Good morning, welcome to the Primerica Q4 Financial Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Kathryn Kieser, Executive Vice President of Investor Relations. Please go ahead, ma'am.
Thanks, Dan. Good morning, everyone. Thank you for joining us today as we discuss Primerica's results for the fourth quarter of 2014. Yesterday afternoon, we issued our press release reporting financial results for the quarter ended December 31st, 2014. A copy of the press release is available in the investor relations 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, Glenn Williams, President and incoming 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, reconciliations between non-GAAP and GAAP financial measures are attached to our press release. In the fourth quarter of 2014, net operating income excludes the after-tax impact of both realized investment gains and losses and the $4.2 million expenses related to the co-CEO transition agreements described in our Form 8-K dated January 2nd, 2015. 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, such statements involve risks and uncertainties that could cause actual results to differ material 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 31st, 2013. This morning's call is being recorded and webcast live on the internet. The webcast and corresponding slides will be available in the investor relations 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.
Thank you, Kathryn, good morning, everyone. Welcome to Primerica's fourth quarter 2014 earnings call. In January, we announced the promotion of Glenn Williams, our current President, to Chief Executive Officer, effective April 1st, 2015. For several years, John and I have worked closely with the board on succession plans. We both feel that the healthy state of the company makes this the right time for a leadership transition. Our decision was solidified as we saw momentum building in the second half of 2014 with growth in the size of the sales force, solid core performance across business segments, as well as EPS and return on equity expansion year over year. Glenn possesses a tremendous depth of understanding of our business.
He joined Primerica in 1981. For the last 15 years, he has successfully overseen marketing for all of Primerica's product lines and has worked closely with us on strategic initiatives. Prior to this role, Glenn was the Chief Executive Officer of our Canadian operations. His strong relationships with our sales force leaders and commitment to the business are well known throughout the organization. Glenn's deep enterprise-wide experience and exceptional leadership skills make him the ideal person to continue Primerica's growth trajectory. Glenn, please provide your perspective on the transition.
Thank you, Rick, good morning, everyone. Today, I'm joining the call from Puerto Rico, where I'll be joined by 1,400 of our representatives who qualified for this incentive trip. As Rick said, we worked very closely together for years. I'm grateful for John and Rick's leadership during that time. I'm honored to be selected as Primerica's next CEO and excited to lead our strong and experienced team of sales force leaders and corporate executives. In January, we held our annual sales force leadership kickoff meeting in Atlanta, followed by nine regional RVP events where I cast my vision for the future. I talked about building on the successful strategy John and Rick have set in motion by launching strategic initiatives to accelerate success.
Between now and our biannual convention in July, we are working on new incentive programs, sales force support, and cutting-edge technology to drive organic growth in 2015. The feedback from our sales force and employees on both the CEO transition and our plans for 2015 has been very positive. I look forward to speaking with you again in more detail on our first quarter earnings call in May.
Thanks, Glenn. In 2014, we delivered shareholder value by focusing on initiatives to drive long-term sales and earnings growth while actively deploying capital. Beginning on slide four, you can see operating revenues for the full year 2014 increased 9% to $1.34 billion, driven by 11% growth in term life adjusted direct premium and strong investment in savings products performance compared to 2013. Positive market conditions as well as enhancements to our ISP product offerings led to a 9% increase in ISP sales and 8% increase in client asset values at the end of 2014 versus the year ago period. Net operating income grew in line with operating revenues up 9% to $182.8 million, driven by business growth and a modest 4% increase in insurance and other operating expenses of $11.8 million in 2014 versus 2013.
Higher employee-related expenses, including $4.6 million of accelerated compensation expense for equity awards with retirement provisions in the third quarter of 2014, were largely offset by higher legal fees and expenses incurred in 2013. The weakening of the Canadian dollar during 2014 also negatively impacted net operating income by approximately CAD 4 million. In 2014, net investment income continued to experience downward pressure, primarily due to lower yield on invested assets and capital deployment throughout the year. The 14% increase in net operating earnings per diluted share to $3.31 for the year and the 60 basis point increase in return on equity to 15.3% compared with 2013 were driven by solid earnings growth and active capital deployment in 2014. Primerica's total shareholder return of 27.8% significantly outpaced the S&P in 2014.
We returned over 95% of operating earnings to shareholders in 2014 through $26.5 million of shareholder dividends and $147.9 million of common stock repurchases. In 2014, 5.5% of Primerica's common stock outstanding was retired. Turning to the fourth quarter results on page five, net operating income increased 6%, $49 million, and net operating income per diluted share increased 9% to $0.91 from the fourth quarter of 2013. Operating results were driven by growth in term life net premiums and strong investment in savings product sales and asset performance. Net investment income was consistent with the prior year due to $3 million of income from called securities in the fourth quarter of 2014, which offset the impact of declining portfolio yields and capital deployment actions.
In the fourth quarter, return on equity expanded to 16.4%, demonstrating that ROE expansion is achievable when key drivers of our diverse business are strong or improving and capital deployment remains a focus. Now let me give you a brief overview of production results for the quarter. In our term life business, issued policies grew 8% compared with the prior year quarter and increased 3% from the third quarter of 2013, driven by strong recruiting and sales force initiatives in the fourth quarter. Productivity of 0.19 times policies issued per life licensed representative per month increased from 0.18 in the year ago quarter and remained consistent with the third quarter of 2013. Our average annualized premium per issued policy of $825 was consistent with the year ago period and increased 2% from $810 in the third quarter of 2014.
Our investment in savings product sales increased 14%, driven by strong retail mutual funds, variable annuities, Canadian segregated funds, and managed account sales in the fourth quarter versus the prior year quarter. Retail mutual fund sales grew 18%, driven by market performance. Variable annuity sales increased 20% year-over-year to $445 million, making the fourth quarter one of the largest variable annuity sales quarters in the history of the company. Sales growth continued to be driven by recent variable annuity product additions. Year-over-year sales of Canadian segregated funds increased 24%, reflecting a new product addition, as well as Canadian clients returning to products with guarantees that tend to do well when there is increased market volatility. Managed account sales increased 19%, and average client assets grew 36% to $1.4 billion from the fourth quarter of 2013.
During the fourth quarter, net flows were positive $295 million, and average client asset values were $48.24 million, up 10% from the fourth quarter a year ago. A positive trend that emerged in 2014 was growth in the average size of clients' initial investments. The average size of our initial mutual fund investment increased 7% to $5,000 in 2014, up from $4,700 a year ago. The average size of our initial variable annuity investment increased 16% to $89,000, up from $77,000 in 2013. On a sequential quarterly basis, investment in savings product sales increased 6% from the third quarter. Average client assets were consistent with the third quarter. John will discuss distribution results.
Thanks, Rick, and good morning, everybody. We are pleased with the continued growth in the size of our sales force, the increase in term life policies issued, and the growth in ISP sales achieved in the fourth quarter. As you can see on slide six, the size of our life insurance license sales force in the fourth quarter increased to 98,358. Recruiting of new representatives increased 13% versus the fourth quarter a year ago due to improved incentive programs and messaging. New life insurance licenses were in line with the prior year period, as life insurance licenses growth typically lags recruiting. On a sequential quarter basis, recruiting declined 12%, and new life insurance licenses were down 3% from the third quarter, reflecting seasonally lower recruiting and licensing levels during the holidays.
The percentage of non-renewals and termination in relation to the size of the sales force slightly increased from the third quarter of 2014 and the fourth quarter of 2014. In the first quarter of 2015, we expect the size of our life insurance sales force to remain relatively flat for the fourth quarter of 2014 due to the seasonally lower new life insurance licenses following the lower recruiting levels, typical for the fourth quarter. Successful incentive programs and business enhancements in 2014 drove 3% growth in both the size of our life insurance licensed sales force and issued life insurance policies versus 2013. The number of regional vice presidents, which represent new distribution outlets across North America, also increased year-over-year.
During 2014, we ran short-term incentive programs as well as two longer-term contest trip competitions designed to increase recruiting levels in order to feed the licensing pipeline and grow the size of the sales force. Incremental enhancements were also made across the business, including expanding the functionality of our client web portal, launching new mobile sales tools, and representative training. In 2014, our investment and savings products business hit all-time records in both sales and client asset values, and the size of our mutual fund licensed sales force increased 4% to 22,607 representatives at year-end. During the year, we expanded our investment and savings products, offering the addition of four new managed account portfolios, new variable annuity providers, AXA and AIG, as well as a new fixed indexed annuity underwritten by Lincoln. We also acquired more robust illustration software for the ISP business.
We are proud to learn that Primerica was awarded DALBAR's Mutual Fund Service Award for Leadership in customer service in 2014, marking the 12th year in a row we have received this esteemed recognition. Alison will now discuss the financial results.
Thank you, John. Good morning, everyone. My remarks today will cover fourth quarter segment operating results, followed by a review of company-wide insurance and operating expenses, investment portfolio metrics, and our capital deployment outlook for 2015. Starting with slide seven, in the fourth quarter, Term Life operating revenues increased 10%, driven by an 11% increase in adjusted direct premiums. Primary direct premiums grew 20%, while legacy direct premiums declined 4%. We expect primary direct premiums to continue to experience strong growth as we layer on new business. Legacy direct premiums, as well as premiums ceded to Citi, should decline approximately 3%-4% on a year-over-year basis as this closed block runs off.
Allocated net investment income was positively impacted by $3 million of income on called securities as well as growth in assets required to support the segment, partially offset by a lower average portfolio yield versus fourth quarter a year ago. Term Life operating income before income taxes was 22.7% of adjusted direct premiums and increased 6% over the prior year period. In the fourth quarter, total incurred claims returned to historical levels while persistency experience improved modestly over the quarter a year ago. Benefits and claims were slightly elevated in the fourth quarter at 59.7% of adjusted direct premiums due to improved persistency year-over-year and a $1.9 million reserve adjustment on certain supplemental policy benefits that waive premiums for disabled policyholders. Staff amortization grew faster than adjusted direct premiums due to more commissions being deferred in recent years, partially offset by improved persistency.
Staff amortization and insurance commissions as a percentage of adjusted direct premiums of 16% was consistent with the prior year period. Term Life insurance expenses increased with normal business growth and the runoff of Citi allowances. The ratio of insurance expenses to adjusted direct premiums was 8% and in line with recent trends. On a sequential quarter basis, operating income before income taxes increased 15%, outpacing 2% growth in operating revenues compared with the third quarter, reflecting higher net investment income from called securities and lower incurred claims in the fourth quarter. Sequential trends also benefited from the recognition of accelerated compensation expense due to a change in the retirement provisions in the third quarter, partially offset by seasonally worse persistency and the adjustment to supplemental benefit reserves in the fourth quarter.
Looking at the Term Life sub-segment, new term pre-tax operating income as a percentage of direct premiums increased versus the prior year period from 15% to 19.1% due to the higher allocation of net investment income, favorable incurred claims, improved persistency, and insurance expenses growing at a slower rate than net premiums. In Legacy, pre-tax operating income as a percentage of direct premiums declined year-over-year to 5.7%, reflecting the adjustment to supplemental benefit reserves and downward pressure on allocated net investment income due to the low rate environment. As a reminder, we will discontinue reporting new term and legacy sub-segment results in our financial supplement next quarter. On slide eight, you'll see our investment in savings products operating revenues increased 9% and operating income before income taxes grew 10% year-over-year.
Our 13% growth in revenue-generating sales in the quarter, driven by growth in retail mutual funds and variable annuities, led to a 13% increase in sales-based revenue. Asset-based revenue and income dynamics are driven by the underlying performance of both the U.S. and Canadian markets, as well as specific product performance. During the quarter, asset-based revenues increased 7%, slightly less than the 10% growth in average client asset values compared with fourth quarter of 2013. Year-over-year lower Canadian segregated fund client asset values created mild pressure on product revenue mix due to their higher relative rates of revenue generation than other sources of asset-based revenue. As we've noted in the past, we recognize asset-based revenues on Canadian segregated funds, but commission expenses associated with this product are recognized over time as amortization of DAC and insurance commissions.
Asset-based revenues and asset-based commission expense growth are more closely aligned if Canadian segregated funds are removed from asset-based revenues in the comparison. Account-based revenue increased 5% over the prior year period, reflecting a 3% growth in our fee-generating accounts, driven by growth in retail mutual funds and managed accounts. ISP fourth quarter results also reflect lower legal fees and expenses, offset by an increase in general operating expenses compared with the year-ago quarter. Although segregated fund DAC amortization remained consistent year-over-year, it was lower than historical levels this quarter as we revised redemption assumptions based on emerging experience and made minor product changes. We expect DAC amortization to return to a more normalized level going forward of approximately $2.5 million to $3 million per quarter, with quarterly fluctuations due to the actual fund performance and redemption experience.
On a sequential-quarter basis, ISP operating revenues increased 2%, reflecting 5% growth in sales-based revenue, partially offset by a 3% decline in asset-based revenue. Operating income before income taxes increased 6%, outpacing operating revenue growth primarily due to the accelerated recognition of compensation expense for equity awards with retirement provisions in the third quarter. Results also benefited from lower DAC amortization due to segregated fund reserve revisions I just discussed. On slide nine, you can see that corporate and other distributed products operating revenues were consistent year-over-year, and the operating loss for income tax increased $2.8 million from the prior year period. Net investment income allocated to corporate and other declined $0.9 million, primarily due to growth in term life required assets, lower yield on invested assets, and continued capital optimizations through share repurchases.
Net investment income in this segment will continue to decline both as term life required assets increase and as capital is deployed to enhance shareholder value. The increase in other operating expenses in the fourth quarter was primarily related to a $1.3 million write-off of developed software as new Salesforce technology is phased in. In our N.Y. subsidiary, benefits and claims increased $1.6 million, primarily reflecting favorable claims experience in the year-ago quarter. Turning to a company-wide review of our fourth quarter insurance and other operating expenses on slide 10. You see insurance and other operating expenses were $69.1 million, up $2.5 million or 4% from the prior year period, partially reflecting growth-related expenses in term life and ISP, and the write-off of developed software as new Salesforce technology is phased in.
Year-over-year trends were also impacted by prior period items, including a premium tax refund and other adjustments, and higher legal fees and expenses in the fourth quarter of 2013. On a sequential-quarter basis, insurance and operating expenses were down $7.7 million, primarily due to the accelerated equity compensation expense recorded in the third quarter. The sequential decline also reflects other expenses that were specific to the third quarter, partially offset by the previously mentioned software write-off in the fourth quarter. As we look towards the first quarter of 2015, we expect expenses to rise to the $80 million-$82 million range. In the quarter, we will incur nearly $9 million of expenses related to employee equity awards, $6 million higher than the first quarter a year ago due to the changes to award retirement provisions we made in 2014.
This increase represents the employee equity awards expense that was historically recorded over a three-year vesting period. Accordingly, equity compensation expense for the rest of the year will be approximately $3 million lower than it has been historically. Other items contributing to the expected increase in the first quarter are annual merit increases and the resetting of payroll taxes for 2015 and privacy and tax-related mailings scheduled for the first quarter. The Co-CEO transition agreement will not materially impact first quarter expenses. Their equity bonuses for services rendered in 2014 will be expensed when granted in the first quarter in the normal course, consistent with the retirement provisions added for all employee equity award recipients. Given the elevated expense level anticipated for the first quarter of 2015, we expect ROAE to decline to the 13% range in the first quarter of 2015.
ROAE should rebound as expenses return to a more normalized run rate in the second quarter. On a quarterly basis, ROAE will fluctuate with income and timing of capital deployment and should continue to be in the 16% range on an annualized basis near term, despite the elevated expenses in the first quarter. On slide 11, you can see investments in cash total of $2.26 billion as of December 31st, 2014, up from $2.23 billion at September 30th. Our net unrealized gain was $101 million, down from $112 million at September 30th, generally reflecting wider credit spreads at year-end. The average book yield of investments at quarter-end, excluding cash and the held to maturity asset held as part of the 2014 redundant reserve financing transaction, was 4.61%, consistent with September 30th.
The average yield on purchases was around 3% for the quarter, up from the third quarter due to a higher proportion of purchases in our life companies during the quarter. As we've mentioned in the past, while not immune to the impact of low interest rates, we are unlike most life insurers in that our reliance on investment returns is relatively low, with a ratio of invested assets and cash to stockholders' equity at a low 1.9 times and net investment income representing only 6% of our operating revenues in 2014. Over the next 12 months, approximately 10%, or $172 million of our portfolio will mature with an effective yield of around 3.3%, which is relatively low compared to recent years.
This low yield on maturities, which is a result of shorter duration purchases over the past few years, should mitigate the pressure on the portfolio in the near term as we should be able to replace the yield at current market rates. However, if rates continue to remain at these historically low levels, pressures on investment income will reemerge in 2016 as maturities begin to carry higher yields again. While we are looking at 2015, one headwind we see is the Canadian exchange rate. The Canadian dollar dropped nearly 9% versus the US dollar during the month of January. To help you think about the potential exposure going forward, in 2014, the Canadian dollar declined 7% on average throughout the year versus the US dollar and negatively impacted our net operating income by approximately $4 million for the full year.
During the fourth quarter, the Canadian dollar declined on average 4% from the third quarter, impacting pre-tax earnings approximately $800,000. As a general rule of thumb, a 10% decline in the Canadian exchange rate would reduce net operating income by approximately $5 million for the year. As I wrap up, let me say that we remain committed to returning capital to enhance stockholder value. Earlier this month, we raised our quarterly stockholder dividend 33%, or $0.04 per quarter. We expect to maintain this quarterly rate throughout 2015. The successful completion of the reserve financing transaction in 2014 positions us to continue deploying capital with a plan to deploy $150 million in both 2015 and 2016.
While our general expectation is to return capital to stockholders ratably throughout the year, the pace at which we will move capital from Primerica Life to the holding company will be governed by our ordinary dividend capacity pursuant to Massachusetts statute. Following a $167 million ordinary dividend payment from Primerica Life Insurance Company to Primerica, Inc. in the fourth quarter, our invested assets and cash at the holding company increased to $194 million, and Primerica Life Insurance Company's estimated RBC ratio declined as expected to about 400% from about 540% at September 30th. We expect our RBC ratio to remain above 400% while paying ordinary dividends of $100 million-$150 million during 2015. With that, I'll turn it back over to Rick.
Thanks, Alison. Before we open up the call for questions, let me just say that John and I have been honored to serve this great company for 30-plus years. We love Primerica and truly believe this is the right time for a leadership transition. We are proud of the last five years, the growth and success we've seen in the organization, the returns we've delivered to our stockholders, the opening of our new home office, and the enthusiasm among our employees. Most recently, the handing of the baton to Glenn, who our board recognized was the right successor for us. We look forward to continuing to serve on the board of directors in a non-executive capacity, and we are confident that Glenn will continue to execute initiatives to grow distribution capabilities, increase earnings, and deploy capital to drive long-term shareholder value. Now let's open it up for questions.
We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question will come from Steven Schwartz of Raymond James. Please go ahead.
Thank you. Good morning, everybody. Congratulations to Rick and John and Glenn. Quarterly conference calls will never be the same.
Glenn will have a lot of good sayings for you, don't worry.
Glenn's got a little John Addison in him, I know that.
Yeah, Glenn's got a lot of it. We were raised near each other, so he'll do good.
Okay. I want to stick with just on Canada for a second. Alison, just so I've got this right, the $4 million that you were citing, that was pre or post-tax?
Post.
That was post. Okay. If the Canadian dollar was about $125 where it is now, we're talking about $7.5 million post? Could you maybe detail which segments is it mostly in, I guess?
Sure. I'm trying to make sure I agree with the $7.5 million. I think that sounds a tad bit high. Give or take, you're talking somewhere in that general range, maybe $5 or $6 million. Anyway, probably the largest place you will see it will actually be in ISP because a significant portion of our mutual fund and segregated fund type business actually does come from Canada. You will see it to some degree in term life, but again, there it's really just a function of the premiums, and relatively speaking, the U.S. premiums really do outweigh the Canadian premiums pretty substantially. When I talk about expenses, you'll actually see somewhat of a benefit for their operating expenses.
The other places you might see it, specifically in some of the production counts, you will see it in AUM, you'll see it in sales volumes for Canada, and to a much lesser degree, you'll see it in term life in force.
Okay. All right. Thanks for that. Just one more on Canada. Is there anything new on the testing issue there?
No, not at this point in time. The issues we've raised in our lawsuit have gotten attention in the industry, and we're hopeful that regulators will focus on it, but there's nothing tangible at this point.
Rick, is there some sense of timing or anything like that?
Unfortunately not. These things run in due course, and it's hard to tell.
All right. Okay. Thank you.
Our next question comes from Mark Hughes of SunTrust. Please go ahead.
Yeah, thank you. In looking at the sales force, can you give us some sense on the recruiting momentum here in the first quarter? You did quite well in 4Q. Is that being sustained early in 2015?
Hey, Mark. How are you doing today?
I'm good, thank you.
We had clearly, particularly in the second half of last year, I believe, there were a lot of things done that really drove successful results in the business. As we say in there, some of it was messaging focused, but some of it was very tangible in this contest where Glenn is in Puerto Rico, and the rest of us will be joining him later, was a very successful contest. We did make some adjustments to bring more newer people and stuff, and so really successful things. The good news is that momentum has continued into the first quarter. It's not like we had a great fourth quarter, and then the spigot turned off. Momentum has continued. Been doing this a long time, all of us have, Glenn being a partner with Rick and I in it.
I've learned one thing is that, as Winston Churchill said, "Success is never final," and spiking the ball in the end zone will get you a 15-yard penalty. We feel good about the momentum that has continued into the first quarter of this year.
Do you think your sort of the yield in terms of licensing, will it be similar to what we've seen, or are these recruits, or I'll just say, are they going to be comparable in terms of their success in getting licensed?
Yes, we do believe that. On the longer-term basis, we still feel good about the 18%-20% of recruits getting licensed. The recruits that came in the fourth quarter were every bit as good as any other recruit that we've had. We still feel good about that. Again, there is seasonality with a mismatch between when a recruit comes in and when they actually get licensed. Over the long term, we do think 18-plus% is still good.
Alison, could you talk about the benefits and claims expense in the legacy block? Where should that be trending? I think you talked about claims frequency maybe normalizing. I know you had a reserve adjustment, but that throughout most of the year has been elevated, certainly compared to the prior year. Where should that trend going forward?
Well, I will remind you again that come next quarter, we won't be reporting legacy.
Yes.
Most of my comments really are focused on the block in the aggregate.
I'll talk to that, but I'll address quickly what I think you're talking about with legacy. Specifically with legacy this quarter, the rate and the volume and the amount of claims, as I said, really did normalize. The anomalies we saw last quarter really did not repeat.
Are you there, guys?
I can hear you.
Sorry, we had a little bit of something. Anyway, that did, in fact, you did have that point correct. We did have that about $2 million adjustment this quarter, and that really almost completely hit legacy, given what those policies are. Also, just in general, legacy claims experience as a percentage of premium would be going up because you do obviously have much older policies there. You have policies that are hitting end of term, and so you look at what their mortality experience may be. The increasing trend on legacy is, in fact, something that we would expect. With that said, if you look at the company in the aggregate, we were at 59.7% of adjusted direct premiums. Again, that's a little bit at the high end of our range, and we do expect that number to come back closer to 59% going forward.
Okay. Just to be clear on the expenses, you say $80 million-$82 million, sort of a one-timer with the $6 million equity award. Going forward, it would be $3 million lower. Is that to say $77 million-$79 million in subsequent quarters?
No. The way we've been doing it is obviously giving you the update one quarter out. Specifically for the equity awards, what you will see is that it will be theoretically $1 million lower than it would have been last year, each quarter. That said, that's got a whole bunch of nuance because each year is obviously different with things that are happening. Just in the aggregate, we wanted to make sure you were aware that $6 million pop, if you will, partially comes back throughout the year. Again, by 2017, you won't be seeing these year-over-year kind of nuances because we will have phased into all of our years the new vesting for retirement. The other things though, that are in the first quarter that won't repeat in next quarter, or second quarter, excuse me, will be things like merit increases.
You'll see that pop from a year-over-year perspective, but then it will be in there forever. You have some other things that are just really one time in the first quarter on privacy and specifically tax mailings and things for our investment business. There are some nuances. We generally see, if you go back over time, that the first quarter is our highest expense quarter. It probably will come down lower than what you are describing. The other thing to consider is what happens with the Canadian exchange rate, because obviously, as I mentioned earlier, the exchange rate will directly impact the Canadian expenses.
Okay. Thank you.
Our next question comes from Daniel Bergman of UBS. Please go ahead.
Hi. Good morning, and congratulations to Rick, John, and Glenn.
Thank you.
Thank you, my friend.
First just wanted to ask a question on the sales force. It looked like the year-over-year change in the ending sales rep count remained solid, but fell a little bit from about 5% in the first half of last year to about 3% in the quarter. I just wanted to see if you had any additional thoughts on how this kind of annual rate of growth should trend ahead. Are you still looking for that mid-single digit growth rate over time? Any thoughts on what's required to achieve and then sustain that level of growth?
Yeah, going back to the core, we are looking for the mid-single digit growth over time in the sales force. We were in the 3%-4% range on a quarterly basis in 2014. You do get sort of the seasonality dynamics, as John mentioned. The first quarter, because of the low recruiting in the fourth quarter, has relatively low licensing in the first quarter. Therefore, the first quarter sales force remaining flat is actually pretty good. The dynamic that you did see in the fourth quarter was the non-renewal jumped up to 8.3%, and as we've been guiding around 8%, 8.5%, but it's been 8% in the prior quarters and 7.7% in the third quarter. There was a little headwind in the fourth quarter on non-renewal, but we still give the same guidance as we had in the past on the non-renewal rate.
Great, thanks. Then I guess shifting gears a little bit to investment and savings products. Sales growth there was again, quite strong in the quarter, and it sounded like some of that strength was due to the recent product introductions. I wanted to see if you could give a little more color on how much of the fourth quarter growth came from these new products, and whether we should view the quarterly result as a run rate or whether some of those sales was more of a one-time pop that should dissipate over time. Thanks.
You go first, and then I'll throw in my two cents on that.
Okay. Talk a little bit about the new products first. Just to give you a feel for the mix, we talked about the variable annuity business growth. We have introduced the AXA product about seven months ago, and that now accounts for about 20% of our variable annuity sales. You can sort of see that all of that's not incremental, but a piece of that is incremental in the business. Seg funds had a change in momentum in the fourth quarter. Again, there was a good product introduction. Both on the variable annuity and the Seg funds side, those new products should help with continued momentum in 2015.
Yeah. Just two cents. Number one, clearly the market being good is the greatest thing we can have. Again, to the messaging and focus, driven by our marketing team, there has been a significant focus in our sales force on the investment and savings business. One of the successful events last year was our contest we ran for our investment and savings producers to The Greenbrier. With improvements in their illustration software, improvements in products, more importantly, a real focus of the organization on the business, along with the market, it significantly improved the business. The plan is to continue to do all of those things. I can't speak for the market, that's you guys' job. Our focus is to continue to deliver Main Street families the right investment platform, and we believe Primerica is that answer.
Very helpful. Thank you.
Our next question comes from Sean Dargan of Macquarie. Please go ahead.
Thank you. Congratulations to everyone on the next move.
Thanks.
Thanks. Just following up on John's commentary on ISP.
ISP has contributed more to overall earnings, I think that's been reflected favorably in your valuation. Can you just tell us about any initiatives you have to convert more of the licensed reps to securities reps?
Let you go first, Rick, then I'll throw in again.
Well, let me answer a question you didn't ask, then I'll come back to the question you did ask. John talked about the focus on the securities business, I've mentioned about the product introductions, there's been quite of other additional focus on that business beyond that. That relates to the automation. About 70% of our securities business now comes in on a handheld phone or an iPad. It's made life a lot easier for the reps to submit the business. What that also does is it makes it easier to train new people coming into the business to become productive in the business. We are also working on new illustration software that should help sales as well. As it relates to just initiatives to get agents licensed, there's a whole variety of training programs that we do have.
You did see, last year, a 12% increase in the number of new securities licensed reps. The securities licensed sales force did grow 4%. Working on trying to make it easier to get licensed has shown some benefit, and we're hopeful that that will continue.
Again, I'll talk focus in a very significant way. Nothing sells at Primerica like success. Our representatives, as you well know, are independent contractors, and they make decisions. We provide the environment, we provide the products, we provide the training, we provide the support, we provide motivation, but they provide the effort. They got to build their business. What people are seeing now is people having tremendous success in the investments business, and it's no longer viewed as a boutique business. It is viewed as a cornerstone of the company, and they're seeing that reflected in the cash flows of the leaders that are succeeding at it. Besides the initiatives, the improvements, all of those things, focus and continuing success and highlighting that Glenn and team will do will continue to drive this business.
All right. Thank you. Do you see more willingness in the middle market in putting money to work in the markets now that we've had a couple of good back-to-back years in the equity markets? Does that change the behavior of the clients at all?
What we see in the middle market right now is more confidence, that people actually feel that things are getting better. For several years, people were saying things were getting better, but the middle market was like, "I don't see things getting better." The biggest indicator that I would say is you saw the increase in the average size of both our variable annuity and our mutual fund sales. Yes, there is more confidence in the middle market right now.
Great. Thanks.
We have a follow-up question from Steven Schwartz of Raymond James. Please go ahead.
Yeah. Thank you. VA business, I'm trying to get something straight in my head here. I tend to think of the typical Primerica client contract holder as lower middle income type of person, probably younger than normal, maybe for the industry as a whole. Then you say your VA, the initial VA deposit is $89,000. That's lower, I think, than Raymond James' initial VA deposit, that's still a lot of money. Is there a difference between who's an ISP and who's in term?
Yeah. Steven, one of the things, Primerica, if you look at our average client, okay, you're right. If you look average client, we're middle market. There's a pretty big standard deviation in that between who our people are. If you look at our ISP business, in our ISP sales force, they're seeing a lot of the clients that Edward Jones sees or whatever. Some of these people, they have money and they're older. Okay? They're not as young as the typical life insurance person coming in. When you look at our business, too much generality, you can be too general with it. Our guys that are out there very focused on that, they see people with a little more money. Rick, I don't know if you want to add to that.
No. You are just right, John. Our business does run the spectrum, and the variable annuity products that we have do fit an income orientation for people who are looking towards retirement. When you get into that demographic of people looking for retirement, They do have a little, it is not huge amounts of money, but it is some money generating the $89,000.
Okay, thank you.
Our next question comes from Colin Devine of Jefferies. Please go ahead.
Thank you, folks. Actually, I remember when I learned a few years ago that the average VA ticket in Smith Barney was the same size as the average ticket you guys are saying. It does not surprise me that they are that big.
Right.
A couple questions for you. What new products do you have in the pipeline? Are there any more VA additions or anything like that coming down? Second question, I was quite impressed with the growth and the size of the mutual fund for its up 5%. Where do those people come from? Are they new additions to the Primerica family? Are they conversions of just former life agents? How does that compare relative to the past? That's the second question for you. Then if we can talk a little bit more on persistency. I appreciate references to it, but can we get a little more granularity on how persistency trends are in your term business?
Okay. This is Rick, let me start. Yeah, we are looking at adding another variable annuity provider, in the next two months, where I can't really, not at liberty to say who that is and what product it is, but we are looking for additional expansion there. As it relates to the agents that are getting securities licensed, yeah, it is almost exclusively agents that have come into the business. They've gotten their district or division leader promotion, therefore they've built a team and begun to develop a client base. Then, as they start to focus on going to full-time, they go ahead and get their securities license. It's rarely sort of people coming into the business. Initially, it is typically people who come into the business, have had some success, and are looking to make this a full-time profession.
How does that 5% increase compare to the past? It just seems to me the bulk of your earnings are coming from the registered reps, and this is really what's setting the sort of forward earnings momentum is your ability to get these people their securities license. How is that trending?
That was a significant improvement over the last two years. It had been flat for the two years prior to that.
Okay. Thank you.
Alison.
The question on persistency, and I appreciate we don't provide a tremendous amount of granularity with regard to persistency, but to try to speak in some general terms, we have been seeing improvement in persistency over the course of the last several years, after the downturn that we saw in the 2008 through 2010 period. Our first and second year persistency, which is what we really focus on because it actually has the most dramatic impact on our financials, again, has been where we've seen most of this improvement. That's a combination of not just the market, excuse me, when I say the market, the overall economy and people just holding onto their policies. That we see across all durations.
Specifically on the early parts of the years or early durations, we've made a substantial push over the last few years with regard to programs with our sales force in order to really encourage and bolster our persistency results. With that said, our business in the first year, we look at things on a 13th-month basis. Our 13th-month persistency is generally going to be lower than you'd see for other term riders who are selling much larger policies to a different marketplace. Once we get past really the first and sort of second duration, we normalize, and then I'd say our persistency rates are very consistent with what you'd see in any other term rider.
Okay. I'll keep asking and maybe we'll get the number out of you yet by these quarters.
You keep trying there, Colin.
I put that out there. Come on, Alison. One final one for you, so you don't feel too left out. With what's happened on the Canadian dollar, and the fact it obviously does meaningfully impact your earnings, does that give you cause to think about starting to hedge some of the currency risk or not?
It's interesting. We talk about that quite a bit. You can look at it from a couple of different perspectives. One is from the balance sheet perspective and then the earnings perspective. Let me hold on for a second. Let me go back to the balance sheet. Most of the Canadian balance sheet is really matched with Canadian liabilities, so the denominations are the same. There's sort of internal hedging happening there. It's really just their equity, and really don't feel the need to hedge that given how much money we move from Canada to the U.S. anyway. On the earnings, it's something that we have done a long, long time ago in the past. The rates have been really very stable until, quite frankly, the last, let's say, 12-18 months.
Actually, most importantly, the last 12 months. It is definitely something we will consider. That said, I would not want to jump into it because every hedging strategy has so many potential gotchas to it that, given the level of exposure, you describe it as material. It is certainly a number we are focused on, but I do think we can tolerate a five, let's say, $8 million impact, $5 million impact on net income, and I'm not sure that's worth the risk associated with a hedging strategy. That said, it's an excellent point. We definitely are talking about it and keeping an eye on it to see if it's something we need to look into.
Okay, just a final one. You mentioned where the RBC ended the year. Where did your MCCSR come in?
RBC what? Excuse me.
No, where did your MCCSR come in in RBC?
MCCSR. I actually don't have that number off the top of my head. We have not finished the filings. Those are due at the end of this month. Even the RBC that I quoted is actually an estimate. We don't normally go through an estimation process on MCCSR. I will tell you that I know, and because it always has been much higher than what is required. Similar to what we have in the U.S., we have a very strong capital business in Canada. I am happy to provide that number once it's a public number, once we've calculated it, quite frankly.
Thanks.
Fully finalized it.
Great. Thanks.
Thank you, everybody. Have a nice day. Great.