Primerica's CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: Primerica, Inc. (PRI)

Primerica, Inc. (NYSE:PRI)

Q3 2012 Earnings Call

November 8, 2012 10:00 am ET

Executives

Kathryn Kieser – Senior Vice President-Investor Relations

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

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

Alison S. Rand – Chief Financial Officer, Executive Vice President

Analysts

Jeffrey R. Schuman – Keefe, Bruyette & Woods, Inc.

Sean Dargan – Macquarie Research Equities

Paul Sarran – Evercore Partners

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

Operator

Good morning and welcome to the Primerica Reports Third Quarter 2012 Results Conference Call. (Operator Instructions). Please note this event is being recorded.

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

Kathryn Kieser

Thank you, Venice. Good morning everyone thank you for joining us today as we discuss Primerica results for the third quarter of 2012. Yesterday afternoon we issued our press release reporting financial results for the quarter ended September 30, 2012. A copy of the release is available on investor relation section of our website in investors.primerica.com.

With us on the call this morning are; Rich Williams, our Chairman and Co-CEO; John Addison our Chairman of 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 to make 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 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 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 10-K for the year ended December 31, 2011.

This morning’s call is been recorded and webcast live on the internet. The webcast and corresponding slides will be available in the investor relation 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 dialed in participants.

Now, I’ll turn the call over to Rick.

D. Richard Williams

Thank you, Kathryn. Good morning everyone. Welcome to Primerica’s third quarter 2012 earnings call. A strong third quarter results were marked by solid core performance across the business segments. As you can see, beginning on slide 4, operating revenues increased by 7% and net operating income increased 21% over the prior year period.

Net operating income per diluted share increased 46% to $0.72 from a year ago. These results were driven by the continued building of recurring Term Life income and investment savings, product sales and client based earnings benefited from favorable market performance. And the Canadian Segregated Fund DAC amortization was favorably impacted by the positive equity returns resulting in a $2.6 million year-over-year reduction in DAC amortization.

Year-over-year results also reflect net investment income enhanced by $2.8 million of certain unusual items that included securities called from our bond portfolio and the recovery of defaulted interests during the quarter. Benefit of these items offset the expected pressure of lower invested assets flowing our stock repurchases over the past 12 months as well as lower market yields.

We feel good about the net operating income return on adjusted stockholder equity increasing to 15.1% from 10.9% a year-ago period. Achieving this level of ROE within two and half years from our IPO was accomplished through effective capital management, the layering of new Term Life premium, strong investment savings product performance and active expense management.

We continued capital redeployment in October with the $60 million share repurchase from Warburg Pincus. Completing the $75 million share repurchase program that began in the third quarter.

Prior to the Warburg transaction, we repurchased approximately $14 million of shares in the open market. We were able to retire a total of 2.6 million shares of common stock through our repurchase program that will be accretive to earnings per share and return on equity.

We also increased our shareholder return in the third quarter by raising our stockholder dividend to $0.07 per share increasing our dividend yield to approximately 1% as we continue to work towards our longer-term goal of a dividend yield more in line with our peers.

Primerica’s uniquely positioned to sell profitable term life insurance and third party fee products to vast and under served middle income market. Our diverse sources of recurring income coupled with prudent capital management should enable us to maintain a strong ROE on a long-term basis.

We still plan to execute a $130 million to $160 million ordinary dividend payment from Primerica Life in 2013. This will allow the Life Company to remain well capitalized to fund future business while enabling us to further enhance shareholder value by redeploying capital.

Our Investment and Savings product sales increased 3% in the third quarter from the year ago quarter primarily reflecting new product sales growth. We are pleased with the results of our new products including the $113 million of fixed indexed annuity sales in the third quarter and the year-over-year growth in managed account client assets from $53 million at the end of the third quarter last year to $478 million at the end of this quarter.

Variable annuity sales resulting from clients transferring their older variable annuity contracts to the current Prime Elite IV variable annuity have normalized from the high levels in the prior year period. Without these prior year elevated transactions, total Investment and Savings product sales would have increased 10% year-over-year.

Our total client asset values at the end of the third quarter increased 17%, $36.9 billion and grew 5% compared with the June 30, 2012 in line with the U.S. and Canadian markets.

Sequentially Investment & Savings product sales declined 9% from the second quarter reflecting strong prior quarter retirement savings sales, typical second quarter trends during the IRA and RRSP season.

In our Term Life business, issued policies were 18% lower than the prior year period as we returned to a normalized productivity level of 0.20, polices issued for life license represented per month from the elevated 0.24 productivity level in the prior year period.

The liens generated by the post-convention recruiting surge drove life insurance productivity in the third quarter of 2011 above our historical range. Productivity has since returned to our historical range and we anticipate it will remain there.

Sequentially, Term Life insurance policies issued were 12% lower than the seasonally strong second quarter. Our average policy issued premium of $782 in the third quarter remained consistent with both the second quarter of 2012 and then third quarter of last year.

John, will now discuss our distribution results.

John A. Addison Jr.

Thanks, Rick, and good morning, everybody. After our post-convention recruiting surge in 2011, it became apparent that we needed to re-focus the front-end of our business on licensing in order to build and grow distribution. Over time our monthly incentives combined with the economic downturn had shifted the focus of our sales force leaders. The new recruit is a source of both new license distribution and sales leads.

After the surge, it became clear that the sales force had shifted more towards a recruit being a source of the sales lead to hit monthly production targets, than as a new potential license to build long-term distribution.

In order to build healthy new distribution for the future of our company, we needed to adjust this focus. So this year, we launched several initiatives to shift this [demand shift]. We recalibrated our messaging and incentive programs, put more focus on licensing.

We also have introduced a streamlined life licensing plan for new recruits. These initiatives improved our licensing ratios, but negatively impacted recruiting levels in the second and third quarters. The impact over recruiting was anticipated, but necessary to change the long-term behavior for the organization.

As we anticipated last quarter, the size of our life license sales force in the third quarter remained consistent with the prior quarter and the prior year period despite the challenging year-over-year recruiting and licensing comparisons.

Last year’s results were elevated by the short-term recruiting initiatives launched at convention in June 2011. Approximately, 25,000 of the incremental recruits in the third quarter of 2011 were a result of this convention incentive. As you can see on Slide 5, year-over-year recruiting declined 43% and new life licenses declined 7% in the third quarter of 2012. Sequentially, new life licenses declined 12% from the second quarter.

Our recruiting experience downward pressured the second and third quarters due to increased focus on licensing. This emphasis over the past two quarters has resulted in an increase in the percentage of recruits to obtain a life license. Our goal is to maintain a healthy balance between licensing and recruiting.

Now that the licensing ratios have improved, we need to increase recruiting in order to pin the licensing pipeline and grow this as of the sales force. We anticipate being able to maintain the size of our sales force in the fourth quarter.

Last quarter, we implemented a strategic initiative to modify our life insurance compensation system. We wanted to more directly incentivize our sales force leaders behavior to focus on developing new people rather than just hitting a monthly sales production target.

Our compensation system has historically paid a combination of daily per policy commissions and a monthly sales bonus. We introduced our new compensation system last quarter. Approximately, one-third of the monthly bonus compensation was moved into the daily commission grid.

We believe this will incentivize regional Vice Presidents to focus more on activities to build new leaders, rather than just trying to hit monthly premium bonus targets. This is adjustment should also increase promotions in all levels in order to ultimately build more regional Vice Presidents. It’s too soon to gauge the success of this modification and it’s with any change you battle paralysis analysis, but I am proud of our leaders and how they are embracing the change.

As part of our continued effort to position Primerica as a premier provider of financial services to mainstream families, we recently conducted a joint study with the Consumer Federation of America about the financial condition of middle income families.

Last month, at the National Press Club in Washington, I spoke about the findings of the report titled The Financial Status and Decision-Making of the American Middle Class. Since advertising is not a significant component of our corporate strategy, we believe this is a cost effective way to increase our profile as the company and then understand the financial needs of middle income families.

The study was covered by over 200 unique print, broadcast and online publications including the major networks CNBC, CNN and the Wall Street Journal and the New York Times, the Washington Post and many others. What the report revealed is something we’ve known for a while. The families without a lot of resources are balancing difficult and expensive priorities such as saving for college and retirement or paying off mortgage and consumer debt.

When you consider these demands with the context of the last decades falling incomes, the financial condition of most middle income families is challenging and they need help navigating for the future.

Since Primerica is one of the only company still successfully and profitably providing financial services to this market, we are uniquely positioned to capitalize on this vast opportunity. The initiatives we have executed this year has laid additional ground work needed to achieve longer-term sales force growth and facilitate our distribution of financial services to more mainstream families.

Our strategic focus continues to be on growing the size of the Life Insurance sales force to generate long-term organic growth.

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

Alison S. Rand

Thank you, John. Good morning, everyone. Today, I will start with a discussion of the earnings results for each of our segments including insight into our Term Life sub-segment. Then I will review company wide insurance and operating expenses and conclude with an overview of invested assets and net investment income.

Starting with Slide 6, our 16% year-over-year growth in Term Life operating revenues is driven by net premium growth of 17% as the new term block continues to build. Likewise, the growth in required statutory assets allocated to the Term Life increased the segments net investment income year-over-year.

As Rick mentioned earlier, net investment income also benefited $2.8 million from cost securities and the recovery of interest from our previously defaulted bond of which about $1.9 million was allocated to Term Life with the reminder recorded in the Corporate and other segments.

Term Life operating income before income taxes increased by 22% over the prior year period driven by the solid revenue growth, I just described and higher commission deferrals, which primarily benefited new term. Results also reflect growth in premium related expenses and high year interest expense related to the redundant reserve financing we executed earlier this year.

During the quarter, incurred claims were consistent with the year ago period, while persistency experienced a slightly lower for new term and moderately high year for legacy.

On a sequential quarter basis, operating income before income taxes declined by 6% primarily reflecting second quarters’ strong seasonal persistency and lower incurred claims.

Since the IPO, the Term Life segment has shown robust growth. Our direct premiums grow slowly as legacy premiums run-off and are replaced by the layering of new term premiums, net premiums grow much faster. The results for new term being – this results from new term being a recently issued block of business that is only subject to yearly renewable term mortality reinsurance, conceded premiums which are low in early policy durations.

Conversely, our legacy business is immature, heavily coinsured block with 80-plus percent of the economic benefit remaining with Citi. The mix shift in net premiums towards new term can be seen on slide 7. Over time we’ve seen the rate of net premium growth begin to normalize from 31% year-over-year in 2011 to 22% in 2010, on a year-to-date basis, as new term becomes an ever increasing component of the total in-force block. We expect to see this dynamic continue in 2013.

Margins reflected in our financial statements for new term and legacy are moving in opposite directions. Current new term profit margins are increasing as the in-force block grows and effectively leverages the fixed cost within our expense base. Current profits for new term have also increased due to the compensation changes we made at the end of 2011, allowing a higher percentage of the cost to be deferred. And it’s important to note that deferrals impacted timing of profit recognition, but not the overall profitability assume when the product has spiked that issue.

On a year-to-date basis, new term pretax operating income has moved from a negative 6% of direct premium in 2011 to a positive 11% in 2012. On the other hand legacy income has been running off slightly faster than net premiums causing legacy pre-tax profit to decrease from 8.8% of direct premiums in 2011 to 8.3% in 2012. These new term and legacy profit trends should continue into the future.

On slide 8, you will see our Investments & Savings products operating revenues increased 4% and operating income before income taxes to 18% year-over-year. Sales trends remained modestly positive in the quarter with sales-based revenue increasing by 2% largely due to success of our new fixed index annuity product. We also continued to experience a moderate shift in sales mix towards managed account, which provide ongoing asset based revenues rather than sales-based revenues.

Managed account after base revenues are higher than asset based revenue received on our other products that also have a sales-based revenue component. During the quarter market performance drove a 5% increase in our average client asset values, but along with the change in client asset mix contributed to the 9% increase in asset-based revenue from the prior year period.

In the third quarter, DAC amortization declined $2.6 million from the prior year period as market returned and the invested assets underlying our Canadian segregated funds improved from the market losses experienced in the prior year. In comparison to the second quarter, Investment & Savings product revenues declined 2% and operating income before income taxes increased 7%.

In the third quarter, we reported lower DAC amortization and higher client asset value from market performance and continued growth in managed account assets. These items partially offset the lower sales in the third quarter versus second quarter sales that were elevated by the IRA and RRSP seasons.

On Slide 9, you can see that corporate and other distributed products operating revenue decreased $6.7 million from the prior year and the operating loss before income taxes increased $3 million. These trends were flat with decreases in both premiums and benefit from premium rate actions taken to improve the loss ratios on the short-term disability product underwritten by our New York subsidiary as well as lower net investment income of $3 million following our cumulative share repurchases through the third quarter of 2012.

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, let’s turn to insurance and operating expenses. On Slide 10, you will see a $2.7 million year-over-year expense reduction related to our prior decision to no longer carry inventory in our print shop, as well as an additional $0.9 million expense reduction related to the record keeping pricing structure changed in the ISP segments that have been mentioned in previous quarters.

Absent these items, you will see our ongoing expense base increased year-over-year by $2 million related to employee merit increases and an additional layer of management stock compensation awards plus another $1.4 million of premium growth related expenses. In comparison to the second quarter, our third quarter expenses benefited both this year and last from annual employee benefit accrual of approximately $18 million.

As we look towards 2013, we expect our core insurance in operating expense base to increase for annual adjustments to salary and benefit, IT and other infrastructure investments, and general inflation. In addition, we will continue to see increases consistent with those we’ve experienced in 2012. These include the runoff of legacy expense allowance and growth in premium-related taxes and fees of about $5 million, as well as the third and final layer of stock compensation to correlate with our three-year vesting provisions of about $3.5 million.

In 2013, we will see the last of the increases from coming off Citi structured contracts particularly in the IT area of about $2 million. Finally, as we’ve mentioned in the past, in March, we will move to our new campus, which will increase our 2013 cost by $4.6 million, half of which will be one-time in nature.

Turning now to Slide 11, our investments and cash totaled $2.18 billion as of September 30, 2012, up from $2.02 billion at June 30, after executing a $375 million inaugural debt offering in July. The proceeds of this transaction were used to repay the $300 million note from Citi and commence a $75 million stock repurchase program in the quarter. At the end of this third quarter, our debt-to-capital ratio remained relatively low at 21.9%.

The new money rate on our purchases for the quarter was 2.64% down from 3.46% in the second quarter primarily due to a higher proportion of purchases at the holding company as we invested in net proceeds our debt issuance in shorter duration investments to fund share repurchases. The lower reinvestment rate had the impact of decreasing the average book yield of our investment to 5.3% from 5.48% at June 30.

As we mentioned last quarter, in 2013, the low rate environment will put some modest pressure on our investment income. We expect about $200 million of our investment portfolio to mature next year and an average book yield of around 5.3%.

While we will actively manage our investment decisions, we do not feel any change in our overall investment strategy is necessary at this time. Furthermore, we do not expect to take any product pricing action for interest rates in 2013.

The liquidity profile of our holding company continues to be very good. As of September 30, the holding company had invested assets and cash of $134.9 million, $65 million of which has been deployed in share repurchases since quarter end.

Finally, Primerica Life statutory risk based capital ratio is estimated to be in excess of 570% as of September 30, 2012, remaining well-positioned to set forth existing operations and fund future growth.

With that, I will turn it back over to Rick.

D. Richard Williams

Thanks, Alison. Our third quarter results highlight that Primerica is not a typical life insurance company. Our focus is on generating distribution profits to the largest life insurance sales force in North America. While balance sheet may look like an insurance company, we write profitable term life insurance that requires low investment leverage.

We also lock in the mortality risk with the extensive use of mortality reinsurance making term life income look more like distribution profits. And our substantial fee based income from the investment and savings product segment generates distributable free cash flow.

Our strong third quarter results were marked by solid core performance across business segments. The emergent of long-term recurring life insurance revenues coupled with positive investment and savings product performance and our share repurchases has continue to drive EPS and ROE expansion underscoring the strength of our franchise.

Now, we’ll open it up for questions.

Question-and-Answer Session

Operator

Thank you, Mr. Williams. (Operator Instructions) Our first question will come from Jeff Schuman of KBW. Please go ahead.

Jeffrey R. Schuman – Keefe, Bruyette & Woods, Inc.

Thank you. Good morning.

D. Richard Williams

Good morning.

John A. Addison Jr.

Good morning, Jeff.

Jeffrey R. Schuman – Keefe, Bruyette & Woods, Inc.

I was wondering if we can go down and read a little bit on some of the expense guidance, Alison. First of all, you do suggest there will be some growth in premium-related taxes, but is that simply going to – obviously, tax is going to grow in proportion to premium or is there something beyond that.

Alison S. Rand

They will grow in proportion to premiums. But understand as well that, they will grow more closely in proportion to net premium and new term, because we loose an allowance if we will for what’s running off on legacy. So overall, we don’t expect any increases in our premium tax rate and that we will want to see growth in our overall direct premium and to have a little bit more of a shift towards what we fund versus what is covered by Citi expense allowance.

Jeffrey R. Schuman – Keefe, Bruyette & Woods, Inc.

Okay. And so, once again, the expense allowances have been pretty much running off in proportion to ceded premiums in legacy. So that trend basically continues?

Alison S. Rand

That is correct. Both of those trends are very consistent with what you’ve seen throughout 2012 and for that matter 2011.

Jeffrey R. Schuman – Keefe, Bruyette & Woods, Inc.

Okay. That’s helpful. And then on the IT expenses and the occupancy cost, any help there in terms of timing next year?

Alison S. Rand

Sure. The IT expenses, you will actually see throughout the entire year. So we’ve actually negotiated really the last of the major contracts already and in fact we are under those new contracts beginning in the fourth quarter of this year. So that will be ratable throughout the year. We obviously incur that expense over the period over which we have the benefit of utilizing the software or the licenses. So that will be ratable throughout the year.

On the building, we intend to move into or begin taking occupancy of the new building in March. So really, you will not see much of the increase happening in the first quarter, it will really start to move very late first quarter, but be predominantly seen in the second through fourth quarters.

Jeffrey R. Schuman – Keefe, Bruyette & Woods, Inc.

Okay. And then just lastly, the IT and the occupancy, I think, those expenses geographically would be distributed throughout the segments or?

Alison S. Rand

That is correct. I will say the one-time cost associated with the new facility, so about half of the $4.6 million that I quoted. We do intend leave corporate and other because it’s really a sort of one-time overhead type expense. But other than that, the occupancy costs themselves will be shared by the segments as they have been in the past as were the IT cost.

Jeffrey R. Schuman – Keefe, Bruyette & Woods, Inc.

Okay. Thanks for the help.

Alison S. Rand

You are welcome.

Operator

Our next question will come from Sean Dargan of Macquarie. Please go ahead.

Sean Dargan – Macquarie Research Equities

Thank you and good morning.

D. Richard Williams

Hi, Sean.

Sean Dargan – Macquarie Research Equities

I got a couple of questions about your capital positions. So your debt to total capital ratio is in the 21% range. Does that imply you have capacity to issue more debt?

D. Richard Williams

The answer is, yes, it would. Although, as I mentioned with the dividend from Primerica Life next year will be lowering the shareholder equity number as we intend to use that money to buy the stock back. So although, it shows excess capacity at the moment, we will get into that as we take the dividend from Primerica Life and repurchase stock.

Sean Dargan – Macquarie Research Equities

Okay

D. Richard Williams

We do – and just we have said and do believe, our longer-term debt-to-capital is about 25%. Yes, the answer is there is a little bit of room there.

Sean Dargan – Macquarie Research Equities

Okay. And it looks like tax rates on dividends are going up. Would your board ever consider declaring a special dividend before this year is over?

D. Richard Williams

I can’t answer for the board on that. That is something that has come up in conversation, but I can’t answer for the board one-way the other on that.

Sean Dargan – Macquarie Research Equities

Okay. Thank you.

Operator

Our next question will come from Paul Sarran of Evercore Partners. Please go ahead.

Paul Sarran – Evercore Partners

Hi, good morning.

John A. Addison Jr.

Hey, Paul.

Paul Sarran – Evercore Partners

How much did you benefit in the number of terminated agents this quarter from changes and procedures that you implemented earlier this year? And then, a more general question about the sales force. As we move forward, how do you expect to balance building, recruiting with maintaining licensing yields as we go forward from here?

John A. Addison Jr.

I’ll let – Rick will do the first part of it and then – this is John, I’ll handle the second part.

D. Richard Williams

Yeah, let me just comment on terminations, because I noticed several of you in your comments last night raised that as a question. The way that we look at terminations is, we look at terminations as a percentage of the beginning sales force for that quarter. And if you go back to 2009 and it does change by quarter depending upon states that come up for renewal.

If you go back to 2009, that percentage was 9.2%; 2010, it was 9%; 2011, it was 9.8% and then this past quarter was 8.8%. So the 8.8% is actually not that out of line relative to 2009 and 2010 experienced, although it is about 900 more terminations than what we – less terminations than what we had in 2011 just to put that in a perspective for you.

Relative to the change in process, I said last quarter, the improvement was about 1,200 quarter-over-quarter terminations or non-renewals, I said about half came from the new process and about half of the 900 came from the new process as well.

John A. Addison Jr.

Good. And I’ll take the second part of it and – you asked the million dollar question that asset round to deal with all the times in Primerica. I have said many times to I think most of you in conferences and questions there. Primerica is an aimed adjust business. You are moving a very large battleship. You are not, and you make mistakes when you start just trying to change things very fast because you never see the effects of what you did, because that has to be aimed and adjusted.

It was clear as I said in my opening remarks that after the surge post-convention last year and seeing the results of that, that it was – which by the way work all bad. We made a lot of life insurance sales. Sales leads is not a bad, it’s not like our sales forces doing anything bad, it was just we were not driving toward really getting people licensed. And then we had to restructure that infrastructure and focus I mean one of the things I’ve learned in this business is what you focus and it grows. And it’s a – and you have a shelf space of things to get people to focus on.

We stepped back this year and we did a lot of things, whether it was within the incentives for our contents and what I would do every month to drive recruiting that we took a lot of excesses out there. We made a significant modification to our compensation program, which was very focused on longer term building not short-term hitting targets. We made a lot of very strategic decisions as we related to that and we’ve improved the ratio.

I will say a lot, I mean, in life you got to learn to walk and shoot gun at the same time, you can’t just say, okay, we’re going to do this and not do the other. And as we’re now heading into the closing part of this year and beginning the real planning for next year, as we build toward our convention next year in the Georgia Dome.

It is we want to shift more to a recurring focus, okay? But the challenge there is, I have a list of ideas that I can get on TV and just scream a few things and jump recruiting, okay? But probably licensing ratios would go back the direction they went. What we want to do is maintain and build on our licensing ratio and grow recruiting in a healthy way.

We are working right now – as we head into – I had a meeting the other day where I told people, in 2012, we did a lot of alterations, we changed a lot things. And any time you change, people tend to discuss change. In 2012, we want to improve and grow versus change and discuss and we want to focus things very much more toward recruiting, but I believe that is one of the things we will build into in the first quarter of next year. But we would do it in a healthy way and not just ramp up recruiting and have licensing go back the wrong direction again. So that’s what we’re working on right now.

Paul Sarran – Evercore Partners

Okay. Thank you.

Operator

(Operator Instructions) The next question will come from Steven Schwartz of Raymond James.

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

Hey, good morning everybody.

D. Richard Williams

Hey, buddy. How are you doing?

John A. Addison Jr.

Hi, Steven.

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

Alright, how you all doing?

D. Richard Williams

Doing good partner.

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

Good, good. Hey, a couple of questions here. John, just on the – going back to the topic of terminations of agents, is certainly like the description of moving forward to daily kind of the monthly bonus might help with terminations as well. It that accurate?

John A. Addison Jr.

You know Steven, I don’t really think that will have a significant effect on it. But terminations really are more driven, but – I don’t even like the word termination, because it really is not renewals, by and large. And the daily could be – going more from the bonuses to daily commissions really is more of an effect on our regional wise presence. Our full time people and what their focus is and it really does not have a significant change to the part-time people who are the people that make up that number.

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

Okay. Moving on, Alison, all in what is the – realizing it changes by state, but what would be your premium tax rate?

Alison S. Rand

We accrue something sigh of 3%, somewhere between 2% and 3% and it’s not really the premium tax, it’s got municipal taxes, a lot of things that we normalize into a per premium dollar rate, but they are actually fixed charges.

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

Okay.

Alison S. Rand

It’s in the twos.

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

Okay. And it seems everybody is raising their prices and I’m not sure that you guys are in that. Maybe that’s the one that you could address, but I was wondering if reinsurance cost might be going up?

Alison S. Rand

Sure. On the first question, the answer is no. When we launched the current product theories back in 2011, we were already in a pretty tight interest rate environment and so obviously, our pricing took that into consideration. And obviously, because we sell term life insurance interest rates in and up themselves are not a large component of our profitability. The rates we assume will impact the timing over which we recognize earnings, but not really the aggregate earnings.

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

Okay.

Alison S. Rand

…on the product itself. Obviously, what we have available to us from net investment income on free capital et cetera is subject to the download pressure. From a reinsurance perspective, we have not seen any pressure for pricing increases at all let alone specifically for interest rates again since we use predominantly YRT type reinsurance. We are not really borrowing the reinsurancers capital, per se like you have in a co-insurance relationship. So, I think there is less susceptibility to interest rate volatility.

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

Okay. And one more if I, may be for Rick. Rick, maybe you can update if there is anything to update what’s going on regulatorily with regards to captives?

D. Richard Williams

Yeah. I mean, I sure you’re following the NAIC subgroup came out with a somewhat negative report relative to using captives for the XXX reserves. We’re working with the [ACOI] who is taking the position opposite thinking that there is a valuable role for captives in there and also sort of following to see how it goes. I mean clearly the industry finding a mechanism for financing XXX reserves is critical to the industry and to the ultimate client. So there is – they will be discussed, but I feel pretty confident that I will get to a right answer there.

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

Okay. Thank you guys.

Operator

And ladies and gentlemen that will conclude our question-and-answer session. We thank you for attending today’s presentation. The conference has now concluded. You may disconnect your lines.

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