Welcome to the Primerica Incorporated Second Quarter 2016 Financial Results Webcast. [Operator Instructions]. I would now like to turn the conference over to Kathryn Kieser, Executive Vice President, Investor Relations. Please go ahead.

Thank you, Chad. Good morning, everyone. Welcome to Primerica's second quarter earnings call. A copy of our earnings release, financial supplement, presentation and webcast of today's call are available on our website at investors.primerica.com. Glenn Williams, our Chief Executive Officer and Alison Rand, our Chief Financial Officer, will deliver prepared remarks. Then we will 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. We will also make forward-looking statements in accordance with the Safe Harbor Provisions of the Securities Litigation Reform Act. The Company will not revise or update these statements to reflect new information, subsequent events or changes in strategy. Risk and uncertainties that could cause actual results to differ material from those exposed or implied are discussed in the Company's 2015 annual report on form 10-K, as reported quarterly by our reports on form 10-Q. Now I will turn the call over to Glenn.

Thank you, Kathryn and good morning, everyone. Today, I will give you my perspective on our second quarter performance as well as update you on our implementation progress for the Department of Labor's final fiduciary rule. Beginning on Slide 3, you can see in the second quarter of 2016, operating revenues increased 7% to $375.8 million and net operating income increased 17% to $57.1 million from the prior-year period. Results were driven by continued momentum in the term life business as well as the seasonally strong trends historically experienced in the second quarter. Ongoing growth in term life issued policies, combined with strong second quarter persistency, led to a 14% increase in adjusted direct premiums year-over-year. Claims experience was below both historical levels and the modestly unfavorable level experienced in the prior-year period. The 30% increase in term life income before income taxes more than offset the modest headwinds experienced in our investment and savings product sales and client asset values which led to a 4% decline in ISP operating income before income taxes year-over-year. During the second quarter, we repurchased $40.6 million or 800,000 shares of our common stock for a total of $90.5 million or 2 million shares repurchased year-to-date through June. We expect to repurchase approximately $60 million of shares in the second half of 2016 and around another $125 million in 2017 in addition to paying stockholder dividends. Solid earnings, as well as ongoing share repurchases in the second quarter drove a 27% increase in diluted net operating income per share to $1.19 and ROAE expanded to 20.2% from the year-ago period. We expect ROAE to be in 18% to 19% range for the full year 2016. In addition to robust financial performance, we also experienced very positive distribution results in a second quarter. Our underlying…

Thank you, Glenn and good morning, everyone. Today, I will cover the earnings results for each of our segments in a Company-wide review of insurance and operating expenses, including some insight into potential DOL rule-related expenses. Starting on slide 6, in our term life segment, we continued to experience strong performance with margins expanding to 20.6% this quarter. The seasonally strong participancy we normally experience in the second quarter was coupled with favorable performance across all aspects of the term life business. Operating revenues and adjusted direct premiums both increased 14% year-over-year. As we've discussed in the past, adjusted direct premiums should naturally grow over the next several years by a minimum of 10% annually as a result of the coinsurance transactions we entered into at the time of the IPO. The 18% growth in policies issued in 2015 and 16% year-to-date growth in 2016 have propelled adjusted direct premium growth even further. We've provided guidance that, in general, operating income before income taxes should grow consistently with adjusted direct premiums, subject to quarterly volatility in claims, persistency and expenses. In the second quarter, we saw a 30% increase in operating income year-over-year, far outpacing growth in adjusted direct premiums, driven by several factors. The benefits and claims ratio was 58.8% in the second quarter, reflecting incurred claims that were approximately $2 million below historical levels, a portion of which comes from the implementation of a new planes adjudication system for disabled lives. The ratio is also benefiting from YRT reinsurance rate reductions that we negotiated on 2014 and later issue years. Favorable persistency experienced in the second quarter led to DAC amortization in insurance commissions as a percentage of direct premiums decreasing to 13.4%, contributing about $1 million to the segment's income before income taxes. The insurance expense ratio…

[Operator Instructions]. The first question comes from Mark Hughes with SunTrust. Please go ahead.

This is actually Kevin on for Mark today. Thanks for taking my question. First question, just with the general market strength in Q3 so far, how is the INS segment looking? And then within that, I guess, how are our variable annuity sales looking?

Hello, Kevin, good morning. Yes, we had a good start to the third quarter throughout our business. We don't provide specific guidance on that. But we're continuing see the kind of trending that you've seen throughout our business, some headwinds in the ISP section, more strength in everything else and that's kind of what our expectation is. It looks like things are trending about the same way as we have seen them in the past.

[Operator Instructions]. The next question is from Ryan Krueger with KBW. Please go ahead.

First question, the 19% term life margin guidance for 2016, is that something you expect to continue at a similar level in 2017 and beyond?

At least through 2017, yes. There are some things that will emerge over time, so we want to continue to keep a close watch on that, but we believe for the next, let's say, three, four, five quarters, that's a good rate to look at. And again, there is some seasonality with it, as you saw, this particular quarter, second quarter is usually a little bit stronger than the others.

And then on ISP, I appreciate the updated expense guidance. I guess I was hoping to talk more about the types of changes you're contemplating more from a product standpoint and, I guess, specifically, how you are thinking about the types of commission structures you currently have and revenue sharing agreements and things like that and if material changes will need to be made to operate under the BIC?

Those details are emerging a little more slowly than our expense details are, obviously, as it is an industry moving, not just Primerica moving. A lot of discussions, as we've said before, we anticipate there will be some standardization of products and to a certain extent, even compensation of those products. Early on, I think the good news is the industry's being very thoughtful about this process. I know it's frustrating that, that means it's somewhat slow, but the industry's being thoughtful and that means there's no knee-jerk reactions or jumping to conclusions. So we're not seeing radical proposals of changes that would cause us a great deal of concern. And I think we're traveling in the pack with most of the rest of the industry that shares characteristics of our business model, so while we don't have the details yet that I know everyone would like to hear, I think the standardization concept is something we keep in mind and we see kind of a slow methodical movement as it goes and we're encouraged by both of those.

I guess maybe just one more specific follow-up. Do believe that you will still be able to sell the Class A shares on mutual funds that you've typically sold in the past under this structure?

Yes, we do, Ryan. There's been a lot of discussion about that and, quite frankly, some misinformation that I've seen in the media discussion of that. Class A shares are an important part of the brokerage platform and will continue to be and, based on my understanding, will continue to be for the entire industry not just for Primerica. Where we see other companies and where we're no longer using Class A shares is in the managed account platforms going forward. So make sure that everyone focuses on the difference between those two pieces of the business. I think Class A shares are being replaced by institutional shares throughout the industry on managed account platforms, but will continue to be sold on brokerage platforms including ours going forward and we believe that is accommodated under BICE.

[Operator Instructions]. The next question is from Adam Klauber with William Blair. Please go ahead.

A couple different questions. The conversion of sales reps has been going up. Could you talk about what are the one or two factors really helping that?

Most of the time at Primerica, it's never one or two factors, it is a host of factors. So we're continuing to see a high-level of confidence in the middle market on Main Street, so we're getting great response to our recruiting messages, so we're seeing our recruiting numbers continue to be strong. We've also focused our sales force and a tremendous amount of the credit for what we see on the distribution side of our business, obviously, goes to our field leadership. We have strong alignment with them at this point. We're communicating with them effectively, they are communicating with us effectively and that's how we come to the best answers and best conclusions on what we need to do. So if there was a standout characteristic, as you've asked for, I think it is that alignment with our field leadership and the fact that we're on the same page like we've never been before. And, of course, they're leading that process, they're also focused, like we're, on growth of the size of the licensed sales force. That, with improvements to how we get people licensed which is something we've worked on a lot over the last couple of years and continue to work on, all of that kind of adds up to the kind of success that you are seeing. So it's several different factors, the strongest ones I think are the field leadership and alignment at this point, but we're getting some tailwinds from continued confidence in the middle market, we're very effective in our messaging to prospective recruits and clients right now. I think we've improved that and so those are some of the secondary characteristics I would add to the list.

And then reps are selling more and greater value term and obviously second quarter is a better quarter, but do you see that as a continuing trend?

Yes, as I mentioned in my prepared comments, we've, over our history of almost 40 years now, we see our business swing back and forth between focus on insurance, focus on investments appropriately and that's part of one of the strengths of our franchise. So we have generated a tremendous amount of excitement around our term insurance business in the last few quarters. We believe that can continue. There's a lot of strength there, there's a lot of focus and so we would expect to continue to see that strength going forward. And, of course, the uncertainty that we continue to discuss about the investment business, whether it be uncertainty in the market or uncertainty in regulations, is a bit of a headwind there, but we're continuing to see good performance in that area at the same time.

Okay. Then on the departmental labor ruling, I think you laid out that this could impact or you have exposure to really more like 10% of earnings. Now after a full review, I guess, how do you feel about that 10% number?

And the 10% was really when we were using that pie chart we've used in the past just to say what pieces could be subject to the change. As I mentioned earlier, I think that, so that was really looking at which components of our business and at this point, we now have to peel the onion down a little further and say, step one is we said we're going to use BICE. So theoretically, there's a construct for us to retain all of that business. The question then becomes the things that Glenn was talking about earlier is what industry-wide changes might there be to product sets or compensation structures and the like and fortunately, unfortunately, that's a very slow process. We want to make sure we've in step with what we're hearing throughout the industry, throughout product providers, et cetera. So a little bit more detail on that will hopefully be able to be provided towards the end of the year. But we continue to work toward minimizing that as much is possible.

And the last and sorry this was sort of an outside question, but certain people draw attention that you are similar to Herbalife. Can you say why you're not similar to Herbalife and why some of the issues that impacted that franchise won't impact Primerica?

Sure. Be happy to do that. There has been a lot of media coverage of the Herbalife settlement and, quite frankly, as is often the case, a lot of poor media coverage. The Herbalife settlement was particular and specific to Herbalife and their dynamics. There's been no rule change at the FTC since that settlement. However, it's obviously wise of us to monitor what's going on in that part of the world and make sure we're seeing the changes in wind direction and so forth, so we're very close to that, we keep our finger on the pulse. Specifically to your question, on differentiation points, Primerica, we're a financial services company that is a model based on the traditional insurance agency model. That's what we grew up from over the last 40 years. We began as an insurance agency and an insurance agency model has different levels of competition between branch managers and area managers and representatives and so there's some similarities in the compensation structures of the traditional agency model and some of direct selling and, quite frankly, some with refranchising. Over time we've evolved to adopt different characteristics of several business models, but one is our history. We come from a different history than that company does. The second thing, obviously, is we operate in highly regulated set of industries, insurance and securities being the two biggest ones, so we've got a set of regulations dictating how we do business that's unique to the financial services industry. Our sales are to end consumer, by the nature of our products. We don't have an inventory, a lot of the Herbalife controversy was around inventory loading and representatives buying inventory and, of course, we have no inventory in our products. We have intangible services and so there's no way to load anyone with inventory in our model and of course our reps are not required to purchase our products. The vast majority of our sales are to clients with absolutely no affiliation to Primerica in any way other than being clients. 70% of our life insurance sales are to end clients that have no affiliation with Primerica at all. They are not our reps, they not our recruits. And so and then other things, we don't pay to recruit. Our recruiting mechanism is something that's not a profit center for the Company or for a representative, there's no money made on that. So we think that we've got a very strong case of how we differ from Herbalife and stand apart from the kinds of issues that were dressed in their settlement.

The next question is a follow-up from Ryan Krueger with KBW. Please go ahead.

Sorry, but just one more DOL follow-up. There's been some discussion around revenue sharing as a management provider. So just hoping to get an update as you think about the revenue sharing agreements you have with your asset management providers, if you feel like those can continue in the current form as well under the BIC.

Revenue sharing is clearly contemplated under BICE. I do think, however, that you will see a standardization. Revenue-sharing agreements, I think, are very unique to each distributor. In today's world, my guess is, over time you will see standardization of those agreements, but we do anticipate that they will continue going forward on our brokerage business under the BICE agreement.

At this time, I'm showing no further questions.

Thank you, everyone, for joining us. If there are other questions we can help with, just let us know. Everybody, have a great day.