Primerica's (PRI) CEO Rick Williams on Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: Primerica, Inc. (PRI)

Primerica, Inc. (NYSE:PRI)

Q2 2014 Earnings Conference Call

August 7, 2014 10:00 ET

Executives

Kathryn Kieser - Executive Vice President, Investor Relations

Rick Williams - Chairman and Co-Chief Executive Officer

John Addison - Chairman, Primerica Distribution and Co-Chief Executive Officer

Alison Rand - Chief Financial Officer

Analysts

Steven Schwartz - Raymond James

Mark Hughes - SunTrust

Dan Bergman - UBS

Operator

Good morning, and welcome to the Primerica Second Quarter 2014 Financial Results Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Ms. Kathryn Kieser, Executive Vice President, Investor Relations. Please go ahead.

Kathryn Kieser - Executive Vice President, Investor Relations

Thank you, Gary. Good morning, everyone. Thank you for joining us today as we discuss Primerica’s results for the second quarter of 2014. Yesterday afternoon, we issued our press release reporting financial results for the quarter ended June 30, 2013. A copy of the press release is available on the Investor Relations section of our website at investors.primerica.com.

With us on the call this morning are Rick Williams, our Chairman and Co-CEO; John Addison, Chairman of Primerica Distribution and Co-CEO; and Alison Rand, our CFO.

We 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. 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 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 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 our 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 will turn the call over to Rick.

Rick Williams - Chairman and Co-Chief Executive Officer

Thank you, Kathryn and good morning everyone. As you can see on Page 4 during the second quarter of 2014, our operating revenues grew 10%, net operating income increased 18% and net operating income per diluted share was up 25% to $0.88 compared with the prior year period. These results were driven by strong investment and savings products performance and higher term life net premiums in the quarter.

Net investment income continues to experience downward pressure from lower yield on invested assets in the low interest rate environment, although the second quarter was enhanced by favorable market value changes on our deposit asset in the Corporate and Other Distributed Products segment. Year-over-year, expenses declined largely reflecting our settlement of the Florida Retirement System matter earlier this year. Solid earnings in the second quarter drove net operating income return on adjusted stockholders’ equity to increase to 16.3% in the second quarter. Over the course of the next 12 to 18 months, ROE should remain in the 15% to 16% range as the recurring income accumulates and stockholder equity builds until capital is employed.

During the quarter, we retired $22 million of Primerica’s common stock for a total of $35 million of stock repurchased year-to-date. In July, we completed a redundant reserve financing transaction with Hannover Re, which should enable the execution of our multi-year capital strategy. Alison will walk you through more details in a minute, but near term, we anticipate returning approximately $150 million of capital to shareholders annually through 2016.

Now, turning to production results, in the second quarter term life insurance policies issued increased 3% from the year ago period and grew 21% from the seasonally lower first quarter. Average annualized issued premium per policy remains fairly constant with both the second quarter of last year and the first quarter of 2014. Productivity in the second quarter of 0.21 policies issued per life licensed representative per month returned to the historical range of productivity that was consistent with the prior year period. On a sequential quarter basis, productivity increased from the seasonally lower first quarter.

Year-over-year, our investment in savings products sales increased 9%, retail mutual funds grew 14% driven by market performance and the rotation from fixed income to equity based investments. Variable annuity sales benefited from recent product additions increasing 16% from the second quarter of last year and managed accounts sales increased 14%, while managed account client assets grew 52% in second quarter 2013. Total client asset values at the end of the second quarter reached another all-time high of $48.01 billion, up 20% from June 30, 2013. Sequentially investment savings product sales increased 2% from the strong sales in the first quarter during IRA and Canadian RRSP season. Total client asset values were up 5% from the end of the first quarter.

During the second quarter we were please to elect Beatriz Perez to the company’s Board of Directors. As the Chief Sustainability Officer of Coca-Cola Company and former Chief Marketing Officer for the North American division of the Coca-Cola Company Beatriz brings extensive marketing experience and a clear understanding of consumer behavior that will be valuable to our Board and management team.

Now, John will discuss distribution results.

John Addison - Chairman, Primerica Distribution and Co-Chief Executive Officer

Thanks Rick. Good morning everybody. We feel good about the positive distribution results in the quarter. As you can see on Slide 5, the size of life license insurance – life insurance license sales force grew 5% to 96,596 in the second quarter compared with the year ago period and was up 1% from the first quarter of 2014. Sales force growth partially reflected growth of new license representatives which increased 2% from the second quarter a year ago and grew 22% compared with the seasonally lower licensing in the first quarter. Recruiting in the second quarter remained consistent with the second quarter of a year ago and increased 4% from the first quarter of 2014. The ratio of new representatives obtaining a life insurance license remains consistent on a year-over-year basis, and increased sequentially from the first quarter with seasonally typical – with seasonality typical for the second quarter. The ratio of representatives not renewing their life insurance license was consistent with both the prior period – with the prior year and the prior quarter period.

As we move into the third quarter last year’s post convention recruiting levels and associated new licenses generated by convention incentives will create challenging year-over-year comparisons. On a sequential quarter basis we anticipate the size of the life license sales force to increase slightly from the end of the second quarter 2014. I have mentioned before that we are continuously evaluating and adjusting messaging and incentive programs to produce positive results. At our contest trip to the La Costa Resort in California this month, our focus will be building on recent sales force momentum by creating a sense of urgency to help more families in the vastly underserved middle income market to become properly protected with term life insurance. We will also be launching technology initiatives at this meeting including new point of sale presentations. And we will be promoting our current incentive trip competition to take 1400 qualifying representatives to Puerto Rico in February.

Now I will turn it over to Alison to walk through our financial results.

Alison Rand - Chief Financial Officer

Thank you, John. Good morning everyone. My remarks today will begin with a discussion of segment operating results highlighting changes that we have made in our presentation of the term life segment followed by a review of company wide operating expenses and invested assets. I will conclude with a discussion of distributable capital from the recently approved redundant reserve financing transaction.

Starting with term life on Slide 6, year-over-year operating revenues increased by 9% driven by 11% increase in net premiums compared with the second quarter a year ago. Allocated net investment income remained consistent with the prior year period as lower portfolio yield was offset by growth in the assets required to support this segment. These revenue trends combined with higher DAC amortization year-over-year from the shifts in our incentives towards more deferrable programs in recent years resulted in a 6% growth in term life operating income versus the year ago period. During the quarter benefits and claims grew in line with net premium. On a sequential quarter basis operating income before income taxes increased 17% primarily reflecting seasonally favorable persistency which reduced DAC amortization from levels experienced in the first quarter. The seasonally favorable second quarter persistency also enhanced the sequential quarter direct premium growth.

Looking at the term life sub-segment, new term pretax operating income as a percentage of direct premiums improved versus the prior year period due to the continued leveraging of fixed cost partially offset by higher DAC amortization in the second quarter of 2014 from increased commission deferrals. In legacy, pre-tax operating income as a percentage of direct premiums declined to 6.1% reflecting downward pressure on allocated net investment income due to the low rate environment as well as higher benefits and claims than in the prior year period.

Providing financial results for term life on a new term and legacy basis was valuable at the time of our IPO, given the relative size of the legacy block in relation to new term. Today, new term direct premiums are about 25% of total direct premiums and are growing each quarter. We believe this is an appropriate time to collapse the new term and legacy sub-segment. Given the development of the business, we do not believe that splitting these key drivers by sub-segment provides greater transparency or better insight into the performance of the business. For ease of transition, we will continue to show net new term and legacy sub-segment results in our financial supplement through year end.

On Slide 7, you can see term life results presented in the format we plan to use going forward. Results in this format have been added to our financial supplement on a quarterly basis back to 2011 to assist you in understanding the development of the numbers over the last few years. For purposes of our new presentation, we have divided net premiums into non-GAAP measures that we believe are more descriptive drivers of the business. A new non-GAAP measure called adjusted direct premium has been added, which is equal to total direct premiums less the premiums needed to Citi, which as the name implies are premiums needed to Citi under the 2010 reinsurance transaction. We believe adjusted direct premiums is a useful measure for analyzing business trends at several critical components of the income statement, including benefits and claims and amortization of DAC, are already shown net of Citi reinsurance on a GAAP presentation basis.

The new format also shows a non-GAAP measure called other ceded premiums, which primarily consist of YRT ceded premiums that we pay to third-party re-insurers to reduce our claims volatility. Other ceded premiums are net of applicable reimbursements we have received from Citi on reinsurance contracts already in existence at the time of the Citi reinsurance transaction. On a year-over-year basis, other ceded premiums should increase slightly more than adjusted direct premiums, because unlike direct premiums which are mostly leveled, YRT premiums increased each year as the policyholders’ age. There is also sequential quarter seasonality in this item as YRT ceded premiums are paid annually on a policy’s anniversary. So, high product quarters will likewise have higher annual YRT premium payments. For analytical purposes, we continue to treat other ceded premiums as a component of benefits and claims rather than a contrast revenue item.

So, now let’s look at term life results using the financial ratios and metrics we have added to our financial supplement. Similar to information provided in the past, we have total direct premiums between legacy direct premiums, which are those that are subject to the Citi reinsurance transaction and the newly named primary direct premiums, which are those that are not. Total direct premiums grew 1.6% year-over-year with a 22% increase in primary direct premiums and a 4% decline in legacy direct premiums. For the second quarter, adjusted direct premiums increased by 11% versus the prior year period. Primary direct premiums will continue to grow as we layer on new business albeit at a somewhat decreasing rate as the block matures.

Legacy direct premiums as well as premiums ceded to Citi should continue to decline approximately 4% on a year-over-year basis. Persistency and to a lesser extent production volumes in the case of primary direct premiums will create fluctuations on a sequential quarter basis. We expect total benefits and claims net of other ceded premiums to remain a stable percentage of adjusted direct premiums generally ranging from 58% to 59% with quarterly fluctuations due to claims and persistency. We expect DAC amortization and insurance commissions to be at a range between 15% and 16% of adjusted direct premiums on an annualized year-over-year basis with sequential quarter fluctuations due to persistency. The higher commission deferrals in recent years will continue to put pressure on this ratio. For the second quarter, seasonally favorable persistency – second quarter persistency reduced DAC amortization resulting in a low ratio of 13.7% for the quarter.

Now, let’s move to Investment and Savings Products segment on Slide 8. Operating revenues increased 13% in the second quarter driven by a 16% growth in sales based revenue and a 13% growth in asset-based revenue compared with the prior year period. Strong mutual fund and variable annuity sales drove an 11% increase in revenue generating product sales. Variable annuities, which provide higher point-of-sales based revenue relative to other products grew 15% and resulted in revenue growth outpacing the growth in product sales year-over-year. The increase in asset-based revenue primarily reflects Canadian and U.S. market conditions and is consistent with the growth in average client asset value.

Year-over-year, DAC amortization declined as market returns on the invested assets underlying our Canadian segregated funds showed improvement from the market loss it experienced in the prior year. These results combined with significantly lower FRS related expenses of $0.3 million versus $3.1 million in the prior year period drove the 30% increase in operating income before income taxes. In comparison to the first quarter, ISP revenues increased 4% and operating income before income taxes grew 6% reflecting sequential quarter growth in revenue generating product sales and average client asset values as well as slightly lower Canadian segregated funds DAC amortization in the second quarter.

On Slide 9, you can see that Corporate and Other Distributed Products operating revenues and the operating loss before income taxes were relatively flat year-over-year. Results reflect higher claims in the non-term insurance products underwritten by our New York subsidiary partially offset by higher net investment income. Allocated net investment income in this segment increased due to mark-to-market adjustments on the deposit asset backing a reinsurance agreement which were positive this year and negative in the prior year. Otherwise, allocated net investment income continues to decline with a higher allocation of assets to the term life segment and a runoff of assets with book yields higher than those currently available in the market. As we continue to optimize our balance sheet, invested assets allocated to the corporate and other segment should decline along with the corresponding net investment income.

Now, turning to insurance and operating expenses on Slide 10. Insurance and operating expenses were $70.5 million for the quarter, down slightly from the prior year period. The year-over-year decline primarily reflects higher prior period FRS-related legal fees and expenses as well as one-time cost associated with the move to our new corporate offices last year. Offsetting the decline are expenses related to growth in our term life and ISP businesses, the runoff of Citi reinsurance expense allowances, and other general operating expense growth. On a sequential quarter basis, insurance and operating expenses were up a modest $1.2 million due to business volumes and other initiatives. We expect our third quarter insurance and other operating expenses to be roughly consistent with second quarter levels.

On Slide 11, you can see that investments and cash totaled $2.04 billion as of June 30, 2014 up from $2.01 billion at March 31. The average book yield of investments excluding cash at quarter end was 4.76%, down slightly from 4.87% at March 31 as the yields on new purchases were lower than the assets that matured. During the quarter, the new money rate on purchases was 2.55%, down from 3.61% in the first quarter. This rate was negatively impacted by the purchase of some short duration, high-quality asset-backed securities in Primerica Life, in anticipation of ordinary dividend payments to the holding company from Primerica Life upon the successful completion of the reserve financing transaction. Excluding the purchases of these asset-backed securities, the average yield on purchases for the quarter was 3.54%, which is more in line with recent periods.

The liquidity profile of our holding company continues to be very good. As of June 30, the holding company had invested assets in cash of $49 million more than ample to cover its modest cash needs. As Rick mentioned earlier, the completion of the reserve financing transaction on July 31 puts us in a strong position to execute our stated capital deployment plans of returning approximately $150 million of capital to stockholders annually through 2016. We believe the transaction has attractive economics with related cost expected to be in the $0.3 million to $0.5 million range per quarter in the near term. The periodic costs will change over time on the amount of reserves – based on the amount of reserves financed and will be reflected in interest expense beginning in the third quarter.

In simple terms, the reserve financing transaction allows us to accelerate the distribution of statutory profits from Primerica Life to the holding company that would have otherwise been distributable over the life of the policy subject to the reserve financing. About $110 million of the $150 million annual return of capital to stockholders through 2016 will be funded by our U.S. Life business, but the pace at which we will move capital from Primerica Life to the holding company will be governed by our ordinary dividend capacity pursuant to Massachusetts statutes.

While our general expectation is to return capital to stockholders ratably throughout the year, we anticipate moving about $68 million of capital from Primerica Life to the holding company in the third quarter and about $140 million in the fourth quarter. As a result, there will be some buildup of capital at the holding company by year end, which will support capital deployment in 2015. Based on the nuances of statutory accounting, the amount of ordinary dividend capacity will not be consistent from period to period. That said, we are confident that we will be able to distribute sufficient capital from Primerica Life to support our stated capital deployment plan through 2016 and be well-positioned to support the ongoing needs of the business.

I will now turn it back over to Rick.

Rick Williams - Chairman and Co-Chief Executive Officer

Thanks, Alison. Primerica’s second quarter results reflect our focus on driving long-term organic growth. Our recurring life insurance revenues coupled with positive investment savings, products performance reflects the strong market position of our core businesses. Our ability to generate significant distributable earnings on an annual basis should drive expansion of operating earnings per share and return on equity longer term. Currently, we are working to build on the momentum generated in the first half of 2014 in order to generate organic growth that will positively impact future earnings and enhance shareholder value.

Kathryn Kieser - Executive Vice President, Investor Relations

And now we’ll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And the first question comes from Steven Schwartz with Raymond James. Please go ahead.

Steven Schwartz - Raymond James

Hey, good morning, everybody. Just a few. First, John, you were talking about third quarter licensed agents, the salesforce growing slightly vis-à-vis the second quarter and you cited the Georgia Dome thing a year ago. Are you implying here that you are going to get greater lapsation, is that the deal these people signed up a year end?

John Addison

No. Coming out of the Dome, which we will be doing our last Dome event next year, because they are going to be tearing the Dome down after that and putting up the new one, but after a Dome event, we always that’s when we have everybody there and we put out great incentives and everybody hears them. And so, we always have significant increase in recruiting and production coming out of the Dome. What I was saying is we are going up, we are not – we don’t have that this year. We are going to – I am going to do some exciting things in La Costa, but it will be with 1,400 couples, not with 40,000. And so last year, we had – this quarter coming up, we had the Dome incentives and the Dome event, the post Dome kind of jump and we won’t have that this year. So, that’s what’s going to make the comparisons from that standpoint difficult this year.

Steven Schwartz - Raymond James

Will there be any new products for the remainder of this year or does that wait again until next year’s convention?

John Addison

No. There won’t be any significant new product changes this year. And at this point, when you are moving this Army and trying to marshal things, in truth right now, we are in the process of getting things lined up for the announcements at the Dome next year.

Steven Schwartz - Raymond James

Okay.

John Addison

Because that really is your opportunity to significantly move things and introduce new and improved things and get – and make sure that you get it in front of maximum number of people.

Steven Schwartz - Raymond James

Okay, great. And then for Alison, Alison you were talking about the new presentation, which I get I understand. Hopefully, you will still split out at least direct premiums between the two so we can do the Citi reinsurance thing. That would be helpful. But what I am asking is you seem to imply that the direct benefit ratio would be consistent over time in the 58% to 59% range, shouldn’t that go up since – for the same reason that the YRT goes up?

Alison Rand

Two things, first of all, if you look at our financial supplement, we do continue to show what we are now calling primary direct premium and Citi direct premium. Each quarter, we have given you that information historically. So that detail has not gone away. The ratio that I am describing actually nets, and this is something I mentioned in my prepared comments. Specifically for YRT, why GAAP presentation has you treat that as a contra revenue, we look at that as a direct offset to mortality costs. So from an analytic perspective, we actually apply or net out the ceded premiums from the benefit costs, in order to come up with that 58%, 59%.

Steven Schwartz - Raymond James

No. I get that. In fact, I do that in my own model. But my understanding would be that the – I thought that that ratio, because it’s related to premiums and not to premiums and investment income that that ratio goes up slowly over time, is that not accurate?

Alison Rand

It does not, it goes up in relation to direct premium, but based on how you would account for any reinsurance under GAAP accounting we basically lock in the cost, if you will and again because we do 90% of our YRT exposure, we pretty much have it as a fixed cost all along. So GAAP will have you levelize that out as a percentage of premium over time.

Steven Schwartz - Raymond James

Okay. And then just on the financing transaction, as you have done the transaction, does that increase RBC since the money is still at the – the cash is still at the life insurance companies and then that comes down over time as it’s moved to the holding company?

Alison Rand

That is correct. In the third quarter, you will see a jump in RBC because we had essentially created free capital, free surplus in excess of what we will be extracting. And there are quite a few nuances about what you can extract. So it doesn’t necessarily correlate dollar for dollar with what we would have otherwise said has been freed up. So you will see an increase in RBC in the third quarter as we take out the capital in the third and fourth quarter, it will come back down. And the important thing to note is by no means do we expect it to get anywhere near to 3.50 that we said as our targeted long-term range.

Steven Schwartz - Raymond James

Okay, alright. That’s what I had. Thanks guys.

Alison Rand

Thank you.

Operator

The next question comes from Mark Hughes with SunTrust. Please go ahead.

Mark Hughes - SunTrust

Thank you. Good morning.

John Addison

Good morning.

Mark Hughes - SunTrust

With the collapsed presentation in the life business, is there any change in the expense allowance structure in the legacy block, is that going to continue essentially as it was?

Alison Rand

That does continue. It is now just being applied to our total term segment but is the exact same expense allowance that we had in the past that’s contractual relationship with Citi.

Mark Hughes - SunTrust

Right and the 6.1% profit relative to direct premiums, how do you think that will trend going forward, is that going to come back up a little bit or stay about the same?

Alison Rand

Are you referring to the legacy ratio?

Mark Hughes - SunTrust

Yes and I know it’s not going to be as relevant, but just for…?

Alison Rand

It definitely and will fluctuate from period to period. It is pretty close to where we thought it would be. We had indicated in the last call it would be the low to mid-6s. What really drives this number more so than anything is the fact that we have not been able to increase our investment yields and so you keep having the downward pressure from as assets roll off, there is a lot of assets backing that segment, so that’s one component. This particular quarter, we did have some slightly negative mortality experience in the legacy block, but on the new term block it was actually more than offset.

And as we – this is a good example although we start to go and think about how we want to be describing the business and how you should look at the business, what’s really important is our mortality experience on the portfolio, not necessarily how it broke out between the two buckets because both buckets reflect whatever co-insurance or YRT you have in place. So we feel it’s more appropriate for us to be talking about the aggregate trends, which is actually one of the drivers as to why we decided to go ahead and collapse the sub-segments. I will say Mark and again we are not going to continue to show legacy after this year, but as we said at all along we do expect that ratio to continue to climb. One, because we don’t see on the horizon any immediate rise in the interest rate and two, because we have got this end of term block that obviously when the business comes to the end of its level term period, the mortality gains that you would have been recognizing because the business had been price so long ago go away.

Mark Hughes - SunTrust

Right. In the new term business, the insurance expenses, you got it looked like very good leverage, did you say there was anything unusual or one-time in nature in that or is that just a – just leverage really kicking in?

Alison Rand

It’s a combination of things. Our expenses in and of themselves in the term life segment, again, I will talk about in the aggregate were up a little bit but really because they were growth related type items, so from a leveraging perspective wouldn’t have caused the problem. The reason you actually had quite a bit of hiccup this quarter was more a function of the premium line in direct – in new term sale combination of the facts that one, the second quarter has always been a seasonally strong persistency quarter, so it helps your premium level. And two, the fact that we did have some growth in our issued business year-over-year and we’ve seen a little bit sequentially as well, which did help to bolster the premium levels. So it’s a combination of those two items, basically holding our expenses pretty consistent and growth in the denominator.

Mark Hughes - SunTrust

And then one final question. Your asset based revenue, the commissions and fees as a percentage of asset value, up a little bit sequentially this quarter, do you think it stabilized here at this level?

Alison Rand

Yes. I think that if you look at the metrics that we show in the supplement, it’s really stayed in a pretty consistent range. Specifically what’s happened this quarter is we had very strong performance in our variable annuity block and that block tends to provide higher returns in that regard. So I think it is sustainable. As we said last quarter, we do see from period to period mix and what we are selling and while it will create noise on a quarter-to-quarter basis, the important thing is in the aggregate over the long-term, sale of one product versus sale of the other is equally valuable to us. So it creates some timing types of bumps, but economically we are happy with whatever production we have.

Mark Hughes - SunTrust

Okay. Thank you.

Alison Rand

You’re welcome.

Operator

(Operator Instructions) Your next question comes from Dan Bergman with UBS. Please go ahead.

Dan Bergman - UBS

Hi, good morning.

Rick Williams

Good morning.

John Addison

Good morning.

Dan Bergman - UBS

You have indicated that the recent redundant reserve financing should support about $150 million of annual capital deployment through I think 2016, I just want to get a little more color on the potential for capital generation and deployment longer term. I guess, I mean should we think of that $150 million annual level as kind of an ongoing run rate, in other words, would you expect to have enough new term policies on the book to do an additional similarly sized reserve deal in another two to three years time?

Alison Rand

Yes. So specifically this deal covers three years of issue and we do have the ability to add another year of issue if we would like to. So I do not see a need to do another transaction for quite some time. That said, this transaction we do believe will fully fund the life component of that $150 million through 2016 and to the extent we decide to add another issue year, even potentially beyond that. The reason we are sort of gauging 2016, I will say somewhere between 2016 and 2017 is the thought that PBR will come into play sometime near that point and at which time the level of redundant reserves that we will need to carry will go down significantly and the need to do additional financing type of transactions will go down as well. So, our theory here is that we have now put us in a position to get through what we stated as 2016, we have not made any decisions for 2017 although this transaction, especially with the ability to add in another year, that give us some ammunition, if you will into 2017. But really we want to wait and see what happens with PBR, with the hopes that it would do away with the need for these in the future.

Dan Bergman - UBS

Got it. That’s very helpful. Thanks. And I just wanted to switch gears a little bit to the sales force, where it looked like the growth on kind of a year-over-year basis has improved to about a 5% pace the past couple of quarters. I just wanted to see if you could give any perspective on what have been the main drivers of this improvement? How much is due to the favorable macro environment versus more company specific factors? And then do you think that this current sales force growth rate is something that’s sustainable going forward?

John Addison

Rick, you go first and then I will jump in.

Rick Williams

One of the dynamics that we have talked about on several of the past calls is the non-renewal rate on the sales force. And by that what I mean is the percentage of agents who don’t renew during the quarter as a beginning balance. If you go back to the second quarter of 2013, that number has ranged around 8.3%, 7.9%, 7.9%, 8% and 8.2% this quarter. At that lower non-renewal rate, that is generated – help generate positive momentum in growing the sales force. That coupled with the improvements that we have made in licensing percentages over the last couple of years have generated that growth. We have said really since coming out of the IPO that we would believe a mid single-digits growth rate for the size of the sales force makes sense and we are running at about that rate right now and still believe long-term that’s the right appropriate measure to be looking at. Again, it will vary from quarter-to-quarter due to seasonality in doing that, due to items like John mentioned relative to the promotions after the convention last year.

John Addison

But as you mentioned, I mean 5% is mid single-digits and that is our goal to have that be the long-term growth in the sales force. And as Rick said very well, other than seasonality in a quarter where you are going against a convention in the previous year and not one this year and stuff like that, taking those kind of things out, that is our goal that we believe that is what we can achieve.

Dan Bergman - UBS

Great, thank you.

Operator

As there are no further questions, this concludes the question-and-answer session. This will also conclude today’s conference. Thank you for attending today’s presentation. You may now disconnect.

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