whether it's an automatic investment, a systematic investment that Alison described or just an account that had a lump sum put in it and is just-- it's there and continuing to grow, any new advice to any type of existing account would bring it under the new Rule.

Okay.

I think that would be other than hold advice. There is some advice that won't do that, but advice to purchase more or an additional security would trigger that new Rule, but hold advice appears to be contemplated under the Rule as not taking away the grandfathering provisions.

Yes, rebalancing also.

And rebalancing as well. Good point.

Okay, and then one more, Glenn. How about just an update on the Canadian licensing situation?

Sure. The changes to the licensing process, as you know, became effective January 1. As we've looked at the results during the first quarter, you have to take into consideration that the pipeline was extremely full. We had robust licensing year, and licensing process in Canada last year, so the new licenses that came through and were issued to us in January and a lot of February were actually the tail of the old process. That means that the new process is actually only showing results maybe since the middle of February and beyond.

I would describe it this way -- we anticipated the level of disruption and the change of the process very well. A new process is always disruptive, there's always a learning curve and so we anticipated what that might be and we came pretty close to the bullseye on that. That was good news that it was not more disruptive than we expected. What happens in a change like this is its most disruptive at the moment it's introduced and then you start adapting immediately after that.

We'd begun the adaptation process and I'm very proud of our Canadian corporate leadership and our field leadership as they worked hard to adapt quickly and also minimize any disruption of that going beyond the licensing process and just being a distraction to the rest of the business. It's still very early in the process, we don't have a lot of actual exam results. The exam results were also held early for curving and evaluation, so they're coming out very slowly. We don't have enough results yet to give a lot of color around it, but the process was about what we expected. We're making our changes quickly and just feel good about our ability to adjust to that and continue to grow.

Okay. Thank you very much, guys.

Sure. Thanks, Steven.

The next question is from Mark Hughes of SunTrust. Please go ahead.

Good morning, Mark.

Thank you. Good morning.

Good morning.

Good morning. Alison, did I hear you correctly, your estimate was $3 million to $5 million per year following implementation, but then some transition expense kind of one time in nature prior to that? Is that correct?

That is correct. I'd also add to that, that obviously we have been in the process of dealing with this Rule for the last several years. We've probably spent about $2 million or so a year each of the last several years. Some of that will be diverted, if you will, and other components of that will stay because they're really more on-going in nature. Things like our relationships with Washington, but there are probably about $1 million or so, about half of that, that would go away. There are some things in our on-going expense base that we may not have to keep up with, but in general we think $3 million to $5 million is about the right number on an on-going basis. Largely that's because we have such a strong infrastructure already with regard to compliance and administration, that we feel like we can really piggy back on that considerably.

Right. One other thing about the investment and savings margin performance this quarter, you know last quarter revenue was down a little bit, but your margins were steady. This quarter your revenue was down slightly more, but your margins were under pressure. Can you characterize -- what was different this quarter? I know you had some personnel expenses that influenced profitability overall, but why did you see more operating [deleverage] this quarter in investment on savings?

It actually wasn't so much focused on operating expense, it was two things distinctly. If you're comparing it to the fourth quarter, it's even a larger piece of it would be from DAC amortization on the SEG funds. If you look at where we hit on DAC amortization, we were pretty much in line with what should be our normal run rate. We were about $2 million and, in fact, that was probably a few hundred thousand dollars favorable from what you'd call an otherwise normal run rate.

The difference is, in the fourth quarter, we were very positive because we made a change in long term redemption assumptions and in the prior year, we were positive as well because the market had performed and the fund portfolio had performed particularly well. About half, if you look at revenues, they shrunk, they went down by about 3% while earnings were down 9%. About half of that differential was because of segregated funds. The remainder of that differential really came from a mix shift.

As both Glenn and I mentioned, variable annuities were much lower this quarter than they have been in the prior year as a relative component of our overall sales mix. As we discussed in the past, variable annuities have the highest of all of our products sales-based compensation. That did have sort of an immediate hit on the margin. Again, when we look at our products, over time we feel like they're all fairly within the same range on profitability, but you would see an immediate hit with a shift away from variable annuities.

Thank you for that. Glenn, your recruiting strategies seem to have been very successful here lately. This run of very good quarters has gone on for quite some time. Can you say how you're doing it and then how long it'll last?

I'll try. I think we are enjoying a very healthy environment right now, everything from the external environment. We're seeing continued confidence on Main Street in spite of the craziness of the world politically and even sometimes economically. Main Street is pretty focused, feeling pretty good, feeling like things are getting better and that's important for us. That's continuing.

I think we also enjoy a very focused field force. Our field leadership has, over the last number of quarters, stayed very focused on growth. That, of course, is the tip of the spear on anything we do here is having our field force in the lead. We're also looking at our momentum. Managing that momentum well, I view momentum not as a finite resource, but as a muscle. The more you use it, the stronger it gets. So it's not a matter of using it up and having it disappear, you continue to build momentum on top of momentum. So we have deliberately tried to manage that momentum well and look for the types of things that would disrupt it and make sure we minimized those and look for the opportunities to increase it and maximize those.

Then I think at the base, the foundation, is over the last couple of years we've made fundamental improvements to our business, we tried to make our opportunity more attractive, our licensing process more effective and so it's a lot of those incremental changes that add up. I do believe that gives us some sustainability, that we can continue to run this play and see on-going growth.

Final quick question. You had mentioned the percentage of your sales based revenue that comes off of systematic withdrawals. What was that?

About 15%. It was really focused on 15% of the sales.

15% of the sales are more systematic? Okay.

Right.

Thank you very much.

Sure thing.

The next question comes from Dan Bergman of UBS. Please go ahead.

Hi, good morning.

Good morning, Dan.

You had mentioned-- good morning -- a plan to launch a new advisory platform ahead. My understanding, based on some past commentary, was that this type of structure could be hard to make it work economically for some of the smaller AUM accounts. I was just hoping you could comment on that. Any thoughts on what portion of your business you'd expect could potentially be shifted to this type of platform? Any thoughts on fee rates or margins, given that I think you mentioned there might be some ATFs in there relative to your current model? That would be helpful.

Okay. Again, as we covered briefly in the script, we've been in the managed accounts business since 2011, but really it was with a single partner with a strategic product, so a fairly narrow range of products. We've continued to see that part of our industry grow very rapidly and, as our business continues to grow and evolve, we continue to work more and more often in the upper end of the middle market, where there are larger ticket sizes and larger assets available.

We've been watching this opportunity and actually working on this opportunity well in advance of any discussion around it created by the DOL Rule, although there is some overlap between the two. We've found the opportunity and felt like the timing was right to expand that single product to a platform of managed accounts. As you described, not only do they have a strategic approach, but also a tactical approach. They have more strategists involved, more money managers involved, more product types instead of currently we're mutual funds only, add ETFs and also some potential other products.

So it really puts us, I believe, more into the main stream of the way the industry does this business. It is designed and focused really for the upper end of the middle market. Our plan is not to take this out to a $25 a month account that we were just talking about with Mark. It's kind of the upper end of our market at least, but we do believe there's an opportunity there and we also believe that the technology that's evolving is making it more efficient. There are a number of companies that we're discussing what technology to use and how to use it. Right now we're having the discussions with the strategists themselves. A lot of work going on behind the scenes before we can give you a lot of final detail in this. But it certainly looks like there's an opportunity, so it's on offensive strategy to grow our business. It does have a defensive element, in that it is the fiduciary world, which is more similar to the final DOL rule world, so it has a little bit of a defensive play in it as well. But, primarily, it's an offensive play.

At this point, we're not prepared to say that we believe in a certain time it will reflect a certain amount of our business, we've got some more work to do before we're ready to get to that kind of detail. But we did want to make you aware of it, because we see that it as an interesting opportunity.

Gotcha. That's very helpful color, , thanks. Maybe shifting gears a little bit, just curious about the big picture now that the final rules are out. Are there any changes, post-DOL, that you anticipate in terms of how you incentivize or motivate your sales force? For example, do you expect any impact on your ability to continue incentive trips for top producers, that kind of thing. Just curious as you think kind of big picture in terms of kind of growing to motivating the sales force and whether you foresee any impact there.

Right. Incentive trips, as you know, are something we use effectively here. We have a disciplined process for incentives. Our incentives have always been product agnostic, so we've never had incentives that have a bias built into them that push our sales towards one product or another, so that's good. Incentives are contemplated under the final rule and fall under the same discussion of reasonable comp and so forth that cash compensation does. So, we're anticipating that we will continue to be able to use incentives. We'll obviously take a look and make sure our incentives fit under the final rule, but we do anticipate that we will be able to continue to use the effective incentives we've used in the past.

Gotcha. Thank you. Maybe if I could slip in one quick last one. In terms of your communication to date with, your sales forces that's focused on the ISP market, I was hoping you could provide any commentary in terms of those discussions. How your agents are thinking about DOL rules, any reactions, concerns, etc.

Sure. One of the things I think we do best at Primerica is we have a huge audience and we communicate with them well and have a number of communication channels. A lot of our cutting edge technology is decked against that. We've certainly used it to regularly communicate with our sales force overall, but also specifically with senior leadership and groups of top producers. So, we've got a very robust communication plan that's ongoing, both at the broadcast level, as well as a more targeted level. We've not only communicated to our representatives, we've asked them for their feedback, their reaction to certain ideas and certain directions, so it's been a very interactive process, which I think has been very effective in making sure that we don't create a distraction.

There is a potential for any change not only to disrupt as you adapt to it, but cause a distraction that bleeds over into other areas of our business.

I think, as you can tell from our production and our results we just talked about, we limited distractions significantly, and we're very focused on growing our business. Even the headwinds that we see in our ISP business, I believe as we stated, our market viability in Canadian exchange rate and limited effect of the DOL rule at this point. I think that's because of our exceptional efforts to community clearly and regularly and we have had good response from our sales force in both the communications itself, as well as involving them in the process and in talking to them about the potential changes that could be out on the horizon. So, I feel that if we're going to do something that's not perfect, we're going to over-communicate rather than under-communicate, and that's the approach that we've taken and it's been well received.

Thanks, that's very helpful caller, thank you.

Very good.

Next, we have a follow-up question from Steven Schwartz of Raymond James. Please go ahead.

Hey, again. Just a quick one. Alison, you talked about 18% operating margin in term life, I just want to make sure that's annual, it's not just for the next nine months.

That's an annualized rate, correct.

I haven't checked my notes, but somewhere in my head I'm thinking 17% was prior guidance, is that correct?

We said 17% to 18%, yeah.

17 -- so now you're saying 18%. Is the difference, going to 18% from that range, is that the interest expense on the reinsurance?

No, because that's actually incorporate in other.

Oh, that's right, okay.

It really is just a function of just the profitability that's emerging on this business. The level of production, obviously we do have fixed costs, so the more we can produce with our same fixed costs, the better margin and overall performance of the book of business.

Okay. All right, thanks.

Mm-hmm.

Next we have another follow-up from Mark Hughes of SunTrust. Please go ahead.

Thank you. Glenn, I was interested in your comment that you thought some of the changes in the final rule helped to limit the legal liability. Can you expand on that a little bit?

Yeah. Obviously, the whole liability issue under BICE was and continues to be one of the majors concerns. So, as the rule became final, one of the things we were looking for was to see how that might have changed. In the final rule you do see things that impact legal liability both directly and indirectly. I mentioned some, like lessening the disclosure requirements makes it easier to meet the disclosure requirements, therefore lowers the liability. Some of the warranties were caveated regarding materiality in the final rule. The final rule allows firms to disclaim punitive damages. It removed the representative from being a signatory, which is very practical in that representatives change on accounts over the life of accounts, so it's hard to sign a new contract as the reps change, but also that, as a process, I think is moving rep to rep could also increase liability. So, there are a number of specifics in the rule that we are currently evaluating to try to determine how much change was created in that legal liability. But, we do believe, overall, it moved in a positive direction.

Thank you.

There are no additional questions that this time. This concludes our question and answer session. The conference is now concluded. Thank you for attending today's presentation, you may now disconnect.