May 8, 2013
Executives
Kathryn Kieser - Senior Vice President, Investor Relations Richard Williams - Chairman of the Board and Co-Chief Executive Officer John Addison - Chairman of Primerica Distribution and Co-Chief Executive Officer and Director Alison Rand - Executive Vice President and Chief Financial Officer
Analysts
Jeff Schuman - KBW Steven Schwartz - Raymond James Mark Hughes - SunTrust Sean Dargan - Macquarie
Operator
Good morning, everyone, and welcome to the Primerica Incorporated first quarter 2013 financial results webcast conference call and webcast. (Operator Instructions) At this time, I'd like to turn the conference call over to Ms.
Kathryn Kieser, Senior Vice President of Investor Relations. Ma'am, you may begin.
Kathryn Kieser
Good morning, everyone. Thank you for joining us today, as we discuss Primerica's results for the first quarter of 2013.
Yesterday afternoon, we issued our press release reporting financial results for the quarter ended March 31, 2013. A copy of the press release is available on the Investor Relation section of our website at investors.primerica.com.
With us on the call this morning are Rick Williams, our Chairman and Co-CEO; John Addison, Chairman of Primerica Distribution and Co-CEO; and Alison Rand, our CFO. We reference certain non-GAAP financial measures in our press release and on this call.
These non-GAAP measures are provided because management uses them in making financial, operating and planning decisions and in evaluating the company's performance. We believe these measures will assist you in assessing the company's underlying performance for the periods being reported.
These non-GAAP measures have limitations and reconciliations between non-GAAP and GAAP financial measures are attached to our press release. You can see our GAAP results on page three of the presentation.
On today's call, we will make forward-looking statements in accordance with the Safe Harbor provision of the Securities Litigation Reform Act of 1995. Forward-looking statements include any statements that may project, indicate or imply future results, events, performance or achievements and may contain words such as expect, intend, plan, anticipate, estimate and believe or similar words derived from those words.
They are not guarantees and such statements involve risk and uncertainties that could cause actual results to differ materially from these statements. For a discussion of these risks please see the risk factors contained in our Form 10-K for the year ended December 31, 2012.
This morning's call is being recorded and webcast live on the internet. The webcast and corresponding slides will be available on the Investor Relation section of our website for at least 30 days after the presentation.
After the prepared remarks, we will open the call to questions from our dial-in participants. Now, I'll turn the call over to Rick.
Richard Williams
Thank you, Kathryn, and good morning, everyone. As you can see on Page 4, during the first quarter of 2013, our operating revenues grew 8% to $306.2 million, driven by the continued growth in Term Life premium and strong investment savings product sales in client asset values.
Operating income before taxes declined $3.4 million year-over-year, while active capital management drove a 6% increase in net operating income per diluted share to $0.66 in the first quarter compared with $0.62 in the prior year. As we look at other drivers of this quarter's results, we see a $2.9 million decline in net investment income year-over-year, which is highly correlated to our successful repurchase of 9.5 million shares throughout 2012 and a lower current portfolio yield as we buildup cash to fund our $150 million dividend from Primerica Life to PRI.
We also continue to recognize legal fees and expenses associated with the Florida Retirement System arbitrations, which impacted net operating earnings by $3.9 million or $0.04 per diluted share. Net operating income return on adjusted stockholders equity was 13.3% as of March 31, 2013.
ROE should expand as we deploy excess capital in 2013. In May, we paid a $150 million ordinary dividend from Primerica Life Insurance Company to Primerica Inc.
and expect to use the proceeds to repurchase Primerica's common stock. Following the $150 million ordinary dividend payment, Primerica Life Insurance Company remains well-positioned to support existing operations and fund new business growth with a pro forma RBC ratio estimated to be in excess of 480%.
Now, turning to segment results. Term Life net premium revenue increased 13% in the first quarter of 2013, although term life insurance policies issued were down 10% from the year-ago period.
Productivity in the first quarter of 0.18 policies issued per Life-licensed representative per month was consistent with productivity levels in the first quarters of 2010 and 2011, but down from 0.21 in the first quarter of 2012, which benefited from strong improving results. Sequentially, term life insurance polices issued were 4% lower than the fourth quarter, largely reflecting fewer application submitted during the typically slower holiday season.
The average premium per policy issued in the quarter was consistent with both the first and fourth quarters of last year. Year-over-year our investment savings product sales increased 15%, reflecting 16% growth in retail mutual fund sales and a significant year-over-year increase in the sales of fixed indexed annuity products launched in the first quarter of 2012.
Managed account client assets grew year-over-year from $275 million at the end of the first quarter a year ago to $721 million at the end of first quarter 2013. Client asset values at the end of the first quarter reached an all-time high at $39.85 billion, up 10% from March 31, 2012.
John will talk more about initiatives driving momentum in our ISP business in a minute. Sequentially, Investment and Savings Products sales grew 10% from the fourth quarter of 2012, primarily reflecting strong mutual fund sales in the first quarter aided by typically higher retirement saving sales in the first quarter during the IRA and RRSP seasons.
And also new fixed indexed annuity products declined in the fourth quarter, which benefited from product changes announced in November, and pulled some sales forward to the fourth quarter. Going forward we expect early fixed indexed annuity sales to be more in line with the second quarter of last year.
Total client asset values were up 7% from yearend 2012. Now, John will discuss distribution results.
John Addison
Thanks, Rick, and good morning to everybody. Welcome to the first earnings call from our new headquarters.
The move went well and we are looking forward to the official ribbon cutting ceremony next week, where we'll be joined by approximately 400 of our senior sales force leaders. Our organization is very excited to see the building that was designed to showcase Primerica's business, including a new interactive tour, state of the art TV studio and theater, and our TV broadcast that we'll host on opening day.
We will set the stage for a biennial convention at the Georgia Dome in June. One of the beauties of the Primerica business model is that we can monitor the business and effectively implement significant change.
As I've said before, Primerica requires leadership, the leadership for the company to aim and adjust the business. Economics of our distribution model enable us to make these adjustments like the recent compensation change, and manage through periods of sluggish recruiting and life insurance sales without having a significant impact on short-term earnings.
Our large block of enforced policies generates recurring income regardless of whether life insurance sales were up or down within a given quarter. Recent changes we made in incentives and compensation has focused our sales force on growing their insurance license representatives as well as building their Investment and Savings Products business.
These enhancements have manifested themselves in improving life license ratios and higher ISP sales. This year, we enhanced our ISP business by launching a streamline securities licensing system and an incentive for representatives to obtain securities license.
The improved securities licensing system, includes free online exam preparation materials, personalized study plan development, and we are in the initial stages of using classroom education to increase unit success. In addition, we are conducting weekly securities licensing seminars and we have reached out to reps that are having difficulty passing the securities exam.
This year, we also implemented an incentive program to create a sense of urgency to get a securities license. And we launched an incentive trip competition to the Breakers Resort for a more seasoned representatives.
Results have been positive. Along with an increase in ISP sales, year-to-date through April, we have experienced a 13% increase in our new securities licenses compared with the same period a year ago.
We have also been working to enhance our ISP product platform. Last year we added managed accounts in fixed indexed annuities.
Recently we announced that we will be expanding our annuity product offerings this summer to include a new variable annuity and a new proprietary fixed indexed annuity underwritten by Lincoln Financial. As I mentioned last quarter, our plan was to increase recruiting in the first quarter to the level above last year's recruiting in the second and third quarters.
We came close to achieving this goal, but we are still not where we want to be. As you can see on Slide 5, first quarter recruiting increased 27% to 46,348 from seasonally slower recruiting results in the fourth quarter, declining 21% from a year-ago period.
These results were due in part to not running an incentive trip contest in the first half of 2013. In non-convention years we typically run two incentive trips, and in convention years we typically only run one trip context due to the cost.
During the quarter recruiting continue to be impacted by sales force leaders adapting their businesses to the new life insurance compensation program implemented in the second half of 2012. As I have told you in the past, the new comp program was fairly significant cultural change we made to generate long-term healthy distribution growth.
We feel good about how the sales force has adapted so far, and about the recent pick up in activity we've been seeing. We are proud of the strides we have made to improve the ratio of new recruits obtaining a life license.
The licensing ratio in the first quarter of 2013 increased compared with the first quarters in the past three years. The number of new representatives obtaining a life license declined 6% year-over-year and were down 14% from the fourth quarter, largely due to the recent recruiting levels.
Non-renewals and terminations normalized during the first quarter with a 6% improvement over the first quarter of last year. Consistent with seasonal trends, besides our life-licensed insurance sales force declined to 90,917 in the first quarter compared with December 31, 2012, and increased from 89,651 at the end of the first quarter of a year ago.
The size of the sales force typically declines in the first quarter following lower recruiting in the fourth quarter, particularly in December. We believe the size of our sales force will slightly increase at the end of the second quarter.
As we head towards the convention, we are developing enhancements to our business opportunity, product portfolio and client experience. We are encouraged by the activity levels we saw in April, and hope they carry through to May and June, so that we can build on that moment and generate growth in the second half of 2013.
With that, I'll turn it over to Alison.
Alison Rand
Thank you, John. Good morning, everyone.
My comments today will cover the earnings results for each of our segments, followed by a company-wide review of insurance and operating expenses and invested assets. Staring with Term Life on Slides 6, year-over-year operating revenues grew 11%, driven by a 13% increase in net premiums.
The rate of net premium growth continues to normalize as new term matures and becomes an ever increasing component of the total in force block. Term Life operating income before income before income taxes increased $1.5 million or 3% over the prior-year period.
There are a couple of dynamics that complicate this quarter's year-over-year trends that will not continue into future quarter comparisons. As an example, interest expense increased $1.5 million, largely related to the redundant reserve financing executed on March 31, 2012.
This is the last quarter that we booked a higher year-over-year interest expense related to this transaction. Also, had we not been building our cash to fund the $150 million dividend from Primerica Life, but overall net investment income and the correlated allocation to Term Life would have been higher.
As a reminder, we allocate net investment income to Term Life based on the proportion of required statutory assets to total assets in cash, with the remainder reported in the corporate and other segment. While the percentage our invested asset allocated to Term Life continues to grow, the associated increase in allocated net investment income was largely offset by the lower effective portfolio yield during the quarter from our substantial cash accumulation.
As we deploy the cash we built up, the effective rate earned on the asset allocated to Term Life will normalize. Now, let's move on to Term Life core performance dynamics.
As discussed in previous quarters, the profit margin for legacy and new terms are moving in opposite direction. New term profit margins are increasing at the in-force block road and effectively leverages the fixed cost within our expense base.
Legacy profit margins are decreasing due to lower margins and both end of term conversions and renewals. Term Life core economics also experienced quarterly fluctuations, primarily related to mortality, persistency and expenses.
First quarter new term results were positively impacted by the evolution of our agent incentive programs, resulting in a higher percentage of compensation cost to be differed. In addition, persistency for new term improved year-over-year, which will reduce the amount of DAC amortization incurred.
New term pretax operating income increased to 14.5% of direct premiums in the first quarter of 2013 from 4.7% in the first quarter of 2012. We expect to see continued improvement in new term profit margins due to the impact of leveraging our fixed cost.
On a year-over-year basis legacy was up or negatively impacted at the allocated net investment income and redundant reserve interest expense dynamics already discussed. In addition, legacy incurred claims were about $1 million unfavorable.
As a result, legacy pretax margins decreased to 6.8%. As we previously mentioned, legacy margins will fluctuate with mortality and will experience downward pressure over time.
Now, we expect the decline to be gradual, an unusual drop in margin from fourth quarter to the first quarter was driven by the previously discussed impact of our cash build out and the net investment income allocation and the unfavorable incurred claims experienced in the quarter. Without these two items, the legacy margin would have been at a level consistent with the fourth quarter.
We expect legacy margins will return to the mid-7% range in the near term. On a sequential quarter basis, Term Life operating income before income taxes increased 3%, primarily due to continued growth in net premiums and better persistency relative to seasonally lower persistency in the fourth quarter.
Total incurred claims were slightly higher versus the prior quarter. On Slide 7, you'll see our Investment and Savings Products operating revenue grew 9% year-over-year.
Sales growth in the quarter drove an 11% increase in sales based revenue, largely reflecting strong retail mutual funds and the addition of our fixed indexed annuity product. Asset based revenues increased 9% over the prior year in line with average client asset values.
The year-over-year increase in sales based commission expense is in line with the related revenue growth, while the indicated asset based commission expense is consistent with the asset based revenue growth, when excluding segregated funds. The relevant cost associated with segregated fund revenues are recorded in insurance commissions and amortization of DAC.
The increase in operating expenses over the prior-year period is largely related to the FRS legal fees and expenses that Rich previously discussed. Operating income before income taxes declined $2.5 million to $26.4 million year-over-year.
Excluding the FRS legal fees and expenses a 5% year-over-year increase would have been achieved. On a sequential basis, ISP operating income before income taxes declined 15% from the fourth quarter, as the increase in sales and client asset values were more than offset by the variable annuity incentive payment recognized in the previous quarter, as well as higher FRS legal fees and expenses and other operating expenses in the first quarter.
When comparing periods, we also need to consider shift in our mix of business. Mix of sales into a lesser extent and mix of assets will change from period-to-period without the fluctuation to revenue and earnings pattern.
For example, variable and fixed indexed annuities have stronger sales based earnings, while mutual funds sales based earnings are more moderate, and managed accounts and segregated funds have no sales based earnings at all. The opposite rating is generally true for ongoing asset based earnings.
The shift we saw in the mix of business, especially from the fourth quarter to the first quarter translate into relatively lower immediate earnings that provides a higher pattern of earnings over time. On Slide 8, you can see that Corporate and Other Distributed Products operating revenues decline $3.5 million from the prior-year period, and the operating loss before income taxes increased $2.4 million.
Results reflect a $3.5 million decline in net investment income between higher allocation to Term Life in line with that segment's higher required assets, a smaller overall portfolio following our cumulative share repurchases as well as lower yields on the portfolio itself. As described in the Term Life discussions previously, the build up of cash in the portfolio put pressure on the expected yields this quarter.
Results for the segment were positively impacted by approximately $2 million of lower claims largely associated with the state disability product underwritten by our New York subsidiary. Slide 9 provides a more detailed review of insurance and operating expenses.
You can see that year-over-year expenses grew by approximately $9.2 million. $3.9 million of the increase comes from legal fees and expenses related to the FRS matter.
Cost of living adjustments to salaries and related items, led to an increase of $1.4 million year-over-year, while our third layer of management stock compensation award led to an $800,000 increase. As our stock compensation awards operate under a three-year investment schedule, annual cost should be relatively consistent year-over-year from here and out.
Expenses increased $2.1 million for premium and growth related expenses, coming from growth in our new term business as well as growth in our managed accounts and other ISP products. During the quarter, we also incurred approximately $0.5 million in cost associated with the move to our corporate headquarters.
Compared to the fourth quarter of 2012, company-wide expenses increased by $3.8 million. $2.5 million of the increase came from employee compensation, mostly driven by payroll taxes and employee benefit that taper off later in the year.
Cost of living adjustments to salaries that occur annually in March, and the third layer of management stock compensation awards granted in February. Move related cost and the $1 million increase in legal fees and expenses related to the FRS matter also contributed to the entry.
Other increase and decreases within this segment occurred, but largely offset on an aggregate company data. We expect our ongoing defense of the FRS matter combined with certain known emerging expenses result in second quarter 2013, insurance and operating expenses in the $73 million to $75 million range, increase of between $3 million and $5 million over first quarter levels.
At this time, we expect FRS related legal fees and expenses to be at levels consistent with those incurred in the last few quarters. We also anticipate approximately $2.6 million associated with the move to our new corporate headquarters, averaged $1.9 million will be one-time in nature.
In addition, the second quarter will include a full quarter of cost of living adjustments to salaries and amortization expense for the third layer of management stock compensation awards as previously mentioned. Each employee related cost will increase our expense base by another $1 million.
We expect fluctuations in other categories of insurance and operating expenses being mostly a function of business volumes as well as other ongoing activities, more routine in nature. Turning to Slide 10.
Our investments and cash flow of $2.12 billion as of March 31, 2013, up from $2.07 billion at December 31, 2012. The average credit rating of our fixed income portfolio continues to be Single A and 95% of that portfolio was rated investment grade.
The average book yield investment, excluding cash at quarter end, was 5.28%, down slightly from 5.32% at yearend. The new money rate on our purchases for the quarter was 2.75%, down from 2.94% in the fourth quarter, reflecting a higher rating of purchases in our non-life companies, which generally invest in shorter-term investments.
We had very few purchases in Primerica Life in the first quarter as the accumulated cash for the ordinary dividend payment. As you can see on the chart, the accumulation of cash took our overall portfolio yield down from the 5% range to 4.71% this quarter.
Net investment income during the quarter declined $2.9 million from the first quarter of 2012, as a result of both the $257.3 million spent in purchasing 9.5 million shares in the last three quarters of 2012 as well as the lower effective yield on the portfolio. The liquidity profile of our holding company continues to be very strong as of March 31, 2013, holding company had invested assets in cash of $58.2 million.
With that I'll turn it back over to Rick.
Richard Williams
Thanks, Alison. Primerica is a unique distribution company with a conservative balance sheet.
The Term Life business provides a stable recurring future earning stream, while our high return ISP business generates free cash flow. As we look to the future, our focus is on driving organic earnings growth and providing meaningful long-term shareholder value.
With that, I'll open it up for questions.
Operator
(Operator Instructions) And our first question comes from Jeff Schuman from KBW.
Jeff Schuman - KBW
I was wondering if you could first talk a little bit about the registered reps, John. I think you said that the number of new securities licenses was up 13% year-over-year?
John Addison
Correct.
Jeff Schuman - KBW
But unless I've mistaken, I don't think I have much context for that. Do I know what the total number of reps is or can you give us sense of what the total number of reps is?
And how the total rep count is evolving?
John Addison
Rick is staring at a sheet of paper, which has every fact on demand. So I'll let him give the exact number.
Richard Williams
As of year-end, we had active mutual fund reps of 21,863. That includes both U.S.
and Canada. And to John's point, we have licensed about 1,700 new reps year-to-date, but we have also terminated on an annual basis about 1,500 at year-end.
So the account is up slightly, but what's encouraging to us is the new licensing activity.
Jeff Schuman - KBW
And so I don't think we've had those numbers historically, so the general trend over the last couple of years has been for that rep count to be what sort of flattish in general?
Richard Williams
Yes, it has been.
Jeff Schuman - KBW
So you've continued to grow that business, I guess through better productivity primarily?
John Addison
Jeff, as we've done investment conferences and stuff, one of the things that we showed in those was the size of our sales force, registered reps compared to the other broker-dealers and stuff. And yes, I mean one of the things we have done strategically is we've added products.
We've improved the business opportunity for those leaders that are big securities producers. And that was a strategic objective as we became an independent company and became our business, and you combine that with unlike the markets done real bad either.
Those two things, the productivity has been better. But our goal now is to grow the size of our license sales force in addition to have in that.
But that business does have much more of a productivity swing in it, specifically driven by the market conditions. And as we add new products, that as you follow through what we've done since we became independent, we added managed accounts, we added new annuities, and we added improved incentives and compensation for our registered reps and we wanted to grow that business.
And (knock on wood so far, that's gone well for us.
Jeff Schuman - KBW
Then I'll ask about one other area, and then I'll get out the way. I'm just wondering if you can give us an update on the number of tending pending FRS arbitrations in suits and whether you can confirm our impression that you want a dismissal of the first arbitration that was decided.
Richard Williams
We have 22 pending arbitrations, seven state court cases and one federal court case outstanding. You are correct.
We did have one arbitration and the arbitration panel did not award the claimant any damages in that case. We have completed the second arbitration, but no decision has been reached in that one at this point.
Jeff Schuman - KBW
And what was the date of the second arbitration hearing?
John Addison
It just finished last Friday.
Operator
Our next question comes from Steven Schwartz from Raymond James.
Steven Schwartz - Raymond James
I want to talk a little bit about one thing I noticed ISP expense, I know you've got more from FRS there, but even without that it looked like it jumped certainly from the fourth quarter. And I was just wondering the streamline processing that you have, did that add to expenses or anything else, in particular going on there?
Alison Rand
The answer to your first part of question is really no. The costs associated with a lot of the initiatives that John described are relatively de minimis.
We've actually hired a handful of people that are really working as coaches and handholding folks. So the incremental cost to us was relatively small.
I think what you're seeing on a quarter-to-quarter basis has very specifically to do with something that actually happened in the fourth quarter. When I talked about expenses, especially in my prepared comments, I usually focus on company-wide.
Specifically within the segment in the fourth quarter of last year, we did do a true up of an accrual we were carrying for out of packet expenses. The mutual fund accounts that we administer.
We had been over accruing when we finally got some deals and we realized that our accrual was too high. We took that accrual down by over $1 million in the fourth quarter.
And so sequentially you see that $1 million or so are attributable to that one change that we did last year. The level of expenses we're incurring for out-of-pocket in the first quarter is very consistent with what we believe our ongoing expense levels will be.
So that quarter or sequential quarter, change you shouldn't see anything further into the second quarter. The other increases specifically in ISP had to do with some of things I already mentioned in my company-wide discussions, but for largely employee-related costs.
Steven Schwartz - Raymond James
And then, Alison, the $150 million of cash that was build up, did that affect interest income in legacy or did that affect interest income in corporate?
Alison Rand
Basically, it moved with the assets required to support the business. So if you look at our total asset base, 60% somewhat of the asset supports the legacy business.
And I am rounding here another 14% or so support the new Term business, but the rest is considered excess, if you will and we keep that incorporated in other. So we did impact those Term Life and legacy and most specifically it had a more substantial impact on legacy within Term Life.
Steven Schwartz - Raymond James
And then, to think about, you got obviously hurt, but you did get some income on that $150 million, presumably it will be gone shortly as share repurchase. Do you know, Alison, what the income on that $150 million was or how are you holding it or whatever.
Alison Rand
It was held very short-term. I mean it was cash and cash equivalent.
And so in today's marketplace, I mean zero is about as close, if estimated something else, so it was a very small earnings rate. And if you look at what we earned on purchases we made in Primerica Life, where we actually placed money on a long-term basis, it was in the fourth quarter range.
So doing simple math, you could say we lost somewhere around 4% on the assets we were building up. And that we chose not to investment long terms.
We look forward to single quarter, but we made that decision because we obviously didn't want to place money long-term with an incredibly low interest rate have rates begin to rise on us and be force to either liquidate higher yielding asset or generate losses in the portfolio.
Operator
Our next question comes from Mark Hughes from SunTrust.
Mark Hughes - SunTrust
John, when you look at the convention for this year, you obviously got that tremendous momentum a couple of years ago, both in terms of recruiting and sales growth. Was there anything unusual about that convention that won't be repeated this time?
Should we assume, or think notionally about that similar types of results this year?
John Addison
If you recall at last convention, one of things we did was on the, last night crazy John went insane and we did $50 versus $99 IBA and we had a massive chunk in liquidity, which was abnormal of what we get out of a convention. Let me just give you kind of the context, that what we want to accomplish at this event in the Georgia Dome.
As I said to all of you many times, many of you kind of personally as we've talked and done investment conferences is one of the things that we saw when we did that and I think it was with Jeff Schuman had a follow-up conference after that when recruiting was going through the roof. His question to me was, was it sustainable?
And I said, I don't know if its five hour energy drink or whether it is a sustainable trend. Well, it turned out to be five hour energy drink.
Now, it did drive significant production. It's not like it was all negative, so having a junk is not a negative thing, it led to sales.
It led to a lot of the things that drove us over in the first quarter of 2012. And we as management team couldn't look and said, let's just keep on this track.
But what we saw is that we were not driving enough distribution building behavior. We were recruits, we're becoming more a way to make a sale than a person to get license promoted and building.
And that led to our compensation change. In all honesty to you guys, as a management team, it might have been easier to say, we're not going to do that.
But because of our, what I said in my prepared statement, the strength of our model and the strength our business, and the fact we are a long-term viewers of this business, not short-term harvesters of this business. That we wanted to make sure we had our incentives and our long-term incentives focused on building.
And we made a significant change to compensation. It's been an adjustment period for us and for our sales force.
I believe that compensation change of what we did was one of the things that drove very positive activity in our ISP business. As we head into our convention, one of the things that we most want to do at the Dome is that we want to put back a proper level of incentive on pure recruiting activity and have that applied to our improved licensing ratios and get growth coming out of that Dome.
As I said in my prepared comments, we were encouraged by April, particularly given there is no incentive running right now and we are comparing to a year ago, when we had an incentive running. I believe with everything, when our sales force sees this new headquarters, it is going to infuse, believe and pride, like nothing we've done probably since the IPO.
And I believe in coupling that with us making more sustainable, not five hour energy drink decisions in the Georgia Dome, we can begin to get the results that we want. One thing I want to make clear, we are excited about what's happening in ISP and we want to continue to grow that.
But that is not a shift away from we want to grow the size of our life insurance distribution system. And so what our goal is this time is to make that more of a sustainable, maybe not quite as bigger jump, but a more sustainable move in the business.
Hope that answers your question.
Mark Hughes - SunTrust
Mutual fund sales, any strength you saw early later in the quarter with the market doing well, I think you've made your point.
John Addison
As you saw, we had strong, and as Alison talked about very well in her prepared comments, we had a move from the annuity business towards mutual funds. Our goal is to sell the right product for our clients.
And our sales forces goal is to sell the right product for their clients. And as people became a little less fearful of the world, some of the guarantees in the annuity products became less of important to them and moving more toward just mutual funds sales in the market.
So I believe the thing that drove it is, a big piece of it, the things we're doing to just drive the overall ISP business, but I think the biggest thing is among people there is more confidence in the market now than there was before.
Mark Hughes - SunTrust
And then a final question. The insurance commissions within the new Term Life segment were a little low this quarter against the prior trend.
How should we think about those going forward?
Alison Rand
Basically that number has continued to evolve as we've change our compensation programs, because we are marking it more specifically towards generating new premium. I think that you're on a level now that is relatively in the range of what we should see from quarter are now borrowing, any decisions we make to do something temporary that may not be deferrable.
But all the core changes in the compensation program really have been flushed through. And so you're at more of a appropriate relative range from here now.
Operator
Our next question comes from Sean Dargan from Macquarie.
Sean Dargan - Macquarie
Just when we're thinking about the progression of the legacy Term Life book, know you said that the pre-tax margin should get back to the mid-seven range for the rest of the year. How should we think about that running off in 2014 and 2015?
I mean, how much of a drop off from the mid-seven range should we be thinking about?
Alison Rand
I am not sure how much of this will be given for that far out, but generally speaking we expect the client to be pretty gradual. They are seeing it in the mid-seven this year.
I would expect it to continue to fall into the low-seven range. It will get into the six-range.
I don't think its 2014, I think it's some time later than that. And I think that's a relatively normalized level for it.
But quite honestly, given how much could possibly happen between now and the time I am thinking about, I can't say that's for certain, but I think you're talking about just a relatively low decline here on out. Again, I don't expect you to get much lower down 7% into next year.
Sean Dargan - Macquarie
And turning to investment and savings products. Given the growth in assets, I would have thought that the asset base, commissions and fees would have gone up more than they did.
Is there any margin pressure or is there anything going on that we should think about in terms of that line?
Alison Rand
I think the asset base, if I am correct. The asset base revenues grew less than the asset base expenses.
So there was a little bit of margin compression that you saw. And the two things about that, one is some of the commentary that I had mentioned to you, which is that we had a shift in some of the business, and if you take cash fund out of both the revenue number the growth in the revenue was very consistent with the growth in the commission expense.
And the reason we would do that is because there is no commission expense line, if you will, I mean cash funds it actually runs through insurance commission and then amortization of GAAP. So it's a little bit of just geography of where it hits.
And the other thing, we didn't really talk about it too much this quarter, is that in the past we had a relatively high level of internal exchanges on our variable annuity product. Those internal exchange while they created sales volume, the aggregate dollar profits on those was lower, because the commission rate was lower but the amount retained on the margin was actually a little bit higher than on a new sale.
So we've been shifting away from those and facing a little bit of an impact of that as well.
Operator
And our next question comes from Jeff Schuman from KBW.
Jeff Schuman - KBW
I just want to follow-up with Alison on the Term question, because it seems that to the extent that maybe legacy margins compressed a bit. I assume that's attributable mostly just to negative operating leverage as that book can track, which is partly a function of just how expenses are allocated between even legacy.
So I guess coming out at it bit differently, how should we think about operating leverage for Term Life in its totality?
Alison Rand
On Term Life in it's totality it should be improving. You do get some real noise in these sub-segments, which is what I was focusing on.
And typically it's a little bit less with expenses. The mortality itself on the legacy business is as expected is going to work and these policies are ageing.
A lot of them are reaching the end of their initial policy term at which case the old mortality gains that we had over time, would no longer emerge. And on a more technical basis, this business is basically the DAC is running off in zero, but the reserves are continuing to grow.
So the interest accruing to the growing liability is actually a negative on the profits in that segment. But other than that I think it's what we've been saying.
Those are the items that will hit legacy on an ongoing basis, obviously, from period-to-period you will see things like mortality fluctuations or persistency in expense fluctuation. But on the longer term those are the things that I think will drive down that profit margin.
And as we've said, on new term it's going to continue to improve, because we keep layering our business, but our fixed cost structure is relatively intact. So you've seen a pretty dramatic increase already in that and I think you will continue to see that.
I think a way to look at it is to look at what you expect the near-term premiums to grow by and other than the growth related expenses for things like premium taxes and non-deferred underwriting costs you can put in a relatively cost of living adjustment if you will on other fixed items to get a growth rate on expenses.
Jeff Schuman - KBW
So basically to the extend that legacy margins suffer a bit from the operating leverage issue that's offset in new term, which continues to grow.
Alison Rand
Absolutely.
Jeff Schuman - KBW
But there are couple of other wrinkles in terms of the mortality margin and what happened maybe with investment income that also is kind of.
Alison Rand
That is correct.
Operator
And ladies and gentlemen, I'm showing no additional questions. I would like to turn the conference call back over to management for any closing remarks.
Richard Williams
Thank you very much for your time. Have a good rest of the day.
Good bye.
John Addison
See you. Have a good one.
Operator
And ladies and gentlemen, at this time the conference has now concluded. We do thank you for attending.
You may now disconnect your telephone lines.