Primerica 's (PRI) CEO Rick Williams on Q1 2014 Results - Earnings Call Transcript

| About: Primerica, Inc. (PRI)

Primerica, Inc. (NYSE:PRI)

Q1 2014 Earnings Conference Call

May 06, 2014 10:00 AM ET


Kathryn Kieser – Senior Vice President-Investor Relations

D. Richard Williams – Chairman and Co-Chief Executive Officer

John A. Addison – Chairman-Primerica Distribution and Co-Chief Executive Officer

Alison S. Rand – Executive Vice President and Chief Financial Office


Sean Dargan – Macquarie Capital, Inc.

Daniel B. Bergman – UBS Securities LLC

Steven D. Schwartz – Raymond James & Associates, Inc

Mark Finkelstein – Evercore Partners

Mark Hughes – SunTrust Robinson Humphrey


Good morning, and welcome to the Primerica First Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (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.

Kathryn Kieser

Thank you, Laura. Good morning, everyone. Thank you for joining us today as we discuss Primerica’s results for the first quarter of 2014. Yesterday afternoon, we issued our press release reporting financial results for the quarter ended March 31, 2013. A copy of the press release is available on the Investor Relations section of our website at

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 referenced 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 provision of the Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may project, indicate or imply future results, events, performance or achievements, and may contain words such as expect, intend, plan, anticipate, estimate, and believe or similar words derived from those words. They are not guarantees and as such statements involve risks and uncertainties that could cause actual results to differ materially from these statements. For a discussion of these risks, please see the risk factors contained in our Form 10-K for the year ended December 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.

D. Richard Williams

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 our operating income increase of 12% to $43.3 million year-over-year coupled with share repurchases in prior periods drove a 20% 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 Florida Retirement System 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 plan to deploy $150 million of capital in 2014 by repurchasing $13 million of Primerica’s common stock. We anticipate the majority of 2014 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 issue premium per policy increased 2% in the first quarter of 2014 while term life insurance policies issued declined 2% in 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 first quarter productivity has ranged from 0.175 to 0.184 policies issued per life licensed representative per month.

In the first quarter of 2014, productivity of 0.173 policies per life license represented per month is 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 investments in savings product sales increased 3% compared with the first quarter of 2013. Year-over-year retail mutual funds sales grew 15% partially reflect in a product retention from heavily-weighted, fixed income Canadian seg funds which declined 34% to primarily equity based mutual funds.

Managed account sales increased to 11% and managed count asset values grew to $1.1 billion at the end of the first quarter of 2014. During the quarter, variable annuity and other sales declined 6% in the prior year period. Client asset values at the end of the first quarter reached an all-time high of $35.8 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 in Canadian segregated fund sales reflect typically higher retirement saving sales in the first quarter during the retirement plan season.

Sales of new fixed-indexed annuity products declined from the fourth quarter as clients appear more comfortable in accepting investment risk in the current market environment. Going forward, we expect quarterly fixed-indexed 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.

John A. Addison

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 grow, highlighted improvements made 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 dialog helped us identify opportunities in potential enhancements including the new-term life training, we launched early this year. The incentive in messaging adjustments, we’ve 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 compare 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 almost grew 5% to 95,382 compared with the first quarter of last year.

On a sequential basis and inline with the seasonality of our business, recruiting of new representatives increased and the number of new representatives obtaining training the 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 remain relatively flat with the fourth quarter is 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 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 continued 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 U.S. 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.

Alison S. Rand

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 life insurance and operating expense and invested assets. Starting with Term Life, on Slide 6, year-over-year operating revenues grew 9% driven by 11% increase in net premium. Of 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 our lower, effective portfolio yields.

These revenue trend when combined with increases in both insurance expenses and the weight of DAC amortization resulted in Term Life operating income before income taxes increasing 5% over the prior year period.

At a segment as a whole policy persistency was stable and consistent with the prior year period and incurred claims were inline 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 year 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 we 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 competition of our ongoing sales force bonus incentive plans towards more deferrable programs, thereby changing expense recognition from immediate insurance commission to ongoing back 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 overtime. The increased DAC amortization associated with the shift was largely offset in 2013 as the general improvement 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 improvement, 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 borrowing shift and persistency, we expect DAC amortization growth to exceed the growth rate in net premium 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 $1 million reversal of previously amortized commission that lower 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 Rollforward 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 $0.5 million in commission on one of our policy writers 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 programs were roughly the same amount. We do not believe that any of these three items have an ongoing economic impact of this segment results.

Now, let’s look at the Term Life sub segment. 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 have generally increased year-over-year as the in-force block has grown and effectively leverage the fixed cost within our expense base.

Legacy profit margins have generally decreased due to the lower margins on both end of term conversions and renewals. Margins for both sale segments also experienced quarterly fluctuations from mortality, persistency and expenses. In the quarter, new term profit margins were consistent with the prior year period as a continued leveraging of fixed cost was offset by higher DAC amortization as a percentage of premiums adjust with cash.

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 sub segments 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% that were modestly assisted by favorable incurred claims in the quarter in contrast to negative claims experienced 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 and Savings Products 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 value. 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 value 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 funds DAC amortization was favorable in the fourth quarter and return to a more normalized level in the first quarter.

During the quarter there was a disconnect between the rate at which sale days and to a far lesser extend asset-based revenues grew and the rate at which products sales and average client assets grew respectively. While the long-term economic are generally similar across our ISP products each has a different level of sales and asset-based earnings in changes in mix can drive period to period fluctuations in revenue and earnings patterns.

To better understand the ISP income dynamics on Slide 8, you can see ISP products categorized 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 account.

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 base and relatively lower asset base revenue 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 product 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 profits stream at amortization of debt or to a lesser extend at insurance commission for level asset-based trails and 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 funds sales which generate no sales-based revenue were down 34%, while retail mutual funds were up 15% and generate mid range sales-based revenues.

Also virtually all of this quarter’s variable annuity sales was fully commissionable whereas about $15 million of variable annuity sales in the prior year period where 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 Distributed Products segment on Slide 9, you can see that operating revenues declined $1.8 million from the prior year period due to $1.7 million decline in allocated net investment income from higher Term Life allocations with growth in its acquired assets, prior year capital deployment and a lower portfolio yield.

This decline combined with a $1.2 million increase in insurance and operating expense that I’ll discuss momentarily resulted in $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 non-core distribution channels managed by our New York insurance subsidiary. Prior year period results have been reclassified from Corporate & 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 2014. Given that we do 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 and our New Term business as well as growth in our managed account and other ISP product. 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 related 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 should be anywhere up $2 million higher than first quarter levels driven mainly by business volumes as well as other initiatives.

Turning to Slide 11, our investments and cash flow of $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 that portfolio was weighted 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 life insurances companies, which typically invest in longer-duration assets.

We continue to expect downward pressure on investment income going forward giving the low interest rate environment and our plan to continue to return capital per 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 accessing 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 will turn it back over to Rick.

D. Richard Williams

Thanks Alison, the first quarter was marked by solid performance across business segments. A recurring channel wise income base and positive investment savings products requirements 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.

Question-and-Answer Session


Thank you. At this time we will begin the question-and-answer session. (Operator Instructions) At this time we will pause momentarily to assemble our roster. And our first question today comes from Sean Dargan of Macquarie.

Sean Dargan – Macquarie Capital, Inc.

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?

Alison S. Rand

Actually it’s interesting when we do all these comparisons to have to look at where it was really this period and then you have to also consider what it was in the period we are 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 is 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 sub-segment. And specifically new term left a little bit negative.

But again that is 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 have 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 a 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.

Sean Dargan – Macquarie Capital, Inc.

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?

D. Richard Williams

No we haven’t gone that far. What we do know is that January and February started out slow coinciding with the bad weather and then towards the end of February and March they 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.

Sean Dargan – Macquarie Capital, Inc.

All right, and just as we think about that metric, 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?

D. Richard Williams

We still believe that productivity will be within sort of the ranges that we had described at the IPO and we 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 result is always a low quarter anyway, so we see no reason to change what we said at the time of the IPO today.

Sean Dargan – Macquarie Capital, Inc.

Okay, great thank you.


And our next question comes from Dan Bergman of UBS.

Daniel B. Bergman – UBS Securities LLC

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 about 8% to 9% as a good range to expect or would you think that could trend lower?

D. Richard Williams

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.

Daniel B. Bergman – UBS Securities LLC

Okay great, and then just switching gears, I believe you'd mentioned some new product offerings in 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.

John A. Addison

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 meaning.

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 or office shut down for a number of days in Atlanta with people can’t get in cars to drive, that’s a bad thing for Primerica.

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

D. Richard Williams

The AXA product, cornerstone product, it became available on May 1st from a role out perspective. It does have it’s 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 a 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.

Daniel B. Bergman – UBS Securities LLC

Great, that’s very helpful. Thank you.

D. Richard Williams

Thank you.


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

Steven D. Schwartz – Raymond James & Associates, Inc

Hey, good morning everybody.

D. Richard Williams

Good morning, Steven.

Steven D. Schwartz – Raymond James & Associates, Inc

How are you doing?

D. Richard Williams

I’m doing awesome. How about you buddy?

Steven Schwartz – Raymond James.

Spring is coming.

D. Richard Williams

Good. Yes you were a part of that weather.

Steven D. Schwartz – Raymond James & Associates, Inc

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?

Alison S. Rand

So, what I specifically was speaking to is about new term. The million dollar is in the aggregate, but realistically given that the legacy block is closed and the fact that we seated 80% of it to Citi. You don’t see quite as much variability there. That 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 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 dollars 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 near-term.

Steven D. Schwartz – Raymond James & Associates, Inc

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

Alison S. Rand

On the new-term, yes. I mean, overtime 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 Citi.

Steven D. Schwartz – Raymond James & Associates, Inc

Okay, got you. Okay, good. And then, 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?

Alison S. Rand

That’s exactly what it is, when were originally creating our segmentation that was obviously something we looked at with these ISP products to say ultimately, doesn’t make sense to put them all in one segment. And we concluded yes because ultimately we are fairly in different whether rather we sell one product versus the other on a long-term basis, but we saw pretty dramatic shift 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 is 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 these are all very good profitable products in the same relative range, and what you should see is some of this emerging over time.

Steven D. Schwartz – Raymond James & Associates, Inc

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

D. Richard Williams

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 you’re talking about.

Steven D. Schwartz – Raymond James & Associates, Inc

Okay, all right. Thank you, everybody.

D. Richard Williams

Good talking to you Steven.

Steven D. Schwartz – Raymond James & Associates, Inc

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


And next we have a question from Mark Finkelstein of Evercore.

Mark Finkelstein – Evercore Partners

Hi, good morning.

D. Richard Williams

Hey, Mark.

Mark Finkelstein – Evercore Partners

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 you had modeled.

Alison S. Rand

Yes, and I’m looking, I’m trying to think through. I don’t think there’s anything other than the fact that new term would have gotten – I’ve 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 and 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.

Mark Finkelstein – Evercore Partners

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 the investment licenses as an example?

John A. Addison

Okay, great question. I’m one of these people that’s never satisfied. Okay 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 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. And 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 in to it.

Mark Finkelstein – Evercore Partners

Okay. That’s very complete. Thank you.


And our next question comes from Mark Hughes of SunTrust.

Mark Hughes – SunTrust Robinson Humphrey

Thank you. Good morning.

D. Richard Williams

Hey, Mark.

Mark Hughes – SunTrust Robinson Humphrey

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-6s? Is there any difference there or is that something that we would expect to trend down over time?

Alison S. Rand

Well, I want to give you kudos because you clearly listen to what I say, so kudos to you. We have historically said mid and 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 asset backing, our term life business, most of them are in legacy right now. And, 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 growing net liability, so your investment income can have a greater – the credited rate, if you will, can have a greater impact on your result.

Mark Hughes – SunTrust Robinson Humphrey

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 – we think it will reach 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?

Alison S. Rand

Sure. And if you look in the financial supplement and unfortunately we don’t keep a whole lot of history here, but hopefully you have it from the past documents we have given you.

You can see that how that the pace is slowing down quite a bit, but it is still fairly strong in what our growth rate has been, and so right now we are at – and where I’m really looking at is the that right now we are right around 15%, it will fluctuate like you will see mostly likely next quarter when persistency with the second quarter is generally better. You will see it top-up, so it’s hard to look at on a quarterly basis, if you look at 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 close to the 20-ish some odd percentage.

But I think that will still take a considerable amount of time to get to, and I think 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 of an annual basis. And then 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 – if the benefit and expense ratio should be fairly stable and it’s really should mostly come from the leveraging of fixed cost as the block continue to grow.

We didn’t see a whole lot of growth in the block this quarter from new business per say and so to the extend we can get new sales growing as well that will help grow that number. It’s really a fixed expense play.

Mark Hughes – SunTrust Robinson Humphrey

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

Alison S. Rand

Thank you, thank you.


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

Steven D. Schwartz – Raymond James & Associates, Inc.

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

D. Richard Williams

Sale of the disability business.

Alison S. Rand

Sure, I’m sorry I didn’t hear the full question. And I think, it disclose we have some more details in the financial supplement. We did sell that block with a gain of just under $3 million, $2.5 plus million net of some one-time expenses. Really that business and we did go head and show you the historical in the financial supplement.

Last year it had a good year because we did – we had an usual item of almost $3 million that realistically, if you look back in previous years. This block has made on any reference zero to $1 million – a year. So we felt like getting out of that with the multiple of a couple times earnings was reasonable.

Steven D. Schwartz – Raymond James & Associates, Inc.

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

Alison S. Rand

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

But it is just I mean really what it boils down to, this was much less of an economic decision, it was much more about, this is a business that is not core to us. 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 I guess it just really didn’t fit our business model.

So if anything I would say it was more about management attention than economic so when we found a buyer that was willing to buy 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.

Steven D. Schwartz – Raymond James & Associates, Inc.

Okay, all right, thanks.

D. Richard Williams

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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