Primerica, Inc. (PRI) Q2 2015 Earnings Report, Transcript and Summary

Welcome to the Primerica Second Quarter 2015 Financial Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Kathryn Kieser, Investor Relations Officer and Executive Vice President. Please go ahead.

Thank you, Amy. Good morning, everyone. Welcome to Primerica's second quarter earnings call. A copy of our earnings release, financial supplement, presentation and the webcast for today's call are available on our website at investors.primerica.com. Following the reading of the Safe Harbor provisions, Glenn Williams, our Chief Executive Officer and Alison Rand, our Chief Financial Officer, will deliver prepared remarks, then we'll open it up for questions. We reference certain non-GAAP financial measures in our press release and on this call. These non-GAAP measures have limitations and reconciliations between non-GAAP and GAAP financial measures are attached to our press release. You can see our GAAP results on page 3 of the presentation. We will also make forward-looking statements in accordance with the Safe Harbor provisions of the Securities Litigation Reform Act. The company does not revise or update these statements to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that can cause actual results to differ materially from these expressed or implied are discussed in the company's 2014 annual report on Form 10-K, as updated quarterly by our form on Form 10-Q. Now I'll turn the call over to Glenn.

Thanks, Kathryn. Good morning, everyone. Today I'll discuss our second quarter performance and distribution results, as well as update our perspective on the Department of Labor's fiduciary rule proposal by giving you a broader understanding of our business model. Beginning on page 3, you can see that during the second quarter of 2015 operating revenues increased by 6% compared with the prior year period. Strong operating results were driven by growth in the term life segment, including 14% growth in life insurance policies issued and a 10% increase in net premiums. The investment and savings product segment continue to perform well with a 9% increase in product sales and 7% growth in average client asset values year-over-year. Operating results reflect higher than historically incurred claims in the current quarter compared to incurred claims in the year ago period which were lower than historical levels. Net investment income continues to be modestly impacted by lower yields on invested assets and ongoing capital deployment. The comparison of year-over-year results was also negatively impacted by the declining Canadian dollar value which reduced operating revenues by approximately $7.5 million and net operating income by approximately $1.5 million. While net operating income was consistent with the prior year period, net operating income per diluted share increased 7% to $0.93, reflecting solid performance and ongoing return of capital to stockholders through share repurchases. ROAE expanded to 17% on an operating basis versus 16.3% in the second quarter of 2014. The significant increase in ROAE from 14.6% in the first quarter of 2015 primarily reflects the expensing of equity awards granted to retirement eligible employees in the first quarter, strong performance and continued share repurchases. Between April 1st and August 5th we repurchased another $100.3 million or 2.2 million shares of Primerica common stock, for a total of $139 million or 2.9 million shares repurchased year-to-date through August 5th. In the second quarter we achieved our best sales and distribution results since becoming a public company in 2010. As you can see on page 4, the size of our life licensed sales force grew 5% to 101,008 at the end of June compared to with the year ago period and was up 3% from the end of the first quarter. As we approached our biannual convention in July, positive momentum continued to build in the business as representatives competed to receive recognition on the stage of the Georgia Dome. This enthusiasm led a 20% growth in recruiting of new representatives and 15% growth in new representatives obtaining a life insurance license versus the prior year period. On a sequential quarter basis, recruiting of new representatives increased 13% and new life licenses increased 39% compared with seasonally lower licensing in the first quarter. We expect the size of our sales force to continue to increase during the third quarter. Now turning to production results on page 5, term life issued policies grew 14% compared with the prior year quarter. Productivity of 0.23 policies issued per life licensed representative per month increased from 0.21 in the second quarter a year ago and 0.19 in the first quarter of 2015. Term life sales growth was driven by continued momentum, as well as strong growth in recruiting and the size of the life license sales force year-over-year. On a sequential quarter basis, term life insurance policies issued increased 22% compared with the first quarter of 2015, reflecting typical seasonality as well as growth in productivity and the size of the life licensed sales force in the second quarter. Our investment and saving products sales increased 9% to $1.57 billion, driven by strong sales of U.S. retail mutual funds, variable annuities and Canadian segregated funds in the second quarter versus the prior year quarter. During the quarter U.S. retail mutual funds and variable annuity sales increased 7% and 4% respectively from the prior year period, reflecting continued momentum driven by product additions, marketing efforts and market performance. Year-over-year, our Canadian segregated funds experienced significant growth due to recent product additions and enhancements. Investment in savings products net flows were positive, $300 million in the second quarter and ending client asset values were $49.37 billion, up 3% from June 30, 2014. On a sequential quarter basis, total investment in saving product sales increased 3% from the strong sales in the first quarter of 2015. Growth in U.S. retail mutual funds reflects typically higher retirement saving sales in the second quarter during the retirement plan season. Sales of variable and indexed annuities also grew from the strong levels in the first quarter. Total client asset values changed very little from the end of the first quarter as positive net flows were mostly offset by lower market values. In July, our biannual convention in the Georgia Dome was attended by 40,000 people from the U.S., Canada and Puerto Rico. The positive momentum in the first half of the year bolstered convention attendance which increased 14% from last convention. The energetic environment paired with announcements of product enhancements, cutting edge technology and incentives, created an excitement level that has continued sales and distribution growth post-convention. Now for some perspective on the DOL's proposed conflict of interest rule, our priority continues to be serving middle income families to ensure they receive investment advice that is in their best interest, so they can make prudent financial decisions. Let me start this discussion by emphasizing the underlying fundamentals of our business are very healthy. And even with the rule proposal, we continue to experience strong sales and distribution growth. Alison will talk broadly about the economics of our term life and ISP businesses in a minute, but first I would like to provide some clarity on how we build distribution. In the U.S., our business model has always focused recruits on getting their life insurance license first. For many of our representatives, especially those that are truly part-time, it can take a few years for them to pursue their mutual fund license. This is evidenced by the fact that 52% of our life insurance policies issued in 2014 were produced by representatives who had only a life insurance license. Approximately 20% of our U.S. life insurance licensed sales force is also licensed to sell mutual funds. Our most productive investment savings products producers actually produce very little life insurance business. Our top 1,000 mutual fund licensed representatives in the U.S. produce 52% of the U.S. ISP sales, but only 6% of U.S. issued life insurance premiums in 2014. For these reasons, we believe, even if the DOL rule is enacted as is, it will not significantly impact our recruiting message, our life licensing process or our term life business. Once a mutual fund licensed representative achieves success in the investment business, they go on to get licensed to sell more sophisticated products, like managed accounts. Currently we have about 2,800 representatives who are licensed as investment advisor representatives. We do not anticipate the timing of obtaining licenses would change radically under a new DOL rule, other than we may encourage representatives to become licensed as investment advisor representatives at the same time they obtain their mutual fund license. Given that a significant portion of our ISP business is produced by a relatively small group of representatives, we believe it will be much easier to make adjustments to accommodate this small group of ISP producers versus the entire sales force. We thoroughly analyzed the proposed rule and it concluded that the Best Interest Contract exemption is unusable in its current form. The DOL has received over 1,000 letters with very thoughtful insight from respected institutions, including FINRA. Throughout this process, DOL Secretary Perez has indicated a willingness to consider changes to the rule. The question at this point is whether those changes will be sufficient to make the rule workable. Because the DOL seems willing to make changes, it is difficult to determine the potential business modifications that would be made without seeing the final rule. With that said, if the DOL rule were to be enacted as proposed, we would likely offer investment solutions that fall outside of the Best Interest Contract exemption in the current proposed rule. For instance, clients with larger account balances could be offered managed accounts. We're also evaluating how we could work within the current rules and exemptions to potentially offer level three products as IRAs. As an example, we could work with a limited group of providers to offer a list of investment alternatives, each with the same fee structure that we believe would, over time, be economically consistent with current profitability levels. Regardless of what happens with the rule, we will not abandon middle income families that desperately need our help saving for the future. These families need to invest for retirement and if qualified investment plans are no longer an option, we could also potentially offer non-qualified investment plans. As you are aware, the DOL rule has raised the question of whether variable annuities can continue to be sold within qualified retirement plans. In 2014 about 70% of our variable annuity sales were in qualified retirement plans. If the industry can no longer offer this option, we believe these investments would most likely move to managed accounts or mutual funds. We also have a high level of confidence in the variable annuity underwriter's ability to adapt to change and bring new products to market. We remain committed to helping hard-working families save for retirement and we're hopeful the DOL will make the changes necessary to allow middle income families to continue receive sound financial education, along with a wide range of investment and savings options. With that, let me turn the call over to Alison to discuss financial results.

Thank you, Glenn and good morning, everyone. Today I will cover the quarter's operating results as I normally do. Then I'd like to spend some time reviewing broad business dynamics of both term life and investment savings products which hopefully will help you frame any potential impact of the proposed DOL's fiduciary rule on our business. Starting with term life, on slide 6, we experienced strong topline growth year-over-year. Our 9% growth in operating revenue was driven by a 10% increase in net premiums and an 8% increase in allocated net investment income. While the percentage of our assets are invested assets allocated to term life continue to grow, the associated increase in allocated net investment income was partially offset by a lower effective portfolio yield. During the quarter, the ratio of benefits and claims, net to adjusted direct premiums increased to 60.7% versus 58.9% in the prior year period. In general, we'd expect the second quarter to have a relatively higher ratio due to the impact of seasonally strong persistency on the change in benefit reserve. That said, in any given quarter, the level of incurred claim in relation to historical norms will cause fluctuations in the overall benefit and claims ratio. The increase in the ratio year-over-year was largely due to incurred claims that were about $1 million above historical levels this quarter whereas in the prior year period incurred claims were about $2 million below historical levels. The ratio of term life DAC amortization and insurance commission to adjusted direct premium of 13.8% was consistent year-over-year as both periods experienced seasonally strong persistency. In contrast to the benefits and claims ratio, strong seasonal persistency drives term life DAC amortization down which generally results in a much lower DAC and insurance commission expense ratio in the second quarter than in other periods. The ratio of insurance expenses to adjust for direct premiums was lower year-over-year at 8.1% versus 8.5% in the prior year period. Operating income before income taxes, as a percentage of adjusted direct premium, was 23.1% for the quarter. Due to seasonally strong persistency, we generally expect second quarter to have the highest profit ratio for the year. The ratio was lower than in the prior year period due to incurred claims volatility. Normalizing out the claims volatility in both periods, the income ratio would have been consistent year-over-year. On a sequential quarter basis, operating income before income taxes, as a percentage of adjusted direct premiums, increased from 20.1% in the first quarter. The increase primarily reflects retired employee related expenses in the first quarter, as well as seasonally strong persistency and higher incurred claims in the second quarter. Moving now to our investment savings product segment, on slide 7 you'll see our ISP operating revenue grew 5% year-over-year, as did operating income before income taxes. Sales-based and asset-based revenues each increased 5%, driven by a 7% growth in both revenue generating product sales and average current asset values. And term-based revenues grew 10% year-over-year, largely reflecting growth in managed accounts and retail mutual fund accounts for which we earn recordkeeping fees, as well as the addition of a mutual fund provider to our recordkeeping platform in the second quarter. Sales-based net revenue, as a percentage of revenue generating sales, was 1.31%, down slightly from 1.33% in the second quarter a year ago. As is the case in this quarter, variability in this metric is generally caused by fluctuations in sales mix as our product has different levels of upfront sales-based versus ongoing asset-based earnings. For the quarter, asset-based net revenue as a percentage of average client asset values was .051% versus .054% in the second quarter of last year. The decline was almost fully attributable to Canada and more specifically segregated funds. Weaker segregated fund returns led to an acceleration of DAC amortization in the second quarter, whereas DAC amortization in the prior year period was positively impacted by fund performance. On a sequential quarter basis, ISP operating revenues increased 5%, reflecting seasonally strong second quarter revenue generating product sales and a growth in fee generating accounts. Strong Canadian segregated fund performance in the first quarter led to lower DAC amortization in that period. Other operating expenses decreased in the second quarter, primarily due to higher expenses related to the accelerated retirement vesting of equity awards in the first quarter. Moving to the corporate and other distributed product segment on slide 8, you can see that operating revenues have declined $4 million from the prior year period and the operating loss before income taxes increased by $2.6 million. Allocated net investment income declined $3.9 million year-over-year, reflecting a higher allocation of invested assets to term life as the business continues to grow, ongoing capital deployment and a lower portfolio yield, as well as a $1.6 million lower return on the deposit asset backing a reinsurance agreement as interest rates increased during the quarter. Insurance and other operating expenses were modestly lower year-over-year. On slide 9, slide 9 provides a more detailed review of insurance and operating expenses. You see that operating expenses of $70.9 million were consistent with the second quarter of 2014. Employee-related expenses were lower, largely due to the timing of expense recognition from the retirement eligible equity awards granted in the first quarter, as we did not make this change to the retirement provisions until the third quarter of 2014 for that year's award. Expenses were also impacted by an increase of $1.6 million for premium and growth-related expenses related to growth in our term life and ISP segments. On a sequential quarter basis, expenses decreased by $8.4 million, primarily due to the accelerated retirement vesting of equity award in the first quarter of 2015. Looking forward, we expect our third quarter insurance and other operating expenses to increase by approximately $2 million in the third quarter, with more than half of the increase tied to our DOL rule making effort in support for a reproposed rule. Turning to slide 10, our investments and cash, excluding the held to maturity asset held as part of a redundant reserve financing transaction, totaled $1.97 billion as of June 30th, down from $2.06 billion as of March 31st. This decline primarily reflects stock repurchases of approximately $71 million during the quarter, as well as a decline in the net unrealized gain of our invested asset portfolio from a sharp increase in interest rates during the quarter. Since the end of the second quarter, we have been actively buying back our stock, repurchasing another $29.4 million through August 5th or $139 million on a year-to-date basis. As we're nearing the repurchase authority for the year of $150 million, it would be at the discretion of our board of directors to choose to increase the authority for 2015. We believe our operating businesses continue to provide us with access to deployable capital. Primerica Life Insurance company's statutory risk-based capital ratio was estimated to be in excess of 430% at the end of the second quarter. Our ISP business continues to have strong results with earnings that are largely distributable to the holding company. Also, we have made plans to allow more money to be repatriated from our Canadian operations. Accordingly, our effective tax rate increased in the second quarter as these earnings are subject to a higher U.S. corporate tax rate. We expect going forward our plans to repatriate earnings from Canada will increase our effective tax rate by approximately 40 basis points from where it would have otherwise been. Now I would like to spend a few minutes talking about our core business segments with the goal of highlighting the strength of the financial platform in which we operate. On page 11, you can see that in 2014 Primerica's operating income before income taxes was $280.2 million, including $201 million of stable recurring earnings from our term life segment and $146 million from our less capital intensive ISP business. We recognized a $66.8 million operating loss in our corporate and other distributed product segments in 2014 which includes corporate expenses in our non-core business line. BNO has incurred losses since its primary revenue source, net investment income, has declined as more investment income is allocated to term life and we optimize the balance sheet through share repurchases. We believe the positive impact to earnings per share associated with share repurchases outweighs the pressure put on pretax operating income trends in this segment. In our term life segment, adjusted direct premiums are the primary revenue driver and increased 13% in 2013, 11% in 2014 and 11% for the first half of 2015. The strong growth in primary direct premiums which are not co-insured with Citi, combined with the slow runoff of legacy direct premiums, is what drives this growth. In fact, even if term life sales remain flat going forward, adjusted direct premiums should continue to show attractive growth rates, near 10% annually, for the next several years. While several items have impacted term life earnings in recent quarters, including low interest rate and insurance expenses and claims volatility, we project that term life pretax operating income will grow by at least 5% per year and more likely by as much as 8% to 10% per year, over the next several years, even if sales were flat. Glenn explained earlier, we do not believe a DOL fiduciary rule significantly impacts our ability to sell term life insurance or retain import business and we believe this segment will be largely unaffected by the rule over the long-term. Glenn also mentioned, we've seen strong growth in the term life issued policies over the last several quarters. While on a GAAP basis it takes a long time for earnings on new business growth to emerge in the financial statement, we shouldn't forget that growth in term life sales generates real upside potential in our earnings. If we assume hypothetically that term life sales grow 10% in 2015, followed by 5% annual growth for the next four years, term life pretax earnings would increase by as much as $35 million in 2019, versus a scenario where sales are flat during the five year period. One final note for the term life segment involves the potential impact of lower interest rates on DAC amortization. We're required to perform tests at least annually to make sure our DAC asset is recoverable. Our term life DAC asset was recoverable, even using a 0% new money rate assumption. So while lower interest rates should impact investment income, they will not impact term life DAC amortization. Now turning to the investment and savings product segment, to better understand the portion of Primerica's earnings that could be impacted by the DOL rule, let's first consider the income sources that should not be impacted by the rule. In 2014 we estimate that about $58 million or roughly 40% of the ISP segment pretax operating income, was derived from sales and client assets in U.S. non-qualified accounts, our managed account platform or in Canada. Another $21 million or about 14% of ISP pretax operating income, was account-based earnings on mutual fund qualified accounts, most of which we believe can be preserved through either transition provisions or adjusting to our account fee structure. The remaining 46% or about $67 million of ISP pretax operating earnings, is associated with U.S. qualified accounts, sales and client asset values. This is broken down into asset-based and sales-based pretax operating income of about $35 million and $32 million respectively. We believe these sources are at risk to differing degrees. First let's discuss asset-based earnings. In our DOL comment letter, we asked for clarity and expansion of the transition provision and we're hopeful changes will be made to grandfather existing client relationships in their entirety. We believe strong arguments have been made as to why this is necessary to avoid client service disruption. Our understanding is that if the proposed rule is enacted as currently written, to the extent that Primerica's representatives are not providing clients with new investment advice on qualified retirement plans, existing revenue sources are not prohibited. In the near term, our current asset-based earnings would be largely intact, but we recognize that they would be pressured over time as existing clients sought new advice or as redemption occurred. Our ability to earn sales-based earnings which for 2014 was roughly $32 million pretax, as well as our ability to grow asset-based earnings, can be closely tied to whether the Best Interest Contract exemption in the final rule is usable or alternatively, our ability to execute options outside of the Best Interest Contract. As Glenn indicated, the question remains as to whether variable annuities will continue to be an option for qualified plans. The qualified VA sales with a move to managed accounts, we believe our profitability over time would not be negatively impacted, but amounts would be earned over time versus at point of sale. If sales were to move to mutual funds, we would receive lower sales-based earnings upfront, but would have the opportunity to earn recordkeeping and custodial fees that are not currently earned on variable annuity. Ongoing asset-based earnings on mutual funds and variable annuities are fairly consistent. While we cannot conclude at this point what will happen, we're committed to finding the best way possible to continue to help middle income Americans save for their retirement. Now let's open the call up to questions.

[Operator Instructions]. Our first question comes from Steven Schwartz at Raymond James.

I have a question but let me ask a couple and get back in line. I'm going to ask two on with concern with the DOL I think. First, Glenn, in your comment, one of the appendices was a letter by Gibson Dunn, by Eugene Scalia or one of his minions. If the BIC, if the rule is adopted as currently seen, are you prepared to sue the DOL?

To answer a question like that you'd have to see what the final rule is and the overall industry reaction to the rule. It's impossible to anticipate how that might turn out without seeing the final rule. There's just too broad a series of possibilities to make a decision like that, so that one's just too difficult to answer at this point. And really --

Well, my caveat was if the rule is adopted as is.

Yes. And it really is an industry-wide issue. You know, we're traveling in the pack with the rest of the industry on the vast majority of the issues with the rule. They are not unique to Primerica. They may apply to us a little differently because of our unique market, but generally the entire industry is in reasonable agreement about the issues and concerns with the rule. So I think that is something that will be elevated to an industry level at the point the rule becomes final.

Okay. And then can we revisit the issue of internal consumption? That came up in the first quarter conference call. What was internal consumption this quarter?

Yes, our internal consumption stays very constant at about 20% of our sales over a year are made -- life insurance sales are made to either a recruit or a licensed agent, 80% are made to people who are neither of those two. And we don't see a lot of fluctuation in that number quarter to quarter or year to year, it's been very constant over a long period of time.

Okay, yes. One thing I'm a little confused about from the discussion last quarter when I was looking it over, is it pretty much -- I guess the question is, what is the definition of a recruit? I mean isn't really everybody you talk to a recruit? I mean isn't that the idea?

No. We define a recruit as someone who has completed infinite business application and paid the $99 fee to join with good funds. And so, you know, it's a very definable group of people that we can identify every day and we do. And so then we can also track that and know if they buy a product from us, either a life product or an investment product, we can match that up.

Okay and then it's like 14% of those people become licensed agents. Okay. I'll leave it there and get back in line.

That number, Steven, that number is higher. That number tracks at about 18% over time. It fluctuates. As recruits spike, the number will drift down. As they normalize, the number goes back up, as you might imagine would happen in a pipeline kind of concept where it takes time for people to get licensed. But it stays closer to 18% than any other number.

The next question comes from [indiscernible] at UBS.

Just want to go back to slide 11 to start, if I could. Alison, as you were talking about some of the potential changes that you might make to the model, I think you referenced, you know, clients maybe moving from variable annuities to mutual funds or managed accounts. And then you gave some sort of fee rate disclosures that I didn't quite follow, so can you walk us through that again? If a client moves from one to the other, what would the fee rate impact be on the company?

Sure. And I didn't give specifics, but let me give you some general thoughts around that. If a client were to move to our managed account platform, we do believe that over the lifetime of that client our profitability would be consistent with where it was in say a variable annuity. The main consideration there is that it would be far less weighted towards point of sale. Our managed account platform obviously pays the same fee on assets over time. And so the fees would be a little less front weighted, but over the long-term, we think they would be consistent. On a mutual fund, we generally feel the same. Specifically, the reason they get closer to each other is that our mutual fund platform, as well as our managed account platform for that matter, allows us to utilize our servicing, our recordkeeping platform, for accounts. So we have another form of revenue outside of asset and sales which is that we provide recordkeeping, custodial related and other types of services for those clients really on -- in most cases on behalf of a transfer agent. So we have these other sources of revenue that we actually don't have available to us on variable annuities. So the long or short answer, I guess, is that over time we feel like the options are fairly consistent. We do think the geography of the earnings, vis-a-vis what the source of earnings is, would change. And we do think the timing of the earnings would change as they would become more backend loaded.

And then I guess, have you done any more work on what the potential additional costs could be from the DOL proposal?

At this point, not particularly because it really depends on whether we would be using the Best Interest Contract exemption and as it currently is written, our view is that we would not use that exemption. So if in fact that exemption became usable for us, we'd have to look at what the rules were and see what the costs associated with it were accordingly.

Okay. And then my last one on this is, the eight-month implementation time that is currently built into the draft, you know, we've heard some companies say that it would be next to impossible to comply with the proposal over an eight-month implementation period. Can you provide your thoughts on how Primerica would be in such a situation?

I think a lot of those timeline challenges are questions about the advice or the Best Interest Contract exemption. As Alison just pointed out, the way we see it right now as currently written, we would operate outside of that. Most of the concerns that I've seen from industry have been if you're trying to operate within BIC, can you provide all of the requirements that BIC has in it within the eight-month timeframe, can you build all of that. And so that's a piece of the challenge. That's a piece of the reason we would make the decision to operate outside of BIC is because we don't believe that eight-month preparation period is long enough. Should BIC change and we reevaluate it, clearly a lot of the discussion, if you're aware of it going on with the DOL, is this very issue. And one of the potential changes to BIC would be it would lighten all of that load and therefore not as much would need to be done during the eight-month period. So I think it's a question of whether BIC becomes workable, where we would reconsider, but currently, as Alison said, we're planning to operate outside of BIC in its current form.

The next question is from Mark Hughes at SunTrust.

So best to understand this as if you operate outside of the exemption, the basic requirement is that you have sort of managed accounts or level fees. You're not generating commissions based on the products you sell, you're just generating fees based on assets. Is that correct?

Yes. I think there are a couple of different possibilities there and how we weight each one. And clearly larger accounts that can move on into the fiduciary world that we already play in with managed accounts is one option for our larger account balances. As we look outside of the Best Interest Contract, but still under the DOL rule, you're exactly right, level fee products, you know we made some reference in here to the possibility of working with providers in our qualified plan business to make sure that we met all the requirements for level fees and so forth and that's another option. And then, of course, a question is whether the non-qualified business grows as a result of all of this if it's not made as flexible as necessary and do you just identify some clients with small accounts who don't have access to a qualified account at this point, they accumulate money in a non-qualified account and later perhaps move to a qualified account, you know assuming it meets all of the annual requirements for contributions and so forth. So, the balance between those three or other options is what we're still working through, but we're looking at all of those possibilities.

Just want to say specifically, you mentioned that we'd only have asset-based. There is an exemption that -- the level fee exemption would allow us to continue to have sales-based and account-based and other forms of earnings, they would just have to obviously be level across all of our products and providers. So we would anticipate still having some forms of earnings that were sales-based or account-based.

Is there a way to -- I guess one concern would be that the incentives for your sales people would be reduced, that the lower commissions would be spread out over the life of the accounts. You know, eventually, they would make as much, but upfront there wouldn't be as much juice in it to make the sale today. Is there a way to provide sufficient incentives to keep people motivated?

Well I think that's a great question, Mark, but that is not directly required under the current rule to say that upfront commissions or higher first year commissions have to be eliminated, they just have to be levelized among products. And so I think, obviously there are always questions of what is the pressure on compensation or on cost of investments and is the pressure downward at the point of sale. But we don't assume that under the DOL rule that an upfront sales charge has to go away, as long as within our qualified business, as Alison kind of broke down the pieces of our business to focus on the part that's under discussion, you know we could still charge an upfront sales charge as long as it was level across all the products we were offering, based on the DOL rule or our understanding of it currently. If there are separate pressures industry-wide for those fees to come down, that's a little bit of a separate discussion, but we're not feeling those right now. And then the other thing is, I think you need to look at the total cost that those clients are paying, because in most current product structures, those that have an upfront sales charge have a lower ongoing annual charge and in fact for a long-term investor, the net is better on the A share model that exists today than it is, for example, on C share model if you're talking about the traditional mutual fund world which is why there was so much controversy around C shares. And so we don't anticipate -- that's not a direct DOL issue. Obviously it's part of the discussion, we're considering it, but we don't expect upfront sales charges to disappear as a result of this. So we do believe we'll continue to be able to motivate our sales force and continue to drive them toward the appropriate sales for our client base as we come through this.

Are you saying as long as the fees are consistent across all of the products that you offer, then you can operate outside of the exemption and you will be consistent with the DOL requirements?

Yes, let me clarify something. That is -- one of the things I see where you're getting the 1% is we can have a managed account platform, a true fiduciary platform, as well as a brokerage platform. Within the brokerage platform is where we would be using this level fee exemption. So the levelization would not be necessarily to match what we do in a managed account which by the way, we accept that a managed account is for a larger account holder. That's where it generally makes more sense to have that type of fee structure. But so the levelization would have to be within anything we sell through our brokerage type channel.

Right. and the level would be level across products, but across time the fees could be different, they could be frontend loaded?

That is correct.

And then, Alison, you had made this in giving your hypotheticals on the term life business should grow at least 5% and probably 8% to 10% even if sales were flat. And then you said, but if sales grew, then there would be another $35 million in -- to understand this correctly -- another $35 million in operating profit by 2019. So we would take today, we would grow it at a certain pace and then we would add $35 million to reflect a scenario where sales were growing. Is that your point?

Yes. And so what you have to make sure, if you're building a model, not to do is assume both growth in that baseline as well as growth on top of it. So if you assume that we basically were running at steady state production and then added that $35 million pretax in 2019, that's what we were trying to describe. And my reason for doing that, a lot of you all know this already but just to remind people, is just, you know, we've seen great results in our term life business. And by the way, I think we've hopefully explained to you why we don't think the DOL rule impacts that aspect of our business. And when you see great results in it, unfortunately you don't see them right away in your income statement. One, our book of business is already very large, so it's hard to see that growth. And two, as we all know, it takes a considerable amount of time for life insurance earnings to really emerge and build in the financial statement. So I wanted to use this as an opportunity to remind people that there is really that upside potential. And the fact that we're seeing such robust growth in our term life business right now really should translate into growing -- and by the way, also very sustainable and with stable recurring earnings in the future.

And then a final question. Could you kind of bracket, you say eventually you'll get back to a consistent level of profitability. If we take that 2014 pie chart, how much could it be down if you adjust the business model in the ways you seem to be anticipating here? I know this is a scenario based, but how much would it be done initially and then how long would it take to rebuild to parity?

Okay. So let me kind of break it into pieces. And unfortunately I don't have a real clear answer because we don't know what the rule will ultimately be. But we think the $58 million is fine and intact. We think the $21 million -- I'm looking at the pie chart -- is fine and intact. The $35 million of asset-based, we actually think, near-term, there would be very little decline in that number. Again, I don't know if we have -- and the extent to which we can grow it will depend on what we can sell, but just what kind of pressure we have from our current state, I think that number is largely intact near-term. The $32 million of sales-based is what's currently at question. We mentioned last quarter there is some component of our sales that are, you know, monthly preauthorized checking sales, where somebody is making a $50 or $100 contribution to an IRA every month and have been doing that for the last eight years, we'll continue to get that money in and we believe that stays under the transition provision, so that's intact. The rest of it is going to become a question of where it goes, what the rule says. And if the rule is not workable, if we can come up with a levelized approach to things or whether we have to start moving our business to a managed account. If we go to a levelized approach, I think the ongoing fee -- I mean excuse me, the current earnings would be much closer to where they are today. But if we have to go or we choose to go to more of a managed account profile, then today you see a dip, but you pick that up pretty quickly over time.

In your view, is the levelized fee is consistent with the DOL rule as written today?

So our view is and the lawyers are going to love me for this, there's a 408(g) exemption is what we would be looking at.

Was that a yes to my question?

Yes.

The next question is from Sean Dargan at Macquarie.

You know, I think what some of the [indiscernible] are concerned with beyond the immediate exposure here is the motivation of your sales force to sell ISP products. So I just want to make sure I have the, I guess the numbers framed right here. So you have approximately 100,000 life licensed reps, of which 20,000, give or take, are licensed to sell mutual funds. Correct?

That's pretty close, yes.

Okay. And so 1000 of those reps do half of the ISP business?

Yes, that was the stat we gave you, very close to half of the business, as personal producers, that's correct. They're the ones that write that business.

Okay. And those producers, is this their primary source of income or are they primarily, you know, making a living off of selling ISP products?

Well they're absolutely making a living off of their Primerica income and you're correct that the vast majority of their Primerica income at that extreme -- I mean our business, like so many businesses, looks like a barbell. It's got people that are extremely productive on one end in the ISP business and extremely productive on the other end in the insurance business and of course we're always working to draw people to the middle and be the best at both worlds, unless we need to focus on them where they are, as we're doing right this moment, to understand them better. But yes, you're on the right track I believe with what you're asking.

Okay. I'm just trying to frame, so for the other 19,000 mutual fund licensed reps, do you have a ballpark figure of their average annual commission that they earn?

No, I don't have that with me, Sean. Because we would look at that -- you know, we look at it as total commissions. As well as broken down between the two primary areas of life and ISP. And then remembering that even a significant portion of those are going to be part-time and so when you think about what that expectation of that amount needs to be, you've got to figure all that in and I don't have that in front of me.

But would it be your -- I guess would the intent be to get the most productive ISP sales people all registered as IARs?

It would certainly be a piece of our plan. I mean what we want to do, Sean, is make sure that we have a rescue plan, a safe place for those most productive people to be first. And make sure that we're, you know, taking care of their clients, accommodating their needs as business people and continue to keep them productive and profitable for the company. And I think it's an advantage that that's a relatively small number that we need to make sure we've got a specific plan to keep them active, keep them productive. You asked a question earlier about the motivation for the kind of rank and file. Co clearly a piece of that is their compensation and a piece of that is their compensation at the time of sale, but that's not their only motivation. We want to make sure we understand, you know and feel like they can be paid appropriately for the service they provide to their clients and that the timing of that is the best possible. But if some of that timing starts to shift, we have other motivational capabilities. You know, people aren't just in our investment business on a part-time basis just for the money they make. They understand that it's a part of the job they need to do for their clients. They understand that this part of our business for them is a business that builds compensation over time for them. I explained earlier people enter our life insurance business first, that's because you can make money quicker in the life insurance business. And they start to add an investment business, especially these that we're talking about that are the rank and file, the 19,000 if you will and they build that over time. That's their expectation. So extending that timeframe a little bit is not perhaps as sensitive an issue as someone might perceive when you first hear this, if we had to go down that path. So I think we've got the capability -- we have a very flexible business model and we can adjust it as needed to make sure that we continue to use all the motivational capabilities that we have to keep those people moving.

Our next question is from Colin Devine at Jefferies.

Just a couple questions here and clarify, with respect to the ISP production, you know you were mentioning the 1000 reps. Are they all in the U.S.? Just so we're distinguishing between the U.S. and Canada, obviously Canada is not at risk with the deal. That would be number one. Number two, if we can change topics. You know, you were talking about product enhancements, perhaps if you could spend a minute or two discussing those. And then lastly, with respect to commissions, I think it would be very helpful to get some granularity as to how those differ across your various products. Thank you.

Okay. Let me pick off those, Colin, if I could kind of one at a time. Yes, the discussion we're having is about our U.S. ISP business. About the breakdown of our total life -- or total sales force on the ISP side, a little over 17,000 of that group is in the U.S. and I think we, you know, make that public at least once a year. So that's a number that's out there. And what we've been discussing today is all pertinent, the stats surrounding and so forth, to our U.S. business. And our Canadian business does behave a little bit differently and of course these rules don't apply to them. When we talk about product --

I just, I want to be very careful here with the numbers. So, the 1000, it's 1000 out of the 17,000.

Correct.

And then of total ISP earnings or of just U.S. ISP earnings which portion are they contributing? Sorry, I just want to be exact.

U.S.

Okay. And what is that percentage again of U.S. ISP earnings?

It wasn't earnings, it was --

U.S., it's 52% of U.S. ISP sales.

How would that compare to earnings?

I would guess it would be fairly close but I'd have to actually do some work. I mean our book of business has been around longer in the U.S. than in Canada, but I don't know. I guess my suggestion to you would be look in the supplement and see how we split the assets between U.S. and Canada and you can gauge it from that.

All right. Product enhancements, I'm assuming we're staying focused mainly on the ISP side of the business. As you know, we've continued to add product providers as well as products going back several years when we first added the managed accounts business, the advisory business and of course we've recently expanded that product line within the single partner that we have currently in that product line. On the variable annuity side, we've added a number of new product providers, as well as on the fixed index annuity side. And so we've seen expansion in those types of products. Our mutual fund line has not brought on -- we brought on a couple of new partners, but they have not been significant in sales up to this point. But as Alison mentioned, moving one of our long-time partners onto our platform, you know, gives us an ability to work more closely with them, plug into them better through our technology and so forth and also provide some of the service that they do to clients which creates an income stream for us. So there are a number of fronts we've been working on, on the ISP side for product enhancements. And of course there's a whole different list of what we've been doing on the life side. I'm not sure if that was part of your question or not. And then your commission question again, refresh my memory on that one.

Just, you know, you talked about how those vary across products. So perhaps you could just expand on that since that clearly is one area that could change if you go to a level commission structure with the DOL.

Right, let me go first maybe and then I'll toss it to Alison for the detailed numbers behind it. But we view our product mix as being reasonably interchangeable from a bottom line perspective. As Alison has explained often, there's a timing difference between whether a product has an upfront commission versus ongoing compensation. But over the lifetime of a client, we see not a lot of difference -- not enough difference that we're trying to drive product mix from an incentive -- of course you shouldn't be doing it anyway -- but you know we're neutral on that, okay. We have more of an open architecture for all of the right reasons and one of them is the question you're asking. Now, as we shift from product to product, you're exactly right, the timing of that compensation could differ and also the question of whether we have fee income off the accounts is the other piece that Alison walked through. So, Alison, I don't know if you want to reiterate anything you said earlier.

I mean I think you've covered it very well, but just to reiterate what I said earlier. And again, I think you need to, from the levelization standpoint, you need to look at just what would be offered in the brokerage platform. So the managed account really is sort of separate to that. And so those key products are really going to be your variable annuities, obviously your other annuities as well and then mutual funds. And as I mentioned, the ongoing asset-based earnings on mutual funds and variable annuities is fairly consistent. There are different components, but when all is said and done, our net earnings are fairly consistent. And on a sales base, as is common, we generally pay -- or earn, I should say, more on a variable annuity upfront, as it is well known, is a more expensive product because it's an insurance product and provides guarantees that you obviously don't have in a mutual fund. So while we do think if there was a shift to more mutual funds or we had to weight something more towards mutual fund compensation upfront, that would be lower, there is, as Glenn mentioned and I mentioned earlier, the ability to generate a fee income, that we do not currently get under variable annuities, that would likely help to offset that differential.

Okay. One follow-up then. Going back to the beginning, the 17,000 U.S. reps that are selling funds and VAs. You know, clearly you expect, no matter which way the DOL goes, that 1,000 of them, as I think said you're going to do whatever it takes to protect them. Looking at the other 16,000, what do you think -- or could you put a number out there of what you expect the attrition rate might be if this goes ahead? Because I would assume the amount of revenues those people would generate is just insufficient to keep them in the business. Is that a fair presumption?

No, we don't look at it like that at all, Colin. Again, of those other 16,000, you know some are part-time, some are full-time, some produce a significant portion of their income from securities, some don't. Some have much larger life insurance businesses. And so we're not anticipating -- we haven't seen any impact yet of concern about the DOL on our whole recruiting, licensing and retention process. As we described earlier, we feel very good about the momentum we have in the fundamentals of our business. And that's in the face of us in constant conversation with our sales force about this DOL process. We keep them updated every month on what's going on because it's an important topic of interest. And we would not anticipate, even under the current DOL rule, that we would see a different dynamic attrition of the existing sales force in any different way than we see today, whether it's the 1,000 or whether it's the other 16,000.

I would say the other thing there too, Colin, is most of those 16,000, if you will, are in the organizations of the 1,000, okay. So they're in their business hierarchies. And so one of the benefits we have is our sales force is a major provider of influence and change and moving along in change. So to the extent we can work positively with that smaller group of people, they'll be partnered with us in really trying to teach the new regime, whatever it is, to those other 16,000 people. So, you know, sometimes people look at our large numbers and say how do you make 20,000 people change. Well, the good thing is we'll focus on the small group and that small group will actually push the change down and create the training and the face-to-face interaction to make it more workable for everybody in the organization.

Okay. Well, we appreciate everyone's time today. We feel like we've delivered strong production and solid financial results in the first half of this year. And we're certainly encouraged by our post-convention activity levels and plan to build on that positive momentum to continue to grow sales, increase earnings and enhance shareholder value long-term. Thank you, everybody.

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