Hello. Welcome to the Primerica second quarter 2015 financial results conference call. All participants will be in listen only mode. Should you need assistance, please signal the conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. 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, Investor Relations Officer and Executive Vice President. Please go ahead.
Thank you, Amy. Good morning, everyone. Welcome to Primerica's second quarter earnings call. A copy of our earnings release, financial supplement presentation, and the webcast of today's call are available on our website at investors.primerica.com. Following the reading of the safe harbor provisions, Glenn Williams, our Chief Executive Officer, and Alison Rand, our Chief Financial Officer, will deliver prepared remarks. We'll open it up for questions. We reference certain non-GAAP financial measures in our press release and on this call. These non-GAAP measures have limitations, and reconciliations between non-GAAP and GAAP financial measures are attached to our press release. You can see our GAAP results on page three of the presentation. We will also make forward-looking statements in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act. The company does not revise or update these statements to reflect new information, subsequent events, or changes in strategy.
Risks and uncertainties that could cause actual results to differ material from these expressed or implied are discussed in the company's 2014 annual report on Form 10-K, updated quarterly by our form on Form 10-Q. I'll turn the call over to Glenn.
Thanks, Kathryn. Good morning, everyone. Today, I'll discuss our second quarter performance and distribution results, as well as update our perspective on the Department of Labor's Fiduciary Rule proposal by giving you a broader understanding of our business model. Beginning on page three, you can see that during the second quarter of 2015, operating revenues increased by 6% compared with the prior year period. Strong operating results were driven by growth in the Term Life segment, including 14% growth in life insurance policies issued and a 10% increase in net premiums. The Investment and Savings Product segment continued to perform well with a 9% increase in product sales and 7% growth in average client asset values year-over-year. Operating results reflect higher than historically incurred claims in the current quarter compared to incurred claims in the year ago period, which were lower than historical levels.
Net investment income continues to be modestly impacted by lower yields on invested assets and ongoing capital deployment. The comparison of year-over-year results was also negatively impacted by the declining Canadian dollar value, which reduced operating revenues by approximately $7.5 million and net operating income by approximately $1.5 million. While net operating income was consistent with the prior year period, net operating income per diluted share increased 7% to $0.93, reflecting solid performance and ongoing return of capital to stockholders through share repurchases. ROAE expanded to 17% on an operating basis versus 16.3% in the second quarter of 2014. The significant increase in ROAE from 14.6% in the first quarter of 2015 primarily reflects the expensing of equity awards granted to retirement-eligible employees in the first quarter, strong performance, and continued share repurchases.
Between April 1st and August 5th, we repurchased another $100.3 million, or 2.2 million shares of Primerica common stock for a total of $139 million or 2.9 million shares repurchased year to date through August 5th. In the second quarter, we achieved our best sales and distribution results since becoming a public company in 2010. As you can see on page four, the size of our life license sales force grew 5% to 101,008 at the end of June compared with the year ago period and was up 3% from the end of the first quarter. As we approached our biannual convention in July, positive momentum continued to build in the business as representatives competed to receive recognition on the stage of the Georgia Dome.
This enthusiasm led to 20% growth in recruiting of new representatives and 15% growth in new representatives obtaining a life insurance license versus the prior year period. On a sequential quarter basis, recruiting of new representatives increased 13%, and new life licenses increased 39%, compared with seasonally lower licensing in the first quarter. We expect the size of our sales force to continue to increase during the third quarter. Now turning to production results on page five. Term Life issued policies grew 14% compared with the prior year quarter. Productivity of 0.23 policies issued per life license representative per month increased from 0.21 in the second quarter a year ago and 0.19 in the first quarter of 2015. Term Life sales growth was driven by continued momentum as well as strong growth in recruiting and the size of the life license sales force year-over-year.
On a sequential quarter basis, Term Life insurance policies issued increased 22% compared with the first quarter of 2015, reflecting typical seasonality as well as growth in productivity and the size of the life license sales force in the second quarter. Our Investment and Savings Product sales increased 9% to $1.57 billion, driven by strong sales of U.S. retail mutual funds, variable annuities, and Canadian segregated funds in the second quarter versus the prior year quarter. During the quarter, U.S. retail mutual funds and variable annuity sales increased 7% and 4% respectively from the prior year period, reflecting continued momentum driven by product additions, marketing efforts, and market performance. Year-over-year, our Canadian segregated funds experienced significant growth due to recent product additions and enhancements.
Investment and savings products net flows were positive $300 million in the second quarter, and ending client asset values were $49.37 billion, up 3% from June 30, 2014. On a sequential quarter basis, total Investment and Savings Product sales increased 3% from the strong sales in the first quarter of 2015. Growth in U.S. retail mutual funds reflects typically higher retirement savings sales in the second quarter during the retirement plan season. Sales of variable and indexed annuities also grew from the strong levels in the first quarter. Total client asset values changed very little from the end of the first quarter, as positive net flows were mostly offset by lower market values. In July, our biennial convention in the Georgia Dome was attended by 40,000 people from the U.S., Canada, and Puerto Rico.
The positive momentum in the first half of the year bolstered convention attendance, which increased 14% from last convention. The energetic environment paired with announcements of product enhancements, cutting-edge technology, and incentives created an excitement level that has continued sales and distribution growth post-convention. Now for some perspective on the DOL's proposed Conflict of Interest Rule. Our priority continues to be serving middle-income families to ensure they receive investment advice that is in their best interest so they can make prudent financial decisions. Let me start this discussion by emphasizing the underlying fundamentals of our business are very healthy. Even with the rule proposal, we've continued to experience strong sales and distribution growth. Alison will talk broadly about the economics of our Term Life and ISP businesses in a minute. First, I'd like to provide some clarity on how we build distribution.
In the U.S., our business model has always focused recruits on getting their life insurance license first. For many of our representatives, especially those that are truly part-time, it can take a few years for them to pursue their mutual fund license. This is evidenced by the fact that 52% of our life insurance policies issued in 2014 were produced by representatives who had only a life insurance license. Approximately 20% of our U.S. life insurance-licensed sales force is also licensed to sell mutual funds. Our most productive investment and savings products producers actually produce very little life insurance business. Our top 1,000 mutual fund licensed representatives in the U.S. produce 52% of the U.S. ISP sales, but only 6% of U.S.-issued life insurance premiums in 2014.
For these reasons, we believe even if a DOL rule is enacted as is, it will not significantly impact our recruiting message, our life licensing process, or our Term Life business. Once a mutual fund licensed representative achieves success in the investment business, they go on to get licensed to sell more sophisticated products like managed accounts. Currently, we have about 2,800 representatives who are licensed as Investment Advisor Representatives. We do not anticipate the timing of obtaining licenses would change radically under a new DOL rule, other than we may encourage representatives to become licensed as Investment Advisor Representatives at the same time they obtain their mutual fund license.
Given that a significant portion of our ISP business is produced by a relatively small group of representatives, we believe it will be much easier to make adjustments to accommodate this small group of ISP producers versus the entire sales force. We've thoroughly analyzed the proposed rule and have concluded that the Best Interest Contract Exemption is unusable in its current form. The DOL has received over 1,000 letters with very thoughtful insight from respected institutions, including FINRA. Throughout this process, DOL Secretary Perez has indicated a willingness to consider changes to the rule. The question at this point is whether those changes will be sufficient to make the rule workable. The DOL seems willing to make changes, it is difficult to determine the potential business modifications that would be made without seeing the final rule.
With that said, if the DOL rule were to be enacted as proposed, we would likely offer investment solutions that fall outside of the Best Interest Contract Exemption in the current proposed rule. For instance, clients with larger account balances could be offered managed accounts. We're also evaluating how we could work within the current rules and exemptions to potentially offer level fee products as IRAs. As an example, we could work with a limited group of providers to offer a list of investment alternatives, each with the same fee structure that we believe would, over time, be economically consistent with current profitability levels. Regardless of what happens with the rule, we will not abandon middle-income families that desperately need our help saving for the future.
These families need to invest for retirement, if qualified investment plans are no longer an option, we could also potentially offer non-qualified investment plans. As you are aware, the DOL rule has raised the question of whether variable annuities can continue to be sold within qualified retirement plans. In 2014, about 70% of our variable annuity sales were in qualified retirement plans. If the industry can no longer offer this option, we believe these investments would most likely move to managed accounts or mutual funds. We also have a high level of confidence in the variable annuity underwriter's ability to adapt to change and bring new products to market.
We remain committed to helping hardworking families save for retirement, we are hopeful the DOL will make the changes necessary to allow middle-income families to continue to receive sound financial education, along with a wide range of investment and savings options. With that, let me turn the call over to Alison to discuss financial results.
Thank you, Glenn, and good morning, everyone. Today, I will cover the quarter's operating results as I normally do. I'd like to spend some time reviewing broad business dynamics for both Term Life and investment and savings products, which hopefully will help you frame any potential impact of the proposed DOL Fiduciary Rule on our business. Starting with Term Life on slide 6, we experienced strong top-line growth year-over-year. Our 9% growth in operating revenue was driven by a 10% increase in net premiums and an 8% increase in allocated net investment income. While the percentage of our invested assets allocated to Term Life continued to grow, the associated increase in allocated net investment income was partially offset by a lower effective portfolio yield.
During the quarter, the ratio of benefits and claims net to adjusted direct premiums increased to 60.7% versus 58.9% in the prior year period. In general, we'd expect the second quarter to have a relatively higher ratio due to the impact of seasonally strong persistency on the change in benefit reserve. That said, in any given quarter, the level of incurred claims in relation to historical norms will cause fluctuations in the overall benefits and claims ratio. The increase in the ratio year-over-year was largely due to incurred claims that were about $1 million above historical levels this quarter, whereas in the prior year period, incurred claims were about $2 million below historical levels. The ratio of Term Life DAC amortization and insurance commissions to adjusted direct premiums of 13.8% was consistent year-over-year, as both periods experienced seasonally strong persistency.
In contrast to the benefits and claims ratio, strong seasonal persistency drives Term Life DAC amortization down, which generally results in a much lower DAC and insurance commission expense ratio in the second quarter than in other periods. The ratio of insurance expenses to adjusted direct premiums was lower year-over-year at 8.1% versus 8.5% in the prior year period. Operating income before income taxes as a percentage of adjusted direct premiums was 23.1% for the quarter. Due to seasonally strong persistency, we generally expect second quarter to have the highest profit ratio for the year. The ratio is lower than in the prior year period due to incurred claims volatility. Normalizing out the claims volatility in both periods, the income ratio would have been consistent year-over-year.
On a sequential quarter basis, operating income before income taxes as a percentage of adjusted direct premiums increased from 20.1% in the first quarter. The increase primarily reflects higher employee-related expenses in the first quarter, as well as seasonally strong persistency and higher incurred claims in the second quarter. Moving now to our Investment and Savings Product segment. On slide seven, you'll see our ISP operating revenue grew 5% year-over-year, as did operating income before income taxes. Sales-based and asset-based revenues each increased 5%, driven by 7% growth in both revenue-generating product sales and average client asset values. Account-based revenues grew 10% year-over-year, largely reflecting growth in managed accounts and retail mutual fund accounts for which we earn record-keeping fees, as well as the addition of a mutual fund provider to our record-keeping platform in the second quarter.
Sales-based net revenue as a percentage of revenue-generating sales was 1.31%, down slightly from 1.33% in the second quarter a year ago. As is the case this quarter, variability in this metric is generally caused by fluctuations in sales mix, as a product of differing levels of upfront sales pace versus ongoing asset-based earnings. For the quarter, asset-based net revenue as a percentage of average client asset values was 0.051% versus 0.054% in the second quarter of last year. The decline was almost fully attributable to Canada, and more specifically, segregated funds. Weaker segregated fund returns led to an acceleration of DAC amortization in the second quarter, whereas DAC amortization in the prior year period was positively impacted by fund performance. On a sequential quarter basis, ISP operating revenues increased 5%, reflecting seasonally strong second quarter revenue-generating product sales and a growth in fee-generating accounts.
Strong Canadian segregated fund performance in the first quarter led to lower DAC amortization in that period. Other operating expenses decreased in the second quarter, primarily due to higher expenses related to the accelerated retirement vesting of equity awards in the first quarter. Moving to the Corporate and Other Distributed Products segment on slide eight, you can see that operating revenues declined $4 million from the prior year period, and the operating loss before income taxes increased by $2.6 million. Allocated net investment income declined $3.9 million year-over-year, reflecting a higher allocation of invested assets to Term Life as the business continues to grow, ongoing capital deployment and a lower portfolio yield, as well as a $1.6 million lower return on the deposit asset backing a reinsurance agreement as interest rates increased during the quarter. Insurance and other operating expenses were modestly lower year-over-year.
On slide nine, we provide a more detailed review of insurance and operating expenses. You see that operating expenses of $70.9 million were consistent with the second quarter of 2014. Employee-related expenses were lower, largely due to the timing of expense recognition from the retirement-eligible equity awards granted in the first quarter, as we did not make this change to the retirement provisions until the third quarter of 2014 for that year's award. Expenses were also impacted by an increase of $1.6 million for premium and growth-related expenses related to growth in our Term Life and ISP segments. On a sequential quarter basis, expenses decreased by $8.4 million, primarily due to the accelerated retirement vesting of equity awards in the first quarter of 2015.
Looking forward, we expect our third quarter insurance and other operating expenses to increase by approximately $2 million in the third quarter, with more than half of the increase tied to our DOL rulemaking effort and support for a re-proposed rule. Turning to slide 10, our investments in cash, excluding the held-to-maturity asset held as part of a redundant reserve financing transaction, totals $1.97 billion as of June 30th, down from $2.06 billion as of March 31st. This decline primarily reflects stock repurchases of approximately $71 million during the quarter, as well as a decline in the net unrealized gain of our invested asset portfolio from the sharp increase in interest rates during the quarter. Since the end of the second quarter, we have been actively buying back our stock, repurchasing another $29.4 million through August 5th, or $139 million on a year-to-date basis.
We are nearing the repurchase authority for the year of $150 million, it would be at the discretion of our board of directors to choose to increase the authority for 2015. We believe our operating businesses continue to provide us with access to deployable capital. Primerica Life Insurance Company's statutory risk-based capital ratio was estimated to be in excess of 430% at the end of the second quarter. Our ISP business continues to have strong results, with earnings that are largely distributable to the holding company. Also, we have made plans to allow more money to be repatriated from our Canadian operations. Accordingly, our effective tax rate increased in the second quarter, as these earnings are subject to a higher U.S. corporate tax rate.
We expect going forward, our plans to repatriate earnings from Canada will increase our effective tax rate by approximately 40 basis points from where it would have otherwise been. I would like to spend a few minutes talking about our core business segments with the goal of highlighting the strength of the financial platform in which we operate. On page 11, you can see that in 2014, Primerica's operating income before income taxes was $280.2 million, including $201 million of stable recurring earnings from our Term Life segment and $146 million from our less capital-intensive ISP business. We recognize a $66.8 million operating loss in our Corporate and Other Distributed Products segments in 2014, which includes corporate expenses and our non-core business lines.
C&O has incurred losses since its primary revenue source, net investment income, has declined as more investment income is allocated to Term Life, and we optimize the balance sheet through share repurchases. We believe the positive impact to earnings per share associated with share repurchases outweighs the pressure put on pre-tax operating income trends in this segment. In our Term Life segment, adjusted direct premiums are the primary revenue driver and increased 13% in 2013, 11% in 2014, and 11% for the first half of 2015. The strong growth in primary direct premiums, which are not co-insured with Citi, combined with the slow runoff of legacy direct premiums, is what drives this growth. In fact, even if Term Life sales remained flat going forward, adjusted direct premiums should continue to show attractive growth rates near 10% annually for the next several years.
While several items have impacted Term Life earnings in recent quarters, including low interest rates and insurance expenses and claims volatility, we project that Term Life pre-tax operating income will grow by at least 5% per year and more likely by as much as 8%-10% per year over the next several years, even if sales were flat. Glenn explained earlier, we do not believe a DOL Fiduciary Rule significantly impacts our ability to sell Term Life insurance or retain in-force business, and we believe this segment will be largely unaffected by the rule over the long term. Glenn also mentioned, we've seen strong growth in the Term Life issued policies over the last several quarters.
While on a GAAP basis, it takes a long time for earnings on new business growth to emerge in the financial statement, we shouldn't forget that growth in Term Life sales generates real upside potential in our earnings. If we assume hypothetically that Term Life sales grow 10% in 2015, followed by 5% annual growth for the next four years, Term Life pre-tax earnings would increase by as much as $35 million in 2019 versus a scenario where sales are flat during the five-year period. One final note for Term Life segment involves the potential impact of lower interest rates on DAC amortization. We are required to perform tests at least annually to make sure our DAC asset is recoverable. Our Term Life DAC asset was recoverable even using a 0% new money rate assumption.
While lower interest rates should impact investment income, they will not impact Term Life DAC amortization. Turning to the Investment and Savings Product segment. To better understand the portion of Primerica's earnings that could be impacted by the DOL rule, let's first consider the income sources that should not be impacted by the rule. In 2014, we estimate that about $58 million, or roughly 40% of the ISP segment's pre-tax operating income, was derived from sales and client assets in U.S. non-qualified accounts, our managed account platform, or in Canada. Another $21 million or about 14% of ISP pretax operating income was account fees earnings on mutual fund qualified accounts, most of which we believe can be preserved through the transition provisions or adjustments to our account fee structure. The remaining 46%, or about $67 million of ISP pretax operating earnings, is associated with U.S.
qualified account sales and client asset values. This is broken down into asset-based and sales-based pretax operating income of about $35 million and $32 million respectively. We believe these sources are at risk to differing degrees. First, let's discuss asset-based earnings. In our DOL comment letter, we asked for clarity and expansion of the transition provisions, and we are hopeful changes will be made to grandfather existing client relationships in their entirety. We believe strong arguments have been made as to why this is necessary to avoid client service disruption. Our understanding is that if the proposed rule is enacted as currently written, to the extent that Primerica's representatives are not providing clients with new investment advice on qualified retirement plans, existing revenue sources are not prohibited. In the near term, our current asset-based earnings would be largely intact.
We recognize that they would be pressured over time as existing clients sought new advice or as redemptions occurred. Our ability to earn sales-based earnings, which for 2014 was roughly $32 million pretax, as well as our ability to grow asset-based earnings, will be closely tied to whether the Best Interest Contract Exemption in the final rule is usable, or alternatively, our ability to execute options outside of the Best Interest Contract. As Glenn indicated, the question remains as to whether variable annuities will continue to be an option for qualified plans. If qualified VA sales were to move to managed accounts, we believe our profitability over time would not be negatively impacted, but amounts would be earned over time versus at point of sale.
If sales were to move to mutual funds, we would receive lower sales-based earnings upfront, but would have the opportunity to earn record-keeping and custodial fees that are not currently earned on variable annuities. Ongoing asset-based earnings on mutual funds and variable annuities are fairly consistent. While we cannot conclude at this point what will happen, we are committed to finding the best way possible to continue to help middle-income Americans save for their retirement. Let's open the call up to questions.
Thank you. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press star then two. Our first question comes from Steven Schwartz at Raymond James.
Hey, good morning, everybody. I have a bunch. I'll only ask a couple and get back in line. I'm going to ask two with concern with the DOL, I think. First, Glenn, in your comment, one of the appendices was a letter by Gibson Dunn by Eugene Scalia or one of his minions. If the rule is adopted as currently seen, are you prepared to sue the DOL?
Thank you, Steven, for that question. I think that to answer a question like that, you have to see what the final rule is and the overall industry reaction to the rule. It's impossible to anticipate how that might turn out without seeing the final rule. There's just too broad a series of possibilities to make a decision like that. That was just too difficult to answer at this point.
Well, I guess, Glenn, my caveat was if the rule is adopted as is.
Yeah. It really is an industry-wide issue. We are traveling in the pack with the rest of the industry on the vast majority of the issues with the rule. They are not unique to Primerica. They may apply to us a little differently because of our unique market, but generally, the entire industry is in reasonable agreement about the issues and concerns with the rule. I think that is something will be elevated to an industry level at the point the rule becomes final.
Oh, I got you. Okay. Can we revisit the issue of internal consumption that came up in the first quarter conference call? What was internal consumption this quarter?
Yeah. Our internal consumption stays very constant at about 20% of our sales over a year are made, life insurance sales are made to either a recruit or a licensed agent. 80% are made to people who are neither of those two. We don't see a lot of fluctuation in that number quarter to quarter or year to year. It's been very constant over a long period of time.
Okay. Yeah. One thing I'm a little confused about from the discussion last quarter, and I was looking it over. I guess the question is, what is the definition of a recruit? I mean, isn't really everybody you talk to a recruit? I mean, isn't that the idea?
No. We define a recruit as someone who has completed an Independent Business Application and paid the $99 fee to join with good funds. It's a very definable group of people that we can identify every day, and we do. We can also track that and know if they buy a product from us, either a life product or an investment product, we can match that up.
Okay. It's like 14% of those people become licensed agents. Okay. I'll leave it there and get back in line.
That number, Steven, that number is higher. That number tracks at about 18% over time. It fluctuates As recruits spike, the number will drift down. As they normalize, the number goes back up, as you might imagine would happen in a pipeline kind of concept of where it takes time for people to get licensed. It stays closer to 18 than any other number.
Okay, thanks. I'll get back in the queue.
The next question comes from Suneet Kamath at UBS.
Thanks. Good morning. Just want to go back to slide 11 to start, if I could. Alison, as you were talking about some of the potential changes that you might make to the model, I think you referenced clients maybe moving from variable annuities to mutual funds or managed accounts. You gave some sort of fee rate disclosures that I didn't quite follow. Can you walk us through that again? If a client moves from one to the other, what would the fee rate impact be on the company?
Sure. I didn't give specifics, but let me give you some general thoughts around that. If a client were to move to our managed account platform, we do believe that over the lifetime of that client, our profitability would be consistent with where it was in, say, a variable annuity. The main consideration there is that it would be far less weighted towards point of sale. Our managed account platform obviously pays the same fee on assets over time, and so the fees would be a little less front-weighted, but over the long term, we think they would be consistent. On a mutual fund, we generally feel the same. Specifically, the reason they get closer to each other is that our mutual fund platform, as well as our managed account platform for that matter, allows us to utilize our servicing, our record-keeping platform for accounts.
We have another form of revenue outside of assets and sales, which is that we provide recordkeeping, custodial-related, and other types of services for those clients, really in most cases, on behalf of a transfer agent. We have these other sources of revenues that we actually don't have available to us on variable annuities. The long or short answer, I guess, is that over time, we feel like the options are fairly consistent. We do think the geography of the earnings vis-a-vis what the source of earnings is would change, and we do think the timing of the earnings would change as they would become more back-end loaded.
Okay, thanks. I guess, have you done any more work on what the potential additional costs could be from the DOL proposal?
At this point, not particularly, because it really depends on whether we would be using the Best Interest Contract Exemption. As it currently is written, our view is that we would not use that exemption. If in fact that exemption became usable for us, we'd have to look at what the rules were and see what the costs associated with it were accordingly.
Okay, my last one on this is the eight-month implementation time that is currently built into the draft. We've heard some companies say that it would be next to impossible to comply with the proposal over an eight-month implementation period. Can you provide your thoughts on how Primerica would be in such a situation?
Sure, Suneet. I think a lot of those timeline challenges are questions about the BICE or the Best Interest Contract Exemption. As Alison just pointed out, the way we see it right now as currently written, we would operate outside of that. Most of the concerns that I've seen from industry have been if you're trying to operate within BICE, can you provide all of the requirements that BICE has in it within the eight-month timeframe? Can you build all of that? That's a piece of the challenge, and that's a piece of the reason we would make the decision to operate outside of BICE is because we don't believe that eight-month preparation period is long enough. Should BICE change and we reevaluate it, clearly a lot of the discussion, if you're aware of it going on with the DOL is this very issue.
One of the potential changes to BICE would be it would lighten all of that load and therefore not as much would need to be done during an eight-month period. I think it's a question of whether BICE becomes workable, where we would reconsider it. Currently, as Alison said, we're planning to operate outside of BICE in its current form.
Okay, thanks.
Next question is from Mark Hughes at SunTrust.
Yeah, thank you. Good morning.
Morning.
Yeah. Best to understand this as if you operate outside of the exemption, the basic requirement is that you have sort of managed accounts or level fees. You're not generating commissions based on the products you sell. You're just generating fees based on assets. Is that correct?
Yes. I think there are a couple of different possibilities there and how we weight each one. I mean, clearly larger accounts that can move on into the fiduciary world that we already play in with managed accounts is one option for our larger account balances. As we look outside of the Best Interest Contract, but still under the DOL rule, you're exactly right, level fee products. We made some reference in here to the possibility of working with providers in our qualified plan business to make sure that we met all the requirements for level fees and so forth. That's another option.
Then, of course, a question is whether the non-qualified business grows as a result of all of this, if it's not made as flexible as necessary, and do you just identify some clients with small accounts who don't have access to a qualified account at this point. They accumulate money in a non-qualified account and later perhaps move to a qualified account, assuming it meets all of the annual requirements for contributions and so forth. The balance between those three or other options is what we're still working through, but we're looking at all of those possibilities.
Hey, Mark.
Yes.
Mark, I just want to say specifically, you mentioned that we'd only have asset base. There is an exemption that the level fee exemption would allow us to continue to have sales-based and account-based and other forms of earnings. They would just have to obviously be level across all of our products and providers. We would anticipate still having some forms of earnings that were sales-based or account-based.
Right. I guess one concern would be that the incentives for your salespeople would be reduced, that lower commissions would be spread out over the life of the accounts. Eventually they would make as much, upfront there wouldn't be as much juice in it to make the sale today. Is there a way to provide sufficient incentives to keep people motivated?
I think that's a great question, Mark. That is not directly required under the current rule to say that upfront commissions or higher first-year commissions have to be eliminated. They just have to be levelized among products. Obviously there are always questions of what is the pressure on compensation or on cost of investments, and is the pressure downward at the point of sale. We don't assume that under the DOL rule that an upfront sales charge has to go away as long as within our qualified business, as Alison kind of broke down the pieces of our business to focus on the part that's under discussion. We could still charge an upfront sales charge as long as it was level across all the products we were offering based on the DOL rule or our understanding of it currently.
If there's separate pressures industry-wide for those fees to come down, that's a little bit of a separate discussion, but we're not feeling those right now. The other thing is, I think you need to look at the total cost that those clients are paying because in most current product structures, those that have an upfront sales charge have a lower ongoing annual charge, and in fact, for a long-term investor, the net is better on the A share model that exists today than it is, for example, on a C share model, if you're talking about the traditional mutual fund world, which is why there was so much controversy around C shares. We don't anticipate that. That's not a direct DOL issue. Obviously, it's part of the discussion. We're considering it, but we don't expect upfront sales charges to disappear as a result of this.
We do believe we'll continue to be able to motivate our sales force and continue to drive them toward the appropriate sales for our client base as we come through this.
You're saying as long as the fees are consistent across all of the products that you offer, then you can operate outside of the exemption, and you'll be consistent with the DOL requirements.
Yeah. Let me clarify something. One of the things I think I see where you're getting the 1% is we can have a managed account platform, a true fiduciary platform, as well as a brokerage platform. Within the brokerage platform is where we would be using this level fee exemption. The levelization would not be necessarily to match what we do in a managed account, which by the way, we've set this managed account is for a larger account holder. That's where it generally makes more sense to have that type of fee structure. The levelization would have to be within anything we sell to our brokerage-type channel.
Right. The level would be level across products, but across time, the fees could be different. They could be front-end loaded and they could.
That is correct.
Yeah. Okay.
Yep.
That is correct.
That's correct.
Alison, you'd made this in giving your hypotheticals on the Term Life business should grow at least 5%, another, and probably 8%-10%, even if sales were flat. You said, if sales grew, there would be another $35 million in, you might have to understand this correctly, another $35 million in operating profit by 2019. We would take today, we would grow it at a certain pace, and we would add $35 million to reflect a scenario where sales were growing. Is that your point?
Yes. What you have to make sure if you're building a model not to do is assume both growth in that baseline as well as growth on top of it. If you assume that we basically were running a steady state production, then added that $35 million pre-tax in 2019, that's what we were trying to describe. My reason for doing that, a lot of y'all know this already, but just to remind people, we've seen great results in our Term Life business. By the way, I think we've hopefully explained to you why we don't think this DOL will impact that aspect of our business. When you see great results in it, unfortunately, you don't see them right away in your income statement. One, our book of business is already very large, so it's hard to see that growth.
Two, as we all know, it takes a considerable amount of time for life insurance earnings to really emerge and build in the financial statement. I wanted to use this as an opportunity to remind people that there is really that upside potential, and the fact that we're seeing such robust growth in our Term Life business right now, really should translate into growing, and by the way, also very sustainable and with stable recurring earnings in the future.
A final question. Could you, Kate, you say eventually you'll get back to a consistent level of profitability. If we take that 2014 pie chart, how much could it be down if you adjust the business model in the ways you seem to be anticipating here? I know this is a scenario base, but how much would it be down initially, and then how long would it take to rebuild to parity?
Let me kind of break it into pieces. Unfortunately, I don't have a real clear answer because we don't know what the rule will ultimately be. We think the $58 million is fine and intact. We think the $21 million, I'm looking at the pie chart, is fine and intact. The $35 million of asset base, we actually think near term, there'd be very little decline in that number. Again, I don't know if we'd have. The extent to which we can grow it will depend on what we can sell. But just what kind of pressure we have from our current state, I think that number is largely intact near term. The $32 million of sales base is what's currently at question. We mentioned last quarter there is some component of our sales that are monthly pre-authorized checking.
It's where somebody's making a $50, $100 contribution to their IRA every month and have been doing that for the last eight years. We'll continue to get that money in, and we believe that stays under the transition provisions. That's intact. The rest of it is going to become a question of where it goes, what the rule says, and if the rule is not workable, if we can come up with this levelized approach to things, or whether we have to start moving our business to a managed account. If we go to a levelized approach, I think the ongoing fee, excuse me, the current earnings would be much closer to where they are today.
If we have to go, or we choose to go to more of a managed account profile, today you'd see a dip, you'd pick that up pretty quickly over time.
Your view is the levelized fee is consistent with the DOL Rule as written today.
Our view is, and the lawyers are going to love me for this, there's a 408 exemption is what we would be looking at.
Was that a yes to my question?
Yes.
Yes. The answer is yes.
Yeah. Okay, good. Thank you.
The next question is from Sean Dargan at Macquarie.
Hello, Sean.
Hello. Thank you for the pie graph on slide 11. I think what some of the bears are concerned with beyond the immediate exposure here is the motivation of your sales force to sell ISP products. I just want to make sure I have the numbers framed right here. You have approximately 100,000 life license reps, of which 20,000, give or take, are licensed to sell mutual funds, correct?
That's pretty close. Yes.
Okay. 1,000 of those reps do half of the ISP business?
Correct. Yeah, that was the stat we gave you, very close to half of the business. As personal producers, that's correct. They're the ones that write that business.
Okay. Those producers, is this their primary source of income, or are they primarily making a living off of selling ISP products?
They're absolutely making a living off of their Primerica income, you're correct that the vast majority of their Primerica income at that extreme. Our business, like so many businesses, looks like a barbell. It's got people that are extremely productive on one end in the ISP business and extremely productive on the other end in the insurance business. Of course, we're always working to draw people to the middle and be the best of both worlds, unless we need to focus on them where they are, as we're doing right this moment, to understand them better. Yes, you're on the right track, I believe, with what you're asking.
Okay. I'm just trying to frame. For the other 19,000 mutual fund license reps, do you have a ballpark figure of their average annual commission that they earn?
No, I don't have that with me, Sean. We would look at that as total commissions
Yep
as well as broken down between the two primary areas of life and ISP. Then remembering that even a significant portion of those are going to be part-time.
Yep.
When you think about what that expectation of that amount needs to be, you have to figure all that in, and I don't have that in front of me.
Got it. Would the intent be to get the most productive ISP salespeople all registered as IARs?
It would certainly be a piece of our plan. What we want to do, Sean, is make sure that we have a rescue plan, a safe place for those most productive people to be first. Make sure that we're taking care of their clients, accommodating their needs as business people, and continue to keep them productive and profitable for the company. I think it's an advantage that that's a relatively small number that we need to make sure we've got a specific plan to keep them active, keep them productive. You asked a question earlier about the motivation for the kind of rank and file. Clearly, a piece of that is their compensation, and a piece of that is their compensation at the time of sale, but that's not their only motivation.
We want to make sure we understand and feel like they can be paid appropriately for the service they provide to their clients. That the timing of that is the best possible. If some of that timing starts to shift, we have other motivational capabilities. People aren't just in our investment business on a part-time basis just for the money they make. They understand that it's a part of the job they need to do for their clients. They understand that this part of our business for them is a business that builds compensation over time for them. I explained earlier, people enter our life insurance business first. That's because you can make money quicker in the life insurance business.
They start to add an investment business, especially these that we're talking about that are the rank and file, the 19,000, if you will, and they build that over time. That's their expectation. Extending that timeframe a little bit is not perhaps as sensitive an issue as someone might perceive when you first hear this if we had to go down that path. I think we've got the capability. We have a very flexible business model, and we can adjust it as needed to make sure that we continue to use all the motivational capabilities that we have to keep those people moving.
Okay, great. Thank you.
The next question is from Colin Devine at Jefferies.
Thank you. Just a couple questions here, clarify. With respect to the ISP production, and you're mentioning the 1,000 reps. Are they all in the U.S.? Just so we're distinguishing between the U.S. and Canada. Obviously, Canada is not at risk with the DOL would be Number 1. Number 2, if we can change topics. I know you were talking about product enhancements. Perhaps you could spend one minute or two discussing those. Then lastly, with respect to commissions, I think it'd be very helpful to get some granularity as to how those differ across your various products. Thank you.
Okay. Let me pick off those, Colin, if I could, one at a time. Yeah, the discussion we're having is about our U.S. ISP business about the breakdown of our total sales force on the ISP side. A little over 17,000 of that group is in the U.S., and I think we make that public at least once a year. That's a number that's out there. What we've been discussing today is all pertinent, the stats surrounding and so forth, to our U.S. business. Our Canadian business does behave a little bit differently, and of course, these rules don't apply to that. When we talk about product-
Okay. Sorry, I want to be very careful here with the numbers. It's 1,000 out of the 17.
Correct.
Of total ISP earnings or of just U.S. ISP earnings, which portion are they contributing? Sorry, I just want to be exact.
U.S.
Okay. What is that percentage again of U.S. ISP earnings?
It wasn't earnings. It was-
It's 52% of U.S. ISP sales.
Sales.
How would that compare to earnings?
I would guess it would be fairly close, but I'd have to actually do some work.
Okay.
Our book of business has been around longer in the U.S. than in Canada. I don't know. I guess my suggestion to you would be look in the supplement and see how we split the assets between U.S. and Canada. You can gauge it from that.
Okay. Thank you.
All right. Product enhancements. I'm assuming we're staying focused mainly on the ISP side of the business. As you know, we've continued to add product providers as well as products going back several years when we at first added the managed accounts business, the advisory business. Of course, we've recently expanded that product line within the single partner that we have currently in that product line. On the variable annuity side, we've added a number of new product providers, as well as on the fixed indexed annuity side. We've seen expansion in those types of products. Our mutual fund line, we brought on a couple of new partners, they have not been significant in sales up to this point.
As Alison mentioned, moving one of our longtime partners onto our platform gives us an ability to work more closely with them, plug into them better through our technology and so forth, and also provide some of the service that they do to clients, which creates an income stream for us. There are a number of fronts we've been working on the ISP side for product enhancements. Of course, there's a whole different list of what we've been doing on the life side. I'm not sure if that was part of your question or not.
Yeah, let's just stick with the ISP. That's fine. Thank you.
Okay. Then your commission question again, refresh my memory on that one.
You talked about how those vary across products. Perhaps you could just expand on that since that clearly is one area that could change if you go to a level commission structure with the DOL.
Right. Let me go first maybe, and then I'll toss to Alison for the detailed numbers behind it. We view our product mix as being reasonably interchangeable from a bottom-line perspective. As Alison has explained, often there's a timing difference between whether a product has an upfront commission versus ongoing compensation. Over the lifetime of a client, we see not a lot of difference, not enough difference that we're trying to drive product mix from an incentive. Of course, you shouldn't be doing that anyway, but we're neutral on that. Okay. We have more of an open architecture for all of the right reasons, and one of them is the question you're asking. Now, as we shift from product to product, you're exactly right, the timing of that compensation could differ.
The question of whether we have fee income off the accounts is the other piece that Alison walked through. Alison, I don't know if you want to reiterate anything you said earlier.
I think you've covered it very well, just to reiterate what I said earlier. Again, I think you need to look at from the levelization standpoint, you need to look at just what would be offered in the brokerage platform. The managed account really is sort of separate to that. Those key products are really going to be your variable annuities, obviously your other annuities as well, and then mutual funds. As I mentioned, the ongoing asset-based earnings on mutual funds and variable annuities is fairly consistent. There's different components, but when all is said and done, our net earnings are fairly consistent.
On a sales base, as is common, we generally pay or earn, I should say, more on a variable annuity up front as it's well known as a more expensive product because it's an insurance product and provides guarantees that you obviously don't have in a mutual fund. While we do think if there was a shift to more mutual funds or we had to weight something more towards mutual fund compensation up front, that would be lower. There is, as Glenn mentioned, and I mentioned earlier, the ability to generate this fee income that we do not currently get on variable annuities that would likely help to offset that differential.
Okay. One follow-up then. Going back to the beginning, the 17,000 U.S. reps that are selling funds and VAs. Clearly, you expect no matter which way the DOL goes, that 1,000 of them, as you said, you're going to do whatever it takes to protect them. Looking at the other 16,000, could you put a number out there what you expect the attrition rate might be if this goes ahead? Because I would assume the amount of revenues those people would generate is just insufficient to keep them in the business. Is that a fair presumption?
No, we don't look at it like that at all, Colin. Again, of those other 16,000, some are part-time, some are full-time, some produce a significant portion of their income from securities, some don't, some have much larger life insurance businesses. We haven't seen any impact yet of concern about the DOL on our whole recruiting, licensing, and retention process. As we described earlier, we feel very good about the momentum we have in the fundamentals of our business. That's in the face of us in constant conversation with our sales force about this DOL process. We keep them updated every month on what's going on because it's an important topic of interest.
We would not anticipate, even under the current DOL rule, that we would see a different dynamic attrition of the existing sales force in any different way than we see today, whether it's the 1,000 or whether it's the other 16,000.
I'd say the other thing there too, Colin, is most of those 16,000, if you will, are in the organizations of the 1,000. Okay? They're in their business hierarchies. One of the benefits we have is our sales force is a major provider of influence and change and moving along in change. To the extent we can work positively with that smaller group of people, they'll be partners with us in really trying to teach the new regime, whatever it is, to those other 16,000 people. Sometimes people look at our large numbers and say, "How do you make 20,000 people change?" Well, the good thing is we'll focus on the small group, and that small group will actually push the change down and create the training and the face-to-face interaction to make it more workable for everybody in the organization.
Got it. Well, you've been doing that for a long time, okay.
Absolutely.
Thank you.
Okay. Well, we appreciate everyone's time today. We feel like we've delivered strong production and solid financial results in the first half of this year. We're certainly encouraged by our post-convention activity levels and plan to build on that positive momentum to continue to grow sales, increase earnings, and enhance shareholder value long term. Thank you, everybody.
This conference is now concluded. You may now disconnect your line. Thank you for attending today's presentation.