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Primerica (NYSE:PRI)

Q2 2012 Earnings Call

August 8, 2012 09:00 AM ET

Executives

Kathryn Kieser - SVP, IR

Rick Williams - Chairman and Co-CEO

John Addison - Chairman, Primerica Distribution and Co-CEO

Alison Rand - CFO

Analysts

Paul Sarran - Evercore Partners

Jeff Schuman - KBW

Steven Schwartz - Raymond James

Mark Hughes - SunTrust

Dan Bergman - UBS

Sean Dargan - Macquarie

Operator

Good morning and welcome to the Primerica Second Quarter Financial Results Conference Call. (Operator Instructions). I would now like to turn the conference over to Kathryn Kieser, Senior Vice President of Investor Relations. Please go ahead.

Kathryn Kieser

Good morning everyone. Thank you for joining today’s Primerica’s Results for the second quarter 2012. Yesterday afternoon we issued a press release reporting financial results for the quarter ended June 30, 2012. A copy of the press release is available on the investor relation 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, 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 to 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 been 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 three of the presentation. On today’s call we will make forward-looking statements in accordance with the Safe Harbor Provisions of the Securities Litigation Reform Act of 1995. Forward-looking statements include any statements that may project, indicate or imply future results, events, performance or achievements and may contain words that is expect, intend, claim, anticipate, estimate and believe or similar words derived from those words.

They are not guarantees on such statements involve risk and uncertainties that could cause actual results to differ materially from these statements. For a discussion of these risks please read the risk factors contained in our Form 10K for the year as of December 30, 2011.

This morning’s call is been 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 the dial-in participants. Now I will turn the call over to Rick.

Rick Williams

Thank you Kathryn and good morning everyone. Welcome to Primerica’s second quarter 2012 earnings call. Beginning of slide four, you can see our strong second quarter results. Operating revenues increased by 9% to 296.2 million and net operating income increased 18% to 45.5 million over the prior year period. Net operating income for diluted share increased 40% to $0.71 from a year ago expecting strong performance in the term segment, lower insurance and operating expense levels due to year items. The execution of our first Redundant Reserve Financing and lower invested assets following our recent share repurchases.

Net operating income, return on adjusted stockholders equity increased to 14.8% from 11.6% in the year ago period was up from 13.5% at the end of the first quarter. This quarter's return on equity is the highest we have achieved since becoming a public company in 2010. Our investment and savings product sales levels were consistent with the first quarter of 2012. Sales increased 5% in the second quarter from the year ago quarter primarily reflecting new product sales growth, including 103 million of fixed indexed annuity sales and 40 million of managed account sales for the second quarter.

Managed account client asset values were 375 million at the end of the second quarter. Variable annuity sales continued to benefit from a slightly elevated rate of clients transferring their older variable annuity contracts to the current primarily four variable annuity that offers an attractive looking benefit. Although client transfers were down from a year ago. Our total client asset values declined 2% to 35.3 billion relative to a year ago in-line with the U.S. Canadian markets. Sequentially, investment savings product sales were flat with the first quarter reflecting strong prior quarter retirement saving sales typical of the first quarter trends during IRA and RRSP seasons.

Total client asset values declined 3% at the end of the first quarter primarily reflecting market conditions. In our term life business, life insurance issue policies increased by 1% in the second quarter, sequentially term life insurance policies issued increased 8% compared with the first quarter of 2012 largely reflecting typical seasonality. Our average policy issued premium of $790 in the second quarter remained consistent with both the first quarter of 2012 and the second quarter of last year.

In the second quarter, we further enhanced shareholder value by repurchasing 5.7 million shares of our common stock for 150 million. This repurchase completed the redeployment of 350 million of extraordinary dividends from the life company much of which was approved in conjunction with our recent redundant reserve financing. During the quarter we also increased our stockholder dividend 5/10ths per share as part of a longer term goal to increase our dividend yield to be more in-line with our peers. In July, we are able to complete another step in our capital plan by successfully executing a 375 million in our overall debt offering of 10 year senior notes at an annual interest rate of 4.75%.

Majority of the proceeds were used to repay the $300 million Citi note. Remaining proceeds are expected to be used for the share repurchase program announced yesterday and later this month. Based on our current average daily trading volumes, we anticipate the 75 million share repurchase program to be completed in about 4 to 6 months. As of June 30, our debt to capital ratio remained low at 19%.

The offering had been completed as of June 30; our debt capital ratio would have been 22.7%. As we look at other opportunities to enhance returns Primerica statutory risk based capital ratio is estimated to be in excess of 570% at June, 30. This elevated surplus level combined with our 2012 anticipate statutory income will allow for an ordinary dividend payment in 2013.

Although the life business is not yet generating free capital due to the layering of the new term business, we believe Primerica Life will be able to pay an ordinary dividend of between 130 and 160 million in 2013 still remain well capitalized to fund future business. We do not anticipate taking an additional ordinary dividends from the company for several years they are after, due to the new business capital strain and our desire to have a longer term RBC ratio on 350% range.

However, we could package another redundant reserve financing at some point in the future which were pretty up significant amount of capital that could be extracted from the life company. Now John will walk you through our distribution results.

John Addison

Thanks Rick. Good morning everyone. We feel good about the positive distribution results of the second quarter, as you can see on slide five, the size of our life license insurance sales force stabilized and grew to 90,868 at the end of the second quarter. This was an increase from both the first quarter of 2012 and the second quarter a year ago. Growth for the sales force was primarily driven by an increase in new life licenses which grew 21% from the second quarter a year ago and increase 28% from the first quarter of this year.

Sales force numbers also benefited from fewer non-renewals and terminations, then occurred in both the first quarter and the prior year period. Recruiting in the second quarter declined 25% compared with the second quarter a year ago and was down 16% from the first quarter of 2012. There are couple of things that led to these results, first we have work to balance our emphasis on recruiting and licensing by recalibrating our messaging and incentive programs to put additional focus on getting new representatives licensed.

We have also introduced a streamline life licensee process for new recruits, over the years we have developed a series of licensing aid to help (inaudible), at various stages of the licensing process. However, there were so many tools available that it actually made the licensing process more complex, so with the help of our sales force leaders we identified the most effective tools and created one simplified licensing system for all the new recruits to follow, as part of the initiative we also refocused our licensing instructors on helping new representatives through the licensing process and our RVPs in tracking and mentoring new recruits through the licensing process.

These recent licensing initiatives have helped stabilize the size of the sales force but it also impacted recruiting. We estimate approximately 2/3rds of the recruiting decline in the second quarter only year-over-year basis was attributable to more focus on licensing and less focus on month to month recruiting incentives. Another dynamic impact, another dynamic impacting the year-over-year recruiting variants was last year’s post-convention recruiting surge that was primarily driven by the $50 independent business application few promotion in June and July.

Approximately 500 of the incremental recruits in the second quarter of 2011 were a result of the convention incentives; we attributed a total of 30,000 incremental recruits to the post-convention surge in the second and third quarters of 2011 with 25,000 of those incremental recruits occurring in the third quarter of 2011.

The liens generated by the recruiting surge also drove life insurance productivity in the third quarter above our historical range. Productivity has since returned to our normal historical range and we anticipate it will remain there. Last year’s, record recruiting results and the associated new licenses generated will be a challenging comparison next quarter but with the positive momentum we are seeing in licensing we should be able to maintain the size of the sales force in the third quarter, so that it will remain at a comparable level with the second quarter.

As I have mentioned before we have been evaluating and adjusting messaging and incentive to produce positive results. Last week we rolled out a new compensation program for our sales force after working closely with senior sales force leaders on the new program for over a year.

There are a lot of moving parts to the change but basically we moved approximately 35% of the total payout for monthly production bonuses to commissions. The new program places more emphasis on developing new leaders and ultimately building distribution and less emphasis on short term premium hurdles. We are hopeful to change, we will drive promotions and ultimately produce more regional Vice President which our distribution outlets across North America. As we drive towards 2013 we are working on initiatives and business enhancement focused on supporting our sales force and building long term distribution growth to drive strong financial results. Now Alison will walk you through our financial results.

Alison Rand

Thank you John. Good morning everyone. My remark today will begin with a discussion of segment operating results followed a review of companywide operating expenses, invested assets and net investment income. As Rick mentioned we had a strong quarter with the growth and net operating income driven primarily by term life results. On slide six, you can see that term life operating revenues grew 24% year-over-year led by an increase in net premiums. 22% of the 28% total increase in net premium results from growth in the new term business and the corresponding impact on seeded premiums. With each successive block of business issued, the waiving of our premium base continues to shift towards new term and away from the business seeded to Citi.

Seeded premiums for the new term block are less than 20% of direct premium, because the new term block is subject only to our via TV insurance programs, exceeded premiums are only reflective of expected claims -- the claims cost in a given period. Conversely seeded premiums for the block we insured with Citi are more than 80% of direct premiums consistent with the underlying co-insurance contracts which essentially share profits with Citi.

With regard to the year-over-year growth in net premiums, 6% of the increase is associated with reprocessed reinsurance transactions during the quarter. Over the normal course of business, we reprocess a very small portion of our reinsurance transactions that are either mixed process or intentionally not processed on an automated basis due to system constraints.

During the second quarter, the reprocessing of certain transactions resulted in a $6 million increase in net premiums that will substantially offset by a corresponding increase in claims and cumulatively was an immaterially increased to earnings. While I will discuss net investment in aggregate shortly, net investment income allocated to term life in the second quarter increased 6% year-over-year consistent with the growth in asset allocated to support the term life business.

Operating income before income taxes increased by 44% over the prior year period, in addition to the strong top line growth just described the increase also reflects high deferrals of commissions consistent with incentive program changes as well as new product launch expenses and convention related expenses both specific to the prior year.

Interest expense increased in the quarter as expected due to redundant reserve financing executed in March, persistency and incurred claims experience were both consistent with the prior year period and did not significantly contribute to year-over-year trends. In comparison to the first quarter operating income before income taxes increase by 17% reflecting continued premium growth seasonally higher persistency and lower incurred claims in the second quarter of 2012.

As I just described net premiums and claims are those elevated by 6 million as a result of reinsurance transactions that were reprocessed. In the second quarter, we also incurred high interest expense associated with our redundant reserve financing and higher growth related to licensing expenses.

On slide seven, you will see our investment and savings product segments operating revenues declined 2% and operating income before income taxes declined 3% in the second quarter compared with the second quarter a year ago. Sales trends remained positive, sales based revenues increasing by 5% driven largely by fixed index annuities. We experienced a modest shift in sales mix towards managed accounts which provide ongoing asset base revenues rather than point up sale based revenues.

Asset based revenues declined 4% similar to the decline in average client asset values which is reflect of market conditions in Canada and the U.S. Account based revenues declined 2.3 million year-over-year from a pricing structure change that is substantially offset by lower expenses as well as fees received in conjunction with a fund merger in the prior period.

DAC amortization declined year-over-year as market returns on the invested assets underlying our Canadian segregated funds showed some improvement from the market losses experienced in the prior year. In comparison to the first quarter investment, savings, products revenues increased by 3% and operating income before income taxes increased 2% generally in line with trends in sales and average client assets values. On slide eight, you can see that corporate and another distributed products operating revenues decreased 6.3 million and the operating loss before income taxes increased 3.9 million year-over-year. The revenue decline is largely driven by $4.6 million decrease in net investment income associated with the $350 million of cumulative share repurchases that have occurred since the second quarter of 2011.

As we continue to optimize our balance sheet, invested assets allocated to the corporate and other segments should decline along with the corresponding net investment income.

Segment results also reflect lower incurred claims on our short term disability product and refinements in our student-life product policy estimate that increased DAC amortization.

Both of these products are underwriting by our New York Insurance subsidiary. Other sequential quarter and year-over-year trends are consistent.

Now turning to insurance and operating expenses, on slide 9 you will see we had a $4.9 million year-over-year expense reduction related to various 2011 convention initiative and product launches combined with the cost of our capital management actions in the prior year.

An additional 1.4 million expense reduction relates to the record keeping fee structure pricing changes that are fully offset by the revenue reduction I mentioned in the IFP segment.

After these activities, you will see our ongoing expense base increase 2.2 million related to employee merit increases and additional here of management stock compensation awards, plus another 1.7 million or premium related taxes and growth in our new term and allowance run-off in our legacy business. In comparison to the first quarter our expenses have increased about a $1 million primarily due to higher life licensing related expenses.

While we are changing the way commissions and bonuses will be distributed to the sales force, the new compensation program John discussed will use essentially the same aggregate dollars as the predecessor program and will remain deferrable. Aiding the transition to the new compensation system, we have instituted a short term transition program that is also fully deferrable and then the aggregate will not be materially to our results.

Turning to page 11, investments and cash totaled 2.02 billion as of June 30, 2012, down from 2.1 billion at March 31 and will be close be $115 million darkly purchased during the quarter. The impact of the repurchase on the portfolio of composition was negligible. For the average credit rating of our fixed income portfolio were mainly single A and 94% of the portfolio rated investment grade. We continue to have minimal direct exposure to Eurozone corrected countries for less than 0.2% of our investments in either financial companies or sovereign debt of these countries.

The average book yield of investment excluding cash at quarter end was 5.48% up slightly from 5.46% at March 30. The new money rate on our purchases for the quarter was 3.46% from 2.6% in the first quarter. Our purchases had an average credit quality of A minus, duration of 6.5 years and consisted primarily of new corporate issues.

The liquidity profile of our holding company continues to be very good, as of June 30, 2012 the holding company had invested assets in cash of nearly $64 million, more than ample to cover its modest cash needs. I would like to take a moment to support our view that PRI’s exposure to the prevailing interest rate environment is relatively low and manageable. The factors to consider are the impact of interest rates on our term life profitability, our ability to maintain portfolio yield at the current levels and the overall extent to which we rely on net investment income to support our earnings.

In our term life business, results are not materially impacted by changes in actual interest rate. First let me discuss the impact of the assumed interest rate looks like other policy assumption is locked in at the time of issue. The interest rate exemption for each issue year is based on the then prevailing rates in the market. Given that we launched our Turn Now product series in 2011 the interest rates assumed when we initially priced the product series is reflective of the current low interest rate environment. Changes in actual investment yields will not impact GAAP or reserve liabilities.

Our lower interest rates may gradually increase the statutory reserve requirement on future policies issued overtime; they do not result in any near term additional capital requirements. Our ALM analysis shows that existing book of business is expected to provide significant perspective statutory profits even if the current low interest rate environment continues. While DAC reserve changes are not impacted by actual investment yields overtime.

Now we can earn on our invested assets clearly as, unlike most insurers our reliance on investment returns is relatively low with invested assets in cash to stockholders equity a low 1.6 times and net investment income representing only 8% of our operating revenues. The remainder of 2012 we do not expect to see a notable impact of lower reinvestment rates on net investment income. During 2013, approximately 12% of our portfolio will mature with an average yield of around 6%, if one were to assume we reinvested these 2013 maturities at our second quarter new money yield of 3.46%, we would expect investment income to be approximately $2 million lower or the same level of asset on an annualized pretax basis and if we were able to replace their current book yields.

If impact will be mitigated by the incremental investment of operating cash flows during the year. As stated in the past we do not anticipate making substantial changes to the overall credit quality, asset allocation or targeted duration of the portfolio to counter assess decline. With that I will turn it back over to Rick.

Rick Williams

Thanks Alison. Our solid net operating income as seen in EPS growth internal equity expansion demonstrate that our simple product portfolio compared with our expenses distribution capability, disciplined approach in managing the business provided stable earnings base with opportunities for our care and growth. With that I will turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question is from Paul Sarran of Evercore Partners.

Paul Sarran - Evercore Partners

I guess first of all you comment on agent termination trends they were a little bit lower in the quarter than they had been running which helped overall, is there anything unusual about that or do you expect them to stay at this level?

John Addison

I will let Rick comment also, one of the things it probably it's the economy, I mean in all honesty, the economy and the fact of non-renewals been a little bit lower than normal, understand what our guys most are part-time and they paid to renew their license and one of the things that it been challenged a last few years was less people renewing at the end of the period, paying the fee to renew to the states and that improved. So hopefully economic trends continue in a positive direction and we believe that’s the single biggest reason for that.

Rick Williams

Yes just sort of adding on to that as you know the terminations improved about 1200 in the second quarter last year, breaking that down a little bit about half of that is what we believe is what John described what’s going on with the economy. The other half about 600 does relate to a change that we have made in the way that we terminate non-renewals, very simply we are giving agents more time to renew their license and do not terminate them. If they have a written a bad policy we are giving more time to write a good policy to recover, offset that, so that’s about 600 of the 1200, the other 600 is just better renewals.

Paul Sarran - Evercore Partners

Okay and then the shift of 35% of comp spend from bonuses to commissions, is that above and beyond the incentive changes that drove higher licenses and lower recruits this quarter. So should we expect that trend to kind of continue going forward?

Rick Williams

What drove higher licenses and lower recruits, were H2 incentives relating to our contest stretches (ph) whether we give extra give credit for recruiting and how we do that, that really is not an economic change at all, it's just incentive space in the underlying compensations component.

Relating to the compensation change where we move money from bonuses to the core commissions, as John talked about that really was done with the objective of sending the sales force to focus on distribution growth and more specifically on promotions within the hierarchy itself. So the message is the same but the changing compensation was not part of the second quarter results.

Paul Sarran - Evercore Partners

Okay and then one last one you mentioned XXX reserve financing, reserve financing was a possible way to free up capital next year. Can you comment on how capital you could potentially free up or maybe how much in redundant reserves operate with each year of new business?

Alison Rand

Sure and generally speaking, we think probably need to pack it about two years of issued business in order to have enough of a size that’s worthwhile for the amount of time and effort that goes into putting together one of these structure. So realistically this is something we could look at every say two years or so. I would aspect that the size of the amount of capital that we would free up associated with this transaction would be somewhat lower than what we freed up with the last transaction but still sizeable in nature. And that would be in combination with the lease of capital that Rick was already mentioning the ordinary dividend that we anticipate during next year.

Rick Williams

In that context, it would either be 2013 or 2014 depending as Alison said on the amount and sizing that we want to group together so it's a sometime towards the end of 2013 or 2014.

Alison Rand

Correct.

Operator

So the next question is from Jeff Schuman of KBW.

Jeff Schuman - KBW

Just want to make sure that I understood, Rick through there is kind correctly, so Rick the expectation is that you would pay an ordinary dividend in 2013 and then did I hear you say that you would expect not to pay an ordinary dividend for several years thereafter?

Rick Williams

Yes that is correct. Although we would have the ability to pay an ordinary dividend, given the new business strain targeting at 350% RBC ratio after the 130 to 160 that we are talking about in 2013 we would anticipate that we would not pay a dividend from the life company for a couple of years thereafter other than any amounts from another redundant reserve financing.

Jeff Schuman - KBW

Is the right way to think about when you did sort of 2014, 2015 that maybe at that point sort of consolidated net premiums are growing kind of low double digits and that you are sort of self-funding at that point and do you think of mature from there to kind of high single digit growth and then you would have more ability to pay more of a dividend is that the right way to think about it.

Alison Rand

Well the one thing I caution you on Jeff there is just sort of mixing statutory and GAAP results to some degree but I would expect that once you get out to about 2015 mark you are going to see growth in premiums that are in. I say the lower double digits and that probably by that point I would say maybe a year or so after that. Our book of business on statutory basis will be substantial enough that the profits and cash flow that it produces will be enough to offset the stream. So you will see us probably beginning to emerge with a normal ordinary dividend capacity streams, you know sometime towards the late 2015-2018 something in that range.

Jeff Schuman - KBW

And then trying to little bit understand the dynamic of moving from less deferrable to more deferrable commissions and how that’s impacting the P&L, if we look at the second quarter, is it the right way to think about maybe new term margins in the second quarter are unusually high in that you had more capitalization but yet not so much amortization because you have been expensing commission and then going forward, you will have higher margins than we have seen historically because you will be deferring but you will also have some more amortization as DAC feels is that kind of the right to think about it?

Alison Rand

I think that is not the best way to look at it, this is a little bit less of a phenomena of the DAC change itself and how we are amortizing et cetera because of say changes in the DAC balance on the balance sheet. Specifically what you see happening in this quarter is that and I mentioned this when I was talking about what I anticipated the impact of the DAC change to be year-over-year, was that last year leading into the convention, we were still running the fast track bonus and when under the current deferrable the nature of that program was largely not deferrable. We subsequent to the convention replaced to that program and now under the compensation program that John just mentioned under the soon to be or the now current program, a larger portion of the same dollar spend is now deferrable. So year-over-year in this quarter is why you see about a $3 million change. That will start to phase out by the time you get into the third-fourth quarter as we phase out that predecessor program. So I think currently for an absent basis we're consistent but on a year-over-year basis, you won't see as much of a tick up as you saw in the second quarter.

Another thing that you see happening in the second quarter is that we do have historically seen very strong seasonal persistency in the second quarter, so on a sequential quarter basis, we don't expect that to be the case next quarter. Year-over-year it's not as dramatic of an impact but do remember that we've all been growing that new term business which is where the DAC is building and favorable persistency had a lot stronger impact on DAC than it does on reserves with such a young block of business. So that's another phenomena you're seeing as regards the new term block. That will continue year-over-year, although in of itself, I don't think that's that dramatic.

Operator

And the next question comes from Steven Schwartz of Raymond James.

Steven Schwartz - Raymond James

First, Alison, can we do some accounting for this reprocessing of the reinsurance. My assumptions is that went through the legacy block of business. What line items did that effect? Did that affect the CD premium?

Alison Rand

That is correct. It would have impacted CD premium and it would have impacted the benefit in claims lines.

Steven Schwartz - Raymond James

So it lowered both lines. Is that accurate?

Alison Rand

Yes, it's lowered both. No, I think it actually increased both. I've to look and see. I'm sorry I'll look at the numbers as you keep asking your questions. The impact was the minimal on a net basis.

Steven Schwartz - Raymond James

I honestly don't remember if you guys have the New York sub or not, obviously you do have a captive. So I am wondering if there is anything you could say about the New York department and in that vein if there is anything coming up at the NEIC meeting next week in Atlanta that you are particularly paying attention to one way or another?

John Addison

Yes, we do have New York sub national benefit life and we were one of the 80 companies that the department did request information from but the rest of the industry is relatively comfortable with what's going on the way reserve financings are done. So we don't have any expectation that longer term there will be a problem but we'll wait and see.

Steven Schwartz - Raymond James

Okay and anything in next week's meetings?

John Addison

No.

Steven Schwartz - Raymond James

Should we be thinking about recruiting staying at these levels for a while given what you're doing?

John Addison

Steven, running this company is an adjust business. It just kind of give you sort of more of a shotgun approach to that answer that when we after the convention a year ago, and we did the crazy John went inside, its two for one recruiting for those two summer months, one of the things we saw in those numbers was, although it helped with life insurance productivity and we did get some growth in the sales force from it. We did not see a significant enough licensing out of that comparative. And so one of the things that we changed this year was we would run outward every one if we were running a contest, announce this month it's double created, triple created. It's crazy April, those kind of things. We took that out of the system and focused very strongly on licensing.

Also on the compensation system change which just occurred, one of our big focus there was instead of people being focused on as much focused on monthly production hurdles to get a business, they have been more focused on building long-term distribution within their organization. My message to people was build a business not build a month. And in many ways we refocused, recalibrated, had very positive improvement in licensing but then now as I have announced the compensation change, we've announced very strong incentive towards recruiting. So our goal is to grow recruiting. I mean our goal is to walk and chewing the government at the same time. Not to just say recruiting is no longer reported but to have it be healthy recruiting based upon more people licensed and growing the size of a licensed sales force.

So the goal is to grow recruiting. But clearly not to the level we are at when we did two for one promotion at the end of…

Rick Williams

Yes just enjoy, we continued with no promotions on recruiting. As John just said with the new comp, we did have a recruiting incentive for the month of August but it is toned down from what we historically have run. The objective is to grow recruiting sequentially not in the big steps that we've done it in the past where you see a very large number then back down and to have it strong high level of recruiting all months. So we're stepping into it.

Steven Schwartz - Raymond James

I guess what I am not getting here is that you've moved compensation from bonuses, monthly production targets. Into the commission grid and what does that have to do with recruiting? Is it just that if you get more people, the commission is going up line or going to be greater?

John Addison

From a standpoint of recruiting, it really is not. It has more to do with licensing. Because we did have a system where for a regional Vice President trying to qualify for their monthly business, there were several different levels you could get in the business and it was triggered not based on recruiting. We don't pay for recruiting. We pay for premium. It was based upon the amount of premium that came out of your organization or out of your base shot out of your office location.

One of the things that we saw Steven, particularly, Primerica has at a attributing any single cost of things or whatever you would inevitably be pong, if you would try to make it a simple little answer. But one of the things we saw with the economy and a lot of the challenges that people with the room, when kind of the economy tanked and stuff is that we saw deterioration in licensing and when you looked under the covers, one of the answers to that was that when people were recruiting the new person and really like I said, the surge of recruiting last year truly highlighted for me as I was stepping back and analyzing again that that new person sitting in the meeting that you are going to train to get in the business really became more a source of a lead to get premium than a source to get a license. And this new system for that person producing at the front, a significant more of the compensation is now just in their points that you automatically get paid running your organization. You don't have to hit a production threshold to get in; it's based upon the sale of an insurance application.

So the goal and both in the messaging, the training and the system is that those new people sitting in my audience, viewing more as a potential license and a potential person to get promoted to district leader and hopefully ultimately a regional Vice President than a source of a lead to just get a sale mix amount so that I get my production total to get a bonus.

So that's very much the messaging of it and Rick mentioned that July and stuff. One of the things we saw that we no real incentive on recruiting. And in our business, when we're changing something like compensation, people are talking about what's the change going to be, what's it going to be and all the stuff. We have now removed the what is the mystery of what's going to be launched and come forth, we are in a big way for our guys been very positively received and as Rick said, then now we're trying to refocus things a little bit more towards the recruiting again but not in all honesty to the level that we did when we really pushed the accelerator through the floor last year.

Steven Schwartz - Raymond James

The ordinary dividends for next year, what would be the timing of that?

Alison Rand

Probably in the second quarter range. And to answer your other question, its (inaudible) because there's a negative in there but basically to decrease and see a premium, it's because it’s a negative to revenue resulting in an increase to net premium and also an increase to benefits and clients.

Operator

And our next question is from Mark Hughes of SunTrust.

Mark Hughes - SunTrust

That reprocessing effect, does that carry over into Q3?

Alison Rand

No

Mark Hughes - SunTrust

And the 6 million, we've got one for one and benefit complains, it seems like that's a pretty high ratio of benefits to that extra premium…

Alison Rand

Because it was mostly from YRT programs. So if you think about how YRT pricing works, it's made to match your plain costs.

Mark Hughes - SunTrust

Okay the higher that in the corporate, I guess related to the student life policies, will that persist into future periods?

Alison Rand

I do not believe that because it was somewhat of us moving over to a new system and there was a catch up associated with that.

Mark Hughes - SunTrust

And then the insurance commissions, I think we probably touched on this a bit, but as we think about insurance commission line in the new term segment, would that be sustained at a low level here or should we think about that moving up in subsequent periods?

Alison Rand

That and as I mentioned earlier, if you're looking at things sort of sequentially, I do believe that this is an appropriate run rate. Here you will not see such a big variance because we have to change over on the back track to a different program last year. But our new compensation system is mean to maintain about the same amount of our current of the cash or the amount paid out be deferrable, as it is today.

Mark Hughes - SunTrust

Right, so insurance commissions on an absolute basis and maybe the percentage of premium on a wholesale there.

Alison Rand

It should. As you see it layering in this slide.

Operator

And the next question is from Dan Bergman of UBS.

Dan Bergman - UBS

So I just had a question on the outlook and potential markets for the new fixed index annuity products given the 100 million cost production in the quarter, averaging the first time it was offered. I just want to see if I get a sense how this compared to your initial expectations for the product and also what the outlook for sales for this product is and where you think it might settle out eventually?

Rick Williams

Versus initial expectations it is above our initial expectations. It was accepted very rapidly in the field. We have about 14,000 agents that have done the criterion so that they can sell it and we do expect that that will expand over time but slowly. I think as to whether the second quarter was a good run rate or not quite frankly we're not sure, I'm not sure how much of that was built off demand versus ongoing demand but we feel very good about where we are on it.

John Addison

(Inaudible) has worked very hard and done a good job working with us on the rollout of the product and they did a very good job of assembling their wholesaling staff with a lot of people that have worked with our sales force in the past in other products and things and have done a very good job. For a new channel penetrating Primerica to be a little difficult because we're different and they've done a very good job of that.

Dan Bergman - UBS

I was hoping if you could have provided a little bit more color on your overall ROE outlook. I think on the third quarter of 2011 call, you guys have said that there will be downward pressure on returns of equity gross but longer term kind of a 14% rate would be achievable. I just want to see if you had any updated thoughts on this given the higher currency turns in subsequent capital management actions.

Rick Williams

I think what we said back then still does apply. We obviously generate a lot of capital, have the ability to generate a lot of capital and what will happen is you'll see, as we retain that capital, if the ROE will trend down, then as we deploy it, it takes a step up. If you're asking me, do I want to raise 14 to 15, I'll say not as versatile.

Operator

And the next question is from Sean Dargan of Macquarie.

Sean Dargan - Macquarie

Most of my questions have been asked but I was just trying to think of the RBC progression. You've talked about a 350% target. About how long would it take to get there?

Alison Rand

Assuming that, the things to consider are one that we plan to take out the 150ish whatever rang it is that Rick quoted next year that will take it down. Also, as I think I mentioned last quarter, where we are in the LOC, we're going to have to start that, that will start coming down, so we've have to be replacing that with hard apathy. This block of business which is a little bit unusual when you see Triple X transaction, that's in so much where there was some historical import business, we were nearly at the peak when we entered into the transaction. So the LT will start coming down or has to start replacing the LT with hard assets, so that will bring the RBC as well. So we do expect that given those items to get to that 350 over the course of next couple of years.

Rick Williams

In the 2016 range.

Sean Dargan - Macquarie

And just this remodeling out, 2013. Are you going to be expressing things associated with the convention differently than you have in the past?

Alison Rand

Given that we went back in retrospectively abide the DAC roles, the answer to that would be no. on a retrospective basis, no.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Rick Williams for any closing remarks.

Rick Williams

Thank you very much. We appreciate your time. Have a good day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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