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Edited Transcript of PRI earnings conference call or presentation 8-Feb-19 3:00pm GMT

Q4 2018 Primerica Inc Earnings Call

DULUTH Feb 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Primerica Inc earnings conference call or presentation Friday, February 8, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alison Sue Rand

Primerica, Inc. - Executive VP & CFO

* Glenn Jackson Williams

Primerica, Inc. - CEO & Director

* Nicole Russell

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Conference Call Participants

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* Andrew Scott Kligerman

Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst

* Daniel Basch Bergman

Citigroup Inc, Research Division - VP

* Jeffrey Paul Schmitt

William Blair & Company L.L.C., Research Division - Associate

* Mark Douglas Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Ryan Joel Krueger

Keefe, Bruyette, & Woods, Inc., Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Primerica Inc. Q4 2018 Financial Results Webcast. (Operator Instructions)

Nicole Russell, Senior Vice President Investor Relations, you may begin your conference.

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Nicole Russell, [2]

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Thank you, Chris, and good morning, everyone. Welcome to Primerica's fourth quarter earnings call. A copy of the press release, along with materials relevant to today's call are posted on our Investor Relations section of our website at investors.primerica.com.

Joining our call today are Chief Executive Officer, Glenn Williams; and our Chief Financial Officer; Alison Rand. Glenn and Alison will deliver prepared remarks, and then we'll open the call for questions.

During the call, some of our comments may contain forward-looking statements in accordance with the safe harbor provisions of the Securities Litigation Reform Act. The company does not assume any duty to update or revise these statements to reflect new information. We reference you to our most recent Form 10-K filing as modified by subsequent Form 10-Q filings for a list of risk and uncertainties that could cause actual results to materially differ from those expressed or implied.

We'll also reference certain non-GAAP measures, which we believe will provide additional insight into the company's operations. Schedules reconciling non-GAAP measures to their respective GAAP numbers are included on our earnings press release and available on our Investor Relations website.

I would now like to turn the call over to Glenn.

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Glenn Jackson Williams, Primerica, Inc. - CEO & Director [3]

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Thanks. Before we get started with today's prepared remarks, I'd like to formally introduce Nicole Russell, who joined the Primerica team in December and be responsible for leading all aspects of our Investor Relations program. Nicole has spent her entire professional career in the financial services industry and brings 20 years of experience in the field of Investor Relations. I'd also like to recognize and thank Kathryn Kieser for leading our Investor Relations program since our IPO. Kathryn has done an exceptional job, and we know she will continue to be successful as she assumes other responsibilities here at Primerica.

Today, I'll share performance highlights and accomplishments that position Primerica for continued growth, then Alison will review our financial results.

At Primerica, we constantly strive to create long-term value for all our stakeholders by executing our strategy and effectively using our capital.

Our strategy remains unchanged. First, maximizing sales force growth and productivity; second, broadening and strengthening protection product offerings; next, expanding client investment options; and finally, developing digital capabilities to deepen client relationships.

Our market, middle-income families across North America, continues to grow and along with it, the need for protection and saving solutions. The size of our sales force and our unique educational approach are key strengths and differentiating factors compared to our competitors.

On Slide 3, you can see that we achieved several important milestones in 2018. First, we surpassed a goal we set when I became CEO 4 years ago, which was to grow the size of our life insurance licensed sales force from 98,000 to over 130,000 representatives. Second, our Term Life face amount issued exceeded $95 billion for the second year in a row, placing us among the top Term Life Insurance issuers in North America. Finally, we delivered strong performance in our Investments and Savings business, including a record $7 billion in sales, led by strong demand for variable annuities and the success of our Lifetime Investment Platform.

We've leveraged the powerful combination of people and technology by enhancing our reps' digital experience starting from their first exposure to Primerica through the licensing and training process and beyond. We've also launched EZ-KEY, an Investment and Savings Products tool with model portfolios that creates an easy-to-use efficient method for our sales force to better serve clients. We believe this high-touch, high-tech approach will drive long-term productivity and make the ISP business more accessible to representatives who are considering obtaining a mutual fund license.

Let's turn now to our fourth quarter performance. We had strong financial results for the quarter with adjusted operating revenues growing 11% and adjusted net operating income increasing 21% compared to the prior year period.

Adjusted operating EPS increased 26% year-over-year and ROAE for the quarter was 24%.

On Slide 4, you can see a summary of our distribution results. Our recruiting and licensing results were somewhat lower than the fourth quarter of the prior year, but we continue to attract a large number of people to our business with 62,000 recruits in the quarter. We ended the year with a total of 130,736 life insurance licensed sales representatives, which represents an increase of 4%, year-over-year. This growth rate is lower than that experienced from 2014 to 2017 but consistent with the 4% compounded annual growth we've seen in the size of the sales force since our IPO. While we will have periods of both faster and slower-pace growth, we believe, over a longer period, the natural compounded growth rate for our sales force is in the mid-single-digit range. Achieving this longer-term growth rate will drive meaningful distribution results for the company, and we expect the sales force to see growth in this range during 2019.

Turning to Slide 5. During the fourth quarter, we issued 72,000 Term Life insurance policies compared to 80,000 policies during the fourth quarter of 2017. Productivity remained within our historical range at 0.18 policies per life insurance licensed representatives per month but below the 0.21 experienced in the prior year. Like the sales force, productivity and, in turn, issued life insurance policies, will experience periods of faster and slower-pace growth. Since the IPO, the compounded annual growth rate in issued life insurance policies has been 4%. We expect Term Life policies issued to increase approximately 3% in 2019, in line with this longer-term growth rate.

We always strive to accelerate growth by driving engagement and creating opportunities for our sales force. We continually monitor the momentum of our business and make regular adjustments to short-term incentives accordingly. This summer we will host our biennial convention in the Mercedes-Benz Stadium right here at Atlanta. We anticipate one of our largest audiences ever and expect that attendees will leave with a renewed sense of energy.

Moving next to our Investment and Savings Products segment, performance during the quarter was driven by both sales and average client asset growth. Total ISP revenue-generating sales increased 10% compared to the fourth quarter of 2017. The largest contribution to growth was variable annuity sales, which increased 44% compared to the same quarter in 2017, reflecting recent product enhancements by our product partners that offer more attractive client benefits. Demand for our managed accounts remained high, reflecting the success of the Lifetime Investment Platform. Average client assets were impacted as financial markets corrected at year-end but still increased 2% compared to the prior year, largely due to positive net client flows of $360 million.

While we are not immune to market downturns, the long-term retirement focus of our clients and the principles of systematic investing that we teach help protect us during short periods of volatility. As a result, our redemption rate is generally better than industry averages. We've had great success driving organic growth over the past few years. And as we enter 2019, we're actively assessing new opportunities to accelerate that growth. Our robust distribution capabilities allow us to offer a range of products and services that meet our clients' needs. We are proud of our success, serving the protection needs of the middle market, and we believe that this opportunity will continue to grow at an exceptional rate. We plan to meet these needs by developing a new generation of Term Insurance products. We're currently working on incorporating the latest advancements in underwriting and issuing policies into a process that will be both faster and more convenient for our clients and our representatives.

We are also assessing opportunities to partner with a third-party to provide a mortgage lending solution that would help our clients consolidate and eliminate debt. We recognize that the debt load in the middle market is at record levels, and it is often the financial need that creates the greatest concern among families. We had a successful lending program while we were part of Citi under the regulations in place at the time. During 2019, we will pilot a new lending program to confirm that we can succeed under current regulations and assess the business opportunity in this area.

Finally, we continue to make investments in technology to enhance our business. We are building additional platform that will seamlessly connect the client, the rep and Primerica and support our mission of creating financially independent families. We will strive to deepen our relationship with clients and extend the reach of our representatives in the market. Our platform will provide a personalized experience that shows clients what products they have; tracks progress toward their financial goals; encourages their best next step; and helps them accomplish it, all with the involvement of the Primerica representative in the company.

We also remain committed to increasing stockholder value by actively deploying capital. Through a combination of share repurchases and dividends, we returned 78% of our 2018 operating earnings to stockholders and reduced our share count by 5%.

We have confidence in our business model and growth opportunities and expect to accelerate capital deployment by increasing our share repurchases to around $225 million in 2019. We've also raised the stockholder dividend by 36% for the first quarter of 2019. We expect our strong earnings and continued active capital deployment to drive an industry-leading ROAE in the 22% to 23% range for 2019.

Now I'll turn it over to Alison.

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Alison Sue Rand, Primerica, Inc. - Executive VP & CFO [4]

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Thank you, Glenn, and good morning, everyone. Today, I will share with you the key drivers from the fourth quarter and provide some insight into 2019.

Starting on Slide 6, our Term Life business continues to perform well, generating a pretax margin of 18.7% in the fourth quarter. The segment's operating revenues increased 11%, driven by a 12% growth in adjusted direct premiums compared to the last year's fourth quarter. Persistency and incurred claims were generally in line with the prior year period while neither period experienced notable claims volatility. Benefits and claims and DAC amortization ratios were 57.5% and 17.1%, respectively, and remained consistent with the prior year.

The net insurance expense ratio for the quarter was 7.8% or $7.9 million higher than the same quarter last year. $3.3 million of this increase was due to a full year premium and retaliatory tax benefit recorded in the fourth quarter of 2017 when Primerica Life changed its state of domicile. The remainder was attributable to supporting business growth.

On a full year basis, the benefits and claims ratio was 58%, down from the 58.5% in 2017, indicative of normal claims volatility. In 2019, we expect the benefits and claims ratio to stay in the 58% to 58.5% range. The DAC amortization ratio was 16% for 2018, in line with both 2017 and our expectations for 2019.

The pretax margin was 18.9% for 2018, and we expect margins to be at a similar range for 2019.

We continue to see good momentum in adjusted direct premiums and expect them to grow around 11% in 2019. The top chart on Slide 7, which has been revised slightly from the chart presented last quarter, shows the various drivers and how they contribute to adjusted direct premium growth. The IPO coinsurance continues to positively impact growth, although, as anticipated, the benefits had been diminishing as growth in the post-IPO block is coupled with runoff of the pre-IPO block. The chart on the bottom of Slide 7 depicts this dynamic. The retention of policies that continue beyond their initial policy term provided additional growth in 2017 and 2018 but has now reached steady state and future incremental growth should be modest. On the bottom line of the chart, you can see that changes in the value of the Canadian dollar also impact growth.

Over time, the level of life insurance policies issued will increasingly drive adjusted direct premium growth. The step-up in life insurance policies issued in 2015, '16 and '17 has provided ongoing value as earnings emerged over the life of the policies. Earlier in the call, Glenn discussed that we are targeting growth in issued policies of around 3% for 2019. If issued policies continue to grow at this rate in the near term, we would expect the adjusted direct premium growth rate to decline by about 1.5% per year over the next few years.

Moving now to other Investment and Savings Products segment on Slide 8. We continue to achieve strong top line growth with ISP operating revenues increasing 11% over the prior year period. Sales-based revenues increased 15%, driven by 10% growth in revenue-generating product sales and a shift in sales mix towards annuities, which generally have higher sales-based fees. Asset-based revenues grew 2.8%, outpacing the growth in average client assets values from continued success in our Lifetime Investment Platform, which provides strong asset-based revenues.

Account-based revenues increased 39% compared to the fourth quarter of 2017, largely due to revisions to our record-keeping platform contract, which resulted in account-based revenues and other operating expenses, both increasing by around $6 million in the quarter.

ISP pretax operating income declined 3% versus the prior year period. Sales in asset-based commission expenses grew generally in line with the related revenue, and operating expenses grew $7.7 million, about $6 million of which was from the record-keeping contract revisions I just mentioned.

Segregated fund DAC amortization in Canada increased $2.6 million year-over-year as Canadian markets were under pressure during the fourth quarter of 2018 in contrast to more favorable market conditions experienced during the fourth quarter of 2017.

Financial markets experienced significant fluctuations in December and January. We believe our diversified earnings, which include sales, assets and account-based sources, help lessen the impact of market volatility. Glenn described the nature of our business, which is heavily weighted towards retirement savings, also mitigates exposure. To help frame our market exposure, our financial supplement shows that on a net revenue basis, after deducting expenses and sales commissions that move directly with asset levels, our 2018 full year asset-based net revenue, as a percentage of average client asset values, was 0.2% or approximately $120 million of pretax earnings, on average client asset values of $52 billion. A 10% variance in average client asset value would therefore result in about a $12 million change in pretax earnings.

Switching gears to our invested assets portfolio on Slide 9. Net investment income increased $2.3 million or 12% year-over-year split with between the Term Life and Corporate and Other Distributed Products segments. The increase in net investment income reflects growth in the invested asset portfolio, partially offset by the continued impact of lower reinvestment yields.

Net unrealized losses on our invested asset portfolio increased to $9.2 million at year-end due to widening spreads during the quarter. The average book yield of our fixed income portfolio at quarter-end was 3.89%. While rising rates should continue to provide us with better yielding investment opportunities, we still expect to see pressure from higher-yielding investments maturing in 2019.

Over the next 12 months, approximately 13% or $273 million of our portfolio will mature with an average yield of approximately 4.5%, in comparison to the 4.02% long-term purchase rate achieved in the fourth quarter. Offsetting this yield headwind, we expect to see continued growth in the size of the invested asset portfolio as our business grows.

Now I'll move to a discussion of the company's insurance and other operating expenses on Slide 10. Fourth quarter expenses of $98.3 million were $17.4 million higher than the fourth quarter of 2017 and were in line with expectations we shared last quarter. Key drivers of the increase was a change to our ISP record-keeping contract, which increased expenses by around $6 million, $8 million of additional cost to support growth in the business and key initiatives and the $3.3 million premium and retaliatory tax benefit recognized during the fourth quarter of 2017 when Primerica Life change of its state of domicile. As we look to 2019, we anticipate insurance and other operating expenses will increase between 6% and 8%, reflecting both growth in normal business operations as well as additional cost to explore new business initiatives and further enhance technology.

As a reminder, first quarter expenses are generally about $10 million higher than other quarters due to the annual grant of management equity award.

Slide 11 shows the main drivers of the expected full year increase in expenses. Salaries and other employee-related costs, excluding technology-related employee cost, which I'll discuss in a moment, are expected to grow by about $5 million to $6 million over 2018 levels, reflecting typical year-over-year merit increases and additions to staff. Expenses that are tied directly to a revenue source such as premium taxes and asset-based fees, are expected to grow by $6 million to $7 million based on anticipated growth in premium, client asset values and [so forth.] We also expect to spend an additional $3 million to $4 million in 2019 to support the mortgage pilot and Term Life product advancements, as Glenn discussed earlier.

In 2019, technology will continue to be a driver of expense growth, and we expect to increase spending by $10 million to $14 million in 2019. There are 4 main components to which we attribute this growth. The first component is cyber and information security, which is largely related to managing risk throughout our IT infrastructure and keeping our confidential information safe. We have budgeted an increase of $3 million to $4 million in 2019 and believe our overall spend is in line with industry trends. The second component is technology management and investment in infrastructure. This include areas that are essential to running the business such as the mainframes, distributed systems, networks and telecom. It also includes the management teams necessary to ensure our technology operations and projects run effectively. We expect the related expenses to grow between $2 million and $3 million in 2019. The third component is tied to modernization initiatives launched in 2018. These include efforts to make information contained in our operating systems more accessible and consumable and deliver new technology solutions to the businesses more efficiently. A key area of focus will be on Term Life client data as we begin to evaluate a new generation of Term insurance products. We expect to spend an incremental $3 million to $4 million on modernization efforts in 2019. Finally, we expect to spend an additional $2 million to $3 million to expand our digital platform, as Glenn discussed earlier.

Moving now to other topics on Slide 12. The effective income tax rate for the fourth quarter was 19.8%. During the quarter, the full year tax expense related to the global intangible low tax income or GILTI component of tax reform was reduced from $4 million to $0.7 million based on regulations released by the Department of Treasury in November 2018. A benefit of $0.07 per diluted share. The full year 2019 operating effective income tax rate is expected to be relatively consistent with 2018 at about 23%.

As I wrap up, let me say that we remain committed to maintaining a strong balance sheet and continue to demonstrate a strong capital position with Primerica Life's statutory risk-based capital ratio estimated to be around 440% and holding company liquidity of $152 million at the end of 2018. We will continue to take out ordinary dividends from Primerica Life, to the extent available, with the goal of maintaining our near-term RBC ratio in the low to mid-400% range.

Now let's open the line up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Ryan Krueger of KBW.

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Ryan Joel Krueger, Keefe, Bruyette, & Woods, Inc., Research Division - MD of Equity Research [2]

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In ISP, it looked like the percentage of annuity sales as a percentage of total revenue-generating sales was basically flat with the third and the fourth quarter, but the revenue yield picked up a fair amount despite that. I was wondering if you could give us some more color there?

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Alison Sue Rand, Primerica, Inc. - Executive VP & CFO [3]

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I think it might be on a year-over-year basis that it had moved. We have seen throughout 2018, obviously, a shift toward not just variable annuities, we also saw in the fourth quarter strong fixed indexed annuities as well. So really, what we were describing and the ratio you're looking at might be more on a year-over-year basis.

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Ryan Joel Krueger, Keefe, Bruyette, & Woods, Inc., Research Division - MD of Equity Research [4]

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Okay. And then in Term Life, the 3% growth you talked about in issued policies. Do you expect -- I guess should we expect that to come through fairly evenly throughout the year? Or would you think it would be more back-half loaded following the convention?

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Glenn Jackson Williams, Primerica, Inc. - CEO & Director [5]

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Yes, Ryan, it's Glenn. Yes, it's probably not going to be smooth. I think you will see it probably more pronounced after the convention. Just when you look at the comparisons year-over-year as well as the convention mid-year this year, that's more likely. A little hard to project, of course, but I think that your intuition is probably correct on that.

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Ryan Joel Krueger, Keefe, Bruyette, & Woods, Inc., Research Division - MD of Equity Research [6]

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And then just last one on the expense guidance. Can you give us a sense of how much of the increase you'd anticipate through the corporate segment?

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Alison Sue Rand, Primerica, Inc. - Executive VP & CFO [7]

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We -- I don't think we shared it that way. I can certainly go back and look and try to share with you, accordingly. I'd say the one thing that -- without giving you exactly because I quite frankly off the top of my head, I don't recall the numbers. When you look at what I said in the past, I had indicated until we figured out what these expenses were, we didn't know how it was going to impact the Term Life margins. What I can reiterate at this point is our Term Life margins and quite consistently the expense ratio for Term Life, given that I said both the DAC and claims ratio are going to be consistent, given that the margins are consistent, you can also conclude that the expense ratio would be consistent. So I think when we, sort of, looked at things, it ended up being fairly evenly weighted amongst the segments between what would be applied. And I'd say, really, the pickup year-over-year is both in Term Life and in Corporate and Other and to a much lesser degree would be in ISP. I'll go back and look at those numbers too, and we can look to try to gauge that for you in the future.

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Operator [8]

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Your next question comes from Andrew Kligerman of Crédit Suisse.

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Andrew Scott Kligerman, Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst [9]

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Maybe first question I'd like to touch on is sales and the sustainability. Your indexed and variable annuity sales were up 51% and 29%, respectively, in the quarter. How sustainable do you think that is? And then on the flip side, mutual funds were, what, 2% up in the quarter. Maybe that was just a really bad environment, I don't know, but where do you think that goes as well?

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Glenn Jackson Williams, Primerica, Inc. - CEO & Director [10]

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Well, Andrew, I mean, of course, those growth rates are unusual. They're exceptional. And so we would not think they're sustainable at that rate. However, we do believe there's good momentum. The volatility in the market plays into the guarantee profile of those products and works against mutual fund products. So the more volatility you have, the more likely you're going to have momentum to VA and fixed indexed annuity sales and the more headwind you're going to create on the mutual fund side. If the market continues to perform well and some of the concern on the volatility, the high-profile news and discussion about trade and all those things that have big type on the headlines, if some of that would subside, I think you'd see mix, kind of, normalized to a certain extent. But we're optimistic about, as long as returns stay positive that all of that has growth potential in it, but you're going to see the mix shift, and it's mostly going to be driven by the level of concern in the marketplace toward or away from the guarantee products.

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Andrew Scott Kligerman, Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst [11]

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I see. That makes a lot of sense. And then just on productivity in the Term area. So you came in the quarter at 0.184% per month, and you typically guide to 0.18% to 0.22%. So you're on the low end. Could you talk about your thinking going forward into 2019? And what you might be doing to get that productivity toward the higher end?

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Glenn Jackson Williams, Primerica, Inc. - CEO & Director [12]

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Sure, absolutely. Great question. I mean, it's very natural in our business to see the increases and decreases in momentum and growth -- and you see a period of strong growth that's going to be followed by a period of regrouping and refocusing. And we've enjoyed about 3.5 years of exceptional growth, which is, I think, at the long end of our historical patterns. And in general, you'll see recruiting and life momentum more or less travel together, and then ISP has a different and sometimes, inverse cycle. But we do feel like the fundamentals are favorable. There's nothing fundamentally different in the marketplace that we see. And so our plan is to use our levers, which are messaging, which -- we're great communicators at all times but particularly, when we have an event like our convention coming, our incentives and then many of the improvements that we touched on in today's discussion, and the game plan is to try to go through that regrouping and refocusing period as quickly as possible. And so we do have the opportunities of the convention where we look constantly and have some positive improvements in our recruiting, licensing and field training processes on tap for 2019. And so it's a combination of trying to move that, which all play into that productivity ratio, that you asked about, is moving that up as high in the quarter as possible -- as quickly as possible. And so that's the process that we're always engaged in that. But at a time when momentum ebbs, you focus harder on that, and that's exactly what we're doing for 2019. And we've got some good opportunities and some good fundamentals to make that happen.

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Andrew Scott Kligerman, Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst [13]

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That's great. And one last one, the EZ-KEY sales tool, any read-throughs, any color on how that's coming along?

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Glenn Jackson Williams, Primerica, Inc. - CEO & Director [14]

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Yes. It's still early, so we certainly don't want to make a final declaration on our opinion on it, but the early returns are very positive. As I intended to describe in my prepared remarks, the first purpose for that is to give a level of ease and confidence to the newest mutual fund salesperson so that they can enter that business more quickly and more confidently. Now the Term Insurance business, I would say, is not a very risky business. There's not that a lot that can go wrong in helping people with their need for Term Insurance. But when you start dealing with people's investments, it's something that new salespeople tend to have a little bit slower uptake. They proceed a little more cautiously, which is good. And anything we can do to give them a track to run on and more confidence is certainly helpful and that's what EZ-KEY is all about. Now it's also an amazing piece of technology, which is very attractive on that front, and it's very simple. But what it does is, it brings those new people into the business faster. And I'd say, the early returns on it is that's exactly where we're seeing the usage. It's open. It's available for anyone to use at any level in our business, but it's most attractive to the newer people. That's where we're seeing most of the activity. We're seeing it in the smaller sales, the first-time salespeople, the first-time investors, which is exactly where we wanted to start this process to engage more people at that end of our business. In my 38 years of being here, I've been able to see and live through small investors becoming major investors over a lifetime. And we want to continue to feed that platform with new salespeople that are bringing in new small accounts of brand-new investors that are being ignored by the rest of the industry. And in a decade or 2 from now, we'll turn around and see, that's a major client and we truly helped them prepare in a significant way for their financial futures. And so that's exactly where EZ-KEY was focused. And the good news is, that's where the uptake is taking place the fastest. So we'll continue to report on that as we -- as it matures, but it certainly entered the picture at exactly the spot we had hoped.

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Operator [15]

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Your next question comes from Mark Hughes of SunTrust.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [16]

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Alison, you had mentioned that the benefit you get from the seeking that provision around the IPO coinsurer -- that it's been a tailwind. You seem to suggest it would stabilize. And I'm thinking about the -- your premium ceded IPO coinsurer, that ratio has been declining. This most recent quarter, it was down 250 basis points. Are you suggesting that should stabilize at this level? Or should continue to go downwards but just not at the same pace?

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Alison Sue Rand, Primerica, Inc. - Executive VP & CFO [17]

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Yes. And so the reason, specifically, that, that ratio -- I think it had historically been right around 4-ish percent. The reason it changed was, particularly starting in 2017 when we started recapturing or retaining, if you will, those end-of-term policies, those do run through that same line since they are all related to that block of business. So I don't see anything that would drive a big shift in that ratio here on out. Like I mentioned, we're not quite at full steady-state on having these level of policies we keep post end-of-term in our kind of forum, but I do think we're pretty close. So I don't expect to see the ratio that you're pointing out, to change very much into the future.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [18]

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So this sort of fourth quarter level, we might want to just model that on a go-forward basis?

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Alison Sue Rand, Primerica, Inc. - Executive VP & CFO [19]

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Yes, I think that would be reasonable -- quite frankly, I've looked at it a little bit more associated with what it does on a net basis. But the only thing that would drive a change there is either if we had some very, very large change in persistency on a very old stable block, which I can't see as being particularly likely. Or if we had periods where we had more business reaching the end of the level premium paying period that had formerly been associated with that contract. I will say, and I think I said this on the last call, what comes to end of term has to do with what we sold 10 years ago, 20 years ago and so forth. So to the extent we were going through a period of growth in one of those corresponding periods, you might see that number kick up a little bit or conversely, come down if we were in a slower growth period. But relatively speaking, it should stay in the general -- this general range.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [20]

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And then how meaningful was that mortgage product you had mentioned that back with Citi you, I think, had some success with that. Could you give us some sense of the scale there?

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Glenn Jackson Williams, Primerica, Inc. - CEO & Director [21]

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Yes. It was an important product for us at that time that we again were in partnership with a sister company. So at that time, we didn't have a lot of insight into the how meaningful the profitability was to the company at that moment. But 2 areas where it was critically important was for our sales force and for our clientele. It was a significant income opportunity for our sales force, which just makes them more successful, increases retention, excitement. It's a better recruiting story. It has a lot of positives to our overall business to have a significant third line of business. And again, that business has a completely different cycle from the insurance business or the investment business, so it has a complementary nature from that focus. But as I said in my prepared remarks, one of the interesting things is we believe what we do today is critically important to the financial future of clients. But most clients don't stay awake at night worrying about buying life insurance or even investing for retirement, but a debt load is something that will cause sleeplessness for sure. And so it is a very hot topic with clients and something that there are a limited number of ways to address it, and it's a very interesting discussion. And also, if we can help them consolidate and accelerate their debts, not just to extend them and postpone them, okay, that's the more traditional way, but help them consolidate and accelerate payment, then that actually can free up money for them to pursue their other needs. There are very few product additions we can think of that don't take money off the table or out of the consumer's wallet, whereas consolidating and accelerating debt -- and so it's not only complementary to our business, it actually could provide a tailwind. And so that's the memory that we have, which is very good of this product in the past. It's a very different environment today. And that's the reason, as I said, the first thing we've got to do is pilot this and see if in today's economic environment and also in today's regulatory environment where it's more difficult to get folks licensed to do this than it was a decade ago and so forth, we want to prove the concept. But it certainly has a lot of significant attributes that we want to go out and test and prove and we think it can certainly be complementary and even beneficial to our existing business.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [22]

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And then a final question. Fourth quarter was pretty volatile in terms of new policies issued. There seemed -- your experience seemed to mirror the industry as a whole, how are you -- and I think you had some pretty good line of sight on that -- at the Q3 call. So early on, you saw it coming. How are you feeling about Q1? I think you touched on maybe full year growth being a little bit more back-end loaded, but how is Q1 shaping up?

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Glenn Jackson Williams, Primerica, Inc. - CEO & Director [23]

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Yes. Well, I think the good news, Mark, is, the environment continues to be more positive than negative out there on Main Street for the middle market. There are a few more distractions now than I think we had this time last year between the market volatility, which people even if they don't understand, they hear about. You've got government shutdowns, all the other distractions. So I think while the environment is still mostly positive, it's not as positive. But at the same time, we believe the need is as great as it's ever been, continues to grow. So it's an interesting kind of yin and yang in the marketplace in the first quarter. So I think that as we discussed earlier, I hope to see that we gain momentum during the year as we go, and I think that is the most likely scenario. And so we hope to get as fast a start as possible but pick up speed as we go throughout the year.

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Operator [24]

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Your next question comes from Daniel Bergman of Citi.

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Daniel Basch Bergman, Citigroup Inc, Research Division - VP [25]

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Just to start, regarding the 6% to 8% growth in operating expenses this year. I appreciate all the color you provided regarding that performance. It was very helpful. So just wanted to see if you would view that 2019 expense level as a typical run rate base to grow off of or if there's some elevated expenses from some of the IT and product initiatives that you mentioned in that number that may not recur? I guess just big picture, I'm trying to get a sense of how we should think about the likely trend in expenses post 2019? So any thoughts on that would be much appreciated.

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Alison Sue Rand, Primerica, Inc. - Executive VP & CFO [26]

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Sure. And I think if you go through the individual components until you get to largely the technology -- and one of the reasons this number does grow more than sort of your average 3% or 4% is because you do have a lot of expenses in here that are really tied to our revenue. So the thing that's actually growing the fastest besides technology are things that if they are not growing unfortunately, the top line is not growing either. So I would just keep that in the back of your mind, which is one of the reasons why we try to break this down into some individual components so you could get better transparency into that. I think, if you break the components down, what we are looking at with salary, employee-related, that's largely in that 3 percentage range. I'd say, that's very normal and typical. I would expect that to always be happening as the business grows and we continue to support our day-to-day operations. The ones I have mentioned tied to revenue sources are directly correlated to that. So a couple of things that are -- let me go through the other on technology. I think cyber and information security -- I think you saw a pretty large impact this year where we're expecting to push forward our spend and quite frankly, we've been pushing forward our spend every year for the last few years. But I don't have to remind anybody about the headlines from 2018. And at the end of the day, this is a big area of attention for both management and the board. And we need to just continue to do what's necessary to maintain security around our information and our systems. So I don't know whether that will grow as much in the future. I think we're sort of taking a little bit of an extra leap this year. I would say, we looked around at what was going on in the industry -- in industry, not just insurance, just in general, we do believe that our spend in this area, as a percentage of our total IT spend, is pretty much in line with the industry. It's about 10%. So I think we've gotten it to the right level. And hopefully, we won't have to see quite as extensive increases as we go into the future. That being said, there will definitely be some increase year-over-year. Looking at some other ones, technology management, infrastructure, I think that one is going to be a little bit more stable. Again, you see $2 million to $3 million increase. I'm hoping that will not continue to grow all that much in the future. The modernization -- for the modernization, the digital platforms and going back to the nontechnology, like the spend on the mortgage pilot and product advancement, those are the ones that will grow to the extent we see that we are really deriving a true benefit from them. So those are the ones that, right now, it's hard for me to predict. The thing I can say is, we're very focused on them, in particular, and if we don't see results from them, we will curtail the spending or quite frankly, shift gears and try something else. So we will keep you posted on our performance against all of those as we go through this year and the future. That's a very, very long-winded answer but that's probably my best way of explaining what should happen in the future. I just -- to reiterate, the things that we feel like we're making investment in and not just -- making sure we're stable and having the people to answer the phones and process the business, we will be very, very focused on making sure we're getting appropriate benefit from them.

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Daniel Basch Bergman, Citigroup Inc, Research Division - VP [27]

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Got it. That's very helpful. And maybe just shifting gears a little bit. The Investment and Savings Product sales held in quite well, overall, I think given the equity market volatility in the quarter. And I believe you said on the last earnings call that sales results had remained pretty strong in October. But I just wanted to get a sense, I mean, if there's any additional color you could provide on how sales trended as we move through the 3 months of 4Q '18 and as the market continued to deteriorate? And then related to that, any update you can give on what you're seeing kind of in January as the markets have bounced back pretty nicely?

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Glenn Jackson Williams, Primerica, Inc. - CEO & Director [28]

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Yes, I think in our -- we are distanced from the kind of real-time response to the market. And so I think that's overall a very big positive. As we've said many times before, short-term disruption can actually sometimes go by unnoticed. But at the same time, if the disruption is severe enough or long enough, it will be probably noticed, but it may be noticed a little later than the more upscale part of the industry might experience. So we were very pleased with our resiliency in the fourth quarter. I do think that the longer -- and you're right, there has been a nice recovery but there's still kind of day-to-day everyday volatility out there. And the longer that's out there, the more likely it is to be evidenced in some slowing of our momentum. And so again, it's impossible to predict. But I would just -- as a rule of thumb, the noisier it is, the more likely you would see pressure on that rate of growth. And so that's -- I'm hoping that the waters smooth pretty quickly. I think that would positive for a whole lot of reasons, not to just mention our business. But the longer it's out there, the more likely, as we get back and report future quarters you're going to -- that noise is going to be reflected in our numbers.

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Operator [29]

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Your next question comes from Jeff Schmitt of William Blair.

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Jeffrey Paul Schmitt, William Blair & Company L.L.C., Research Division - Associate [30]

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Could you maybe talk about growth of the agents that are licensed to sell mutual funds? Is that impacted much by the market volatility?

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Glenn Jackson Williams, Primerica, Inc. - CEO & Director [31]

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Interestingly, Jeff, it has not been -- again, I think for people to become discouraged and maybe postpone getting a mutual fund license, it would have to be a pretty long-term disruption in the market, and it hasn't been long enough for any of that. We've actually seen good momentum. I think as we reported in -- at the last call or on New Year's press release, we've actually seen good growth in that. Some of that was driven by our very deliberate efforts to -- even been asked many times over the years when is the growth rate of our investment sales force going to catch up with the growth rate of our life Salesforce and it's done that. Some of that was driven because we worked very hard to make that happen, some of that was driven because FINRA changed their licensing process, and it wasn't really a change to make it necessarily more difficult, but a change is a change, and it's a good opportunity to get people to hurry up and get licensed under the current regime because you don't know what the future one might look like. As so we actually capitalized on that. So we've actually had very strong momentum in new licenses, great retention and renewals. We've been very pleased with that. And we're seeing good growth in that sales force. And then also, on that subset of that sales force, it gets the additional requirements in place to be able to market -- manage accounts, that's continued to grow as well. So we're feeling very good about that.

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Jeffrey Paul Schmitt, William Blair & Company L.L.C., Research Division - Associate [32]

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Got it. Does Term Life productivity for that group -- and I think it's quite a bit higher, does that remain more stable? Or is that trend as well...?

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Glenn Jackson Williams, Primerica, Inc. - CEO & Director [33]

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Term Life productivity for the group that becomes mutual fund licensed?

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Jeffrey Paul Schmitt, William Blair & Company L.L.C., Research Division - Associate [34]

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Yes, don't they sell more Term Life products? Isn't their productivity higher than your typical agent? I'm just curious if that, that's been trending -- how that's been trending?

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Glenn Jackson Williams, Primerica, Inc. - CEO & Director [35]

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That is true of an aged group of people. Over time, we think it's a very healthy thing for people to have both licenses because we think it creates more stable opportunity for them and increases retention, all those things are good. At the point you have new people going through the licensing process, it probably works against their life productivity to a certain extent because they're studying, testing, doing all those things. So we wouldn't see any results or any benefit from that group getting licensed right away, but I do think it's a great foundational preparation for maybe a year from now. Because retention is better and overall productivity is higher when people have 2 licenses. But it's too -- it's way too early for us to be able to measure any of that. That wave that went through to get licensed was probably a little less productive in the fourth quarter than they would be a year or 2 from now.

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Jeffrey Paul Schmitt, William Blair & Company L.L.C., Research Division - Associate [36]

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Right. And I was just thinking broadly, that group of, whatever, 24,000, that productivity -- Term Life policies per agent in that group, I was just kind of curious how that had been trending but...

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Glenn Jackson Williams, Primerica, Inc. - CEO & Director [37]

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Yes, and you're exactly right, that's the group that has our most active, most committed. Remember, so many of our people are part-time and those people who have 2 licenses are either full-timers, spend more time, and just that additional dedication means that their productivity is better. So you're reading that correctly, but there's no change to really report on that as a result of that growth.

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Jeffrey Paul Schmitt, William Blair & Company L.L.C., Research Division - Associate [38]

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Yes. Okay. And then one last one. Just looking at ISP, it's -- I was surprised to see net flows up, it's actually the highest it has been in probably 8 quarters despite the market dropping. Any sense on why that may have been?

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Glenn Jackson Williams, Primerica, Inc. - CEO & Director [39]

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Well, you've got strong sales that were kind of certainly an outlier compared to the rest of the industry. And again, that goes to the things that we mentioned, our little bit of extra distance from Wall Street on Main Street that gives us a buffer. But also, remember that our -- the vast majority of our clients are saving long term for retirement. They're also saving systematically. They're dollar cost averaging. And so they recognize that a certain amount of market volatility is actually positive because it gives them an opportunity to buy at lower price. And so I think that's evidence of one of the strengths of our business model is that we actually had a strong kind of net quarter that was unusual in the industry, and I think that's just kind of a testament to how different we are.

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Operator [40]

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Your next question comes from Mark Hughes of SunTrust.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [41]

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Glenn, you had alluded in your opening comments, and I may have -- this may have just been a part of your discussion about the new mortgage pilot, but I think you had referred to actively assessing new strategies to accelerate growth. I thought you were talking about the ISP business. Again, could have been the mortgage pilot, but could you clarify that?

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Glenn Jackson Williams, Primerica, Inc. - CEO & Director [42]

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Sure. Well, I mean, we are always actively assessing strategies to accelerate growth, both in existing and potential future businesses. And, of course, as I explained earlier, we believe -- there is a distraction factor in change. And so we're very careful not to introduce change or not just because we have great distribution capabilities, just try to distribute anything that someone might recommend that we distribute. But we believe that specifically, the mortgage business can actually add a tailwind to our existing businesses for the reasons I described earlier. And then also, we're working, as both Alison and I mentioned, on the next-generation life project. A lot of very interesting things going on in the life marketplace, not as much today surrounding price as underwriting and delivery and that kind of plays into our strong suit. We've always recognized that convenience and simplicity is something that adds to sales. It excites our sales force and it excites our consumers. And there's a lot going on in the industry in that world that we be believe we can add it and make our life insurance business even more convenient and even simpler to deliver, both for the sales rep and the client. So those are some of the things, and then we've got the more day-to-day blocking and tackling of making our recruiting message a more attractive, which I think with the success our sales force is achieving is something that's absolutely doable. And then taking those new recruits and making sure that we engage them and give them a chance of early success because the new recruit is going to instantly enter a dual track of becoming field-trained and understanding our business and what we do for consumers and get licensed at the same time, and so all day every day, we're working on making those 2 tracks have less friction along the way. And so I would put all of those -- a couple of different buckets there, but I think all of those fit under that expression that you related, Mark, of we're looking for ways to accelerate growth.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [43]

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And then finally, you had talked about the mortgage. Back in the day, it was significant, the understanding that it is a new time and that this is early days for this version. How much of a rep's commission or compensation might have come from the mortgage product kind of back in its heyday?

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Glenn Jackson Williams, Primerica, Inc. - CEO & Director [44]

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Yes. It was a significant product. It wasn't nearly as big as our life insurance business or our securities business. I don't think we publicly disclosed those numbers, but I would say that it was third. It was bigger than any of the other ancillary products that we have today. And we have a number of kind of second-tier products, no disrespect to those products intended. But they're just not as important to the cash flow of our sales force. And the lending business was clearly in third, significantly ahead of anything else, but not as significant as our life or securities business. And that's I kind of think the vision that we have for a new product line would be to reoccupy that same space.

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Alison Sue Rand, Primerica, Inc. - Executive VP & CFO [45]

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Yes. I think the really important thing is to remember what Glenn said though about the licensing and regulatory regime we're under. When we were in this in the past, it with really something that was accessible for the vast majority of our sales force, and we do think that this would be a much more disciplined approach because getting licensed takes such a significant effort. And so we do think this is something that has the ability to become very powerful for individuals in certain hierarchies, or people within hierarchies. But again, this is not going to be something that we believe will be every person who joins our sales force has an opportunity to do this. Now, they all have an opportunity to be connected with people who can do this. And I think that's the way how we're going to hopefully try to structure this. But just it's very important and while we do have strong goals for this, it is a very different environment than we were -- when we were last in this business.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [46]

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Right. So you could refer to maybe some centralized producer within a certain hierarchy?

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Glenn Jackson Williams, Primerica, Inc. - CEO & Director [47]

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Exactly. I think the difference would be, we want to make this accessible to all clients but unlike our last program where all reps had access to the program, it would probably be a narrower group of reps, and there will be some kind of referral mechanism or handoff mechanism to be able to do it. And that's exactly what we need to pilot and see exactly how that works and what the points of friction are in that model. And so that's what we hope to accomplish this year.

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Operator [48]

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That was our final question, and this concludes today's webcast. Thank you for participating. You may now disconnect.