Good morning, and welcome to the Primerica first quarter 2015 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a 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 1 on your touch tone phone. To withdraw your question, please press star 2. Please note that 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.
Thank you, Robert. Good morning, everyone. Thank you for joining us today as we discuss Primerica's results for the first quarter of 2015. Yesterday afternoon, we issued our press release reporting financial results for the quarter ended March 31st, 2015. 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 Glenn Williams, our Chief Executive Officer, and Alison Rand, our Chief Financial Officer. We reference certain non-GAAP financial measures in our press release and on this call. These non-GAAP measures are provided because management uses them in making financial operating and planning decisions and in evaluating the company's performance. We believe these measures will assist you in assessing the company's underlying performance for the periods being reported.
These non-GAAP measures have limitations, and reconciliations between non-GAAP and GAAP financial measures are attached to our press release. You can see our GAAP financial 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 statement that may project, indicate, or imply future results, events, performance, or achievements and may contain words such as expect, intend, plan, anticipate, estimate, and believe, or similar words derived from those words. They are not guarantees, and such statements involve risks and uncertainties that could cause actual results to differ materially from these statements. For discussion of these risks, please see the risk factors contained in our Form 10-K for the year ended December 31st, 2014. This morning's call is being recorded and webcast live on the internet.
The webcast and corresponding slides will be available on 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 Glenn.
Thanks, Kathryn. Good morning, everyone. After 34 years with the company, I'm honored to be leading my first earnings call as the CEO of Primerica. Our leadership transition plan has been executed with great success, and I'm fortunate to have a talented team of executives working alongside me. Peter Schneider, a 15-year veteran of the company, has stepped into the President's position. Alison Rand, who served as the company's Chief Financial Officer since 2000, continues in that important role. Greg Pitts, a member of the Primerica team for 30 years, will continue as our Chief Operating Officer. I believe this executive team, along with the other talented sales force and home office leaders, positions us for continued growth and success. Today, I'll discuss our first quarter performance and distribution results, as well as provide our perspective on the Department of Labor's fiduciary rule proposal.
Beginning on page three, you can see that during the first quarter of 2015, compared to the first quarter of 2014, our operating revenues increased 6%, driven by strong product performance, including 11% growth in Term Life adjusted direct premiums, as well as a 7% increase in total Investment & Savings Products sales, and 8% growth in average client asset values. While revenue drivers were strong in the quarter, net operating income declined 2% from the year ago period, primarily due to the timing of expense recognition in the first quarter for employee equity awards granted to retirement eligible employees in 2015. Net operating income per diluted share increased 3% to $0.80, and operating ROAE was 14.6% in the first quarter of 2015, partially reflecting our ongoing share repurchase activity.
Adjusting for the accelerated equity compensation expense, operating EPS would have been higher by $0.07, and ROAE remained on track to be in the expected 16% range for the year. During the first quarter, we repurchased approximately $39 million, or 740,000 shares of Primerica's outstanding common stock, consistent with our previously announced 2015 stock repurchase program. We remain committed to the execution of our multi-year capital strategy to return approximately $150 million of capital, in addition to stockholder dividends, to shareholders annually through 2016. In the first quarter of 2015, we carefully executed our transition plan to build on fourth quarter momentum and accelerate growth during our leadership change. Our extensive plan included timely and effective communications to all of our constituents, including in-person meetings with a significant number of our sales force leaders.
We began the year with a meeting here in Atlanta, attended by over 300 of our most senior sales leaders, where I walked them through the transition plan and launched the 2015 initiatives. This meeting culminated with a live webcast to nearly 4,000 sites, viewed by a significantly larger number of representatives across North America. I then hit the road and hosted nine regional meetings that were attended by 7,500 representatives across the U.S. and Canada, and I interacted with over 1,500 top producing reps at our Puerto Rico incentive trip in February. The business enhancements and incentives we launched at these events generated a high level of excitement and focused our sales force leaders on building and growing the business in 2015. As we turn to distribution and production results, we're pleased with the year-over-year growth in every area.
With double-digit growth in recruiting new representatives and life insurance policies issued. On page four, you can see the size of our life license sales force increased 3% to 98,145 representatives, and recruiting of new representatives was up 10% versus the prior year period. The year-over-year recruiting growth reflects continued momentum in 2015, as well as a relatively weaker first quarter of 2014. In the first quarter of 2015, we ran a very effective recruiting promotion in Canada. We believe the elevated recruiting levels in the first quarter will result in a larger Canadian sales force by the end of 2015, considering the longer licensing process in Canada. Company-wide, the first quarter percentage of non-renewals and terminations slightly improved year-over-year, and we continue to expect this ratio to be in the 8% range near term.
On a sequential basis, in line with the expected seasonality of our business, recruiting of new representatives increased and the number of new representatives obtaining a life license declined. As we indicated last quarter, the size of the sales force remained relatively flat with the fourth quarter due to the seasonally lower new life insurance licenses following the lower recruiting levels typical of the fourth quarter. Longer term, we continue to believe we can grow the size of the sales force in the mid-single digit range on an annualized basis. We expect the size of our sales force to modestly increase at the end of the second quarter. Now turning to production results on page five. Term Life issued policies grew 13% compared with the prior year quarter, driven by continued momentum and supported by strong recruiting and sales force initiatives in the first quarter.
Productivity of 0.19 policies issued per life license representative per month increased from 0.17 in the quarter a year ago, which was impacted by severe weather, and remained consistent with the strong fourth quarter of 2014 results. Our average annualized premium per issued policy of $811 was consistent with year-ago period and slightly lower than the fourth quarter of 2014. On a sequential quarter basis, Term Life policies issued were 2% lower than the fourth quarter, largely reflecting fewer new life insurance applications submitted during the typically slower holiday season at year-end. Our Investment & Savings Products sales increased 7% to $1.5 billion, driven by strong sales of U.S. retail Mutual Funds and Variable Annuities and Canadian Segregated Funds in the first quarter versus the prior year quarter.
During the quarter, U.S. retail Mutual Funds and Variable Annuity sales increased 13% and 9% respectively from the prior year period, reflecting continued momentum driven by product additions, marketing efforts, and market performance. Year-over-year, our Canadian ISP business experienced a shift to Segregated Funds, which were up 49%, from Canadian retail Mutual Funds, which declined 15%. This shift related to recent product additions and enhancements as well as market performance. Investment & Savings Products net flows were positive $269 million in the first quarter, and ending client asset values were $49.2 billion, up 7% from March 31, 2014. Sequentially, Investment & Savings Products sales increased 4% from the strong fourth quarter performance of 2014. Growth in retail Mutual Fund and Canadian Segregated Fund sales reflect typically higher retirement savings sales in the first quarter declined 16% from the strong level in the fourth quarter.
The slight increase in total client asset values from year-end 2014 reflects market performance and positive net flows, partially offset by the lower value of the Canadian dollar relative to the U.S. dollar. As we head into the second half of the year, we're working on initiatives and business enhancements to drive organic growth, including product enhancements, incentive programs, sales force support, and cutting-edge technology. At our biannual convention in July, we will launch improvements to our life insurance business, including product enhancements and additional support for our top life insurance producers. In our Investment & Savings Products business, we'll expand our product providers and deliver strong messaging on growing the number of Mutual Fund licensed representatives. As part of our continued effort to attract millennials, we will add more capability to recently launched mobile sales tools and training.
This initiative includes a new Primerica app that will provide sales tools, a client relation management system, production tracking, contest standings, and instant communication capabilities. We're pleased with the organic growth we've achieved in the last two quarters and are encouraged by the activity levels we saw in April. We are hopeful this activity will carry through the remainder of the second quarter, so post-convention, we can build on the solid momentum in the first half of 2015. Let me conclude my remarks today by discussing our perspective on the DOL's fiduciary rule proposal. Like many other financial services firms across the industry, we're undergoing a disciplined process to carefully review and evaluate the lengthy document to understand the potential implications.
The DOL's intention for the new proposed rule, unlike the original rule proposal, is to preserve common forms of compensation to broker-dealers, and the new prohibitive transaction exemptions are added expressly for that purpose. We continue to analyze these exemptions to determine whether they are workable as written. Our preliminary assessment is that there are structural and procedural changes we could make to adjust to the rule that will, over the long term, preserve our strong performance. However, we believe modifications to the proposed rule are necessary to fulfill the DOL's stated purpose of protecting rather than harming middle-income families saving for retirement. Our priority is to act in the best interest of our clients.
We take an educational approach and offer Main Street families the help they need to make prudent financial decisions, including obtaining the proper life insurance protection and beginning to systematically save for retirement and other goals. Our core competency is leading one of the largest life insurance and Mutual Fund licensed sales forces in North America. We've demonstrated the flexibility to adapt to regulatory changes in the past and have robust compliance and supervision procedures already in place. We expect to play an active role in the rulemaking process and to work with other industry stakeholders, trade associations, and public officials to ensure the final rule achieves the DOL's stated objectives.
The DOL has indicated its intent to provide a flexible approach that accommodates a wide range of current business practices while minimizing the impact of conflict of interest in ensuring that IRA owners receive investment recommendations that are in their best interest. We're hopeful the DOL will work with the industry to achieve this goal so that hardworking middle-income families can continue to receive the assistance they need to plan for their retirement. With that, let me turn the call over to Alison to discuss financial results.
Thank you, Glenn. Good morning, everyone. My comments today will cover the earnings results for each of our segments, including a review of expanded ISP business metrics provided in light of the DOL fiduciary rule proposal. My discussion will conclude with a company-wide review of insurance and operating expenses and invested assets. Starting with Term Life on slide six, year-over-year operating revenues grew 8%. The key driver was the 11% increase in adjusted direct premiums, reflecting 20% growth in primary direct premiums, partially offset by a 4% decline in legacy direct premiums. Other ceded premiums increased faster than adjusted direct premiums, resulting in a 9.2% increase in net premiums. For analytical purposes, we treat other ceded premiums as a component of benefits and claims, and changes in the growth patterns are typically offset by a corresponding change in reserves with little impact to profit margins.
While the percentage of our invested assets allocated to Term Life continued to grow, the associated increase in allocated net investment income was largely offset by a lower effective portfolio yield. During the quarter, benefits and claims, net of other ceded premiums, increased as a percentage of adjusted direct premiums to 59.5% as growth in reserves from improved persistency year-over-year was partially offset by incurred claims that were slightly below historical levels. DAC amortization and insurance commissions as a percentage of adjusted direct premiums of 15% was lower than the prior year period due to strong persistency in the first quarter of 2015. The ratio of insurance expenses to adjusted direct premiums increased to 10.9% in the first quarter from 9.1% in the prior year, largely driven by higher employee-related expenses year-over-year, including the accelerated expense recognition for retirement vesting provisions in employee equity awards.
I will provide more details on this when I cover overall insurance and other operating expenses later in my remarks. Overall, solid revenue trends and lower DAC amortization in the quarter were offset by the expected first quarter spike in employee-related expenses and continued pressure from the low interest rate environment. As a result, Term Life operating income before income taxes increased 1% over the prior year period and income before income taxes as a percentage of adjusted direct premiums declined to 20.1% from 22% in the year ago period. On a sequential quarter basis, while Term Life operating revenues remained consistent, operating income before income taxes declined 9%, primarily due to higher employee-related expenses and lower net investment income from fewer called fixed income securities compared with the fourth quarter.
These items were partially offset by strong persistency in the first quarter compared to the seasonally weaker fourth quarter persistency, as well as prior period revisions to reserve assumptions on certain supplemental policy benefits. Moving now to our Investment & Savings Products segment. On slide seven, you'll see our ISP operating revenue grew 5% year-over-year. Overall, ISP product sales grew 7% year-over-year, while sales-based revenue generating sales grew 5%, consistent with the 4% growth in sales-based revenue. The ratio of sales-based net revenue as a percentage of revenue generating sales of 1.32% was well within the recent historical range of 1.27%-1.4%. Variability within the range is generally caused by fluctuations in sales mix. In the first quarter of 2015, asset-based revenue grew 6%, slightly slower than the 8% growth in average client asset values year-over-year.
The difference in growth rates is largely due to the decline in Canadian Segregated Funds average client asset values, which have a higher rate of asset-based revenues since there is no sales-based revenue component for this product. Since certain asset-based expenses, such as insurance commissions and DAC amortization for Segregated Funds, are shown separately in the financial statements from asset-based commission expenses, the best way to compare asset-based expense growth to revenue growth is by using the asset-based net revenue ratio included in the financial supplements. For the quarter, asset-based net revenue as a percentage of average client asset values was 0.053%, consistent with historical levels. Account-based revenues grew 8% year-over-year, and account-based net revenue per fee-generating account increased from $2.52 in the prior year to $2.70, largely reflecting growth in Managed Accounts and retail Mutual Fund accounts for which we earn record-keeping fees.
A large but shrinking portion of our revenue-generating accounts do not earn the full array of record-keeping fees. Strong market performance in the first quarter led to a deceleration of Canadian Segregated Fund DAC amortization from the year-ago period, and other operating expenses were higher, largely due to employee-related expenses that I will discuss shortly. In total, operating income before income taxes increased 3% year-over-year. On a sequential quarter basis, ISP operating revenue decreased 2%, largely reflecting lower sales-based revenue. While total product sales grew 4%, much of the growth was in Canadian Segregated Funds that do not provide sales-based revenue. This, combined with a mix shift away from Variable Annuity sales, which were very strong in the fourth quarter, to U.S. Mutual Funds, led to the sequential quarter decline. Asset-based revenues were flat, in line with the modest 1% growth in average client asset value.
Canadian Segregated Fund DAC amortization was slightly lower than the fourth quarter due to market performance. The sequential quarter increase in other operating expenses was largely employee-related and will be discussed later in the call. Given recent questions stemming from the DOL's proposed fiduciary rule, let me spend a few minutes discussing new metrics and geographic breakouts we've added to the ISP section of our financial supplement, as well as the percentage of sales and client asset values for 2014 in U.S. qualified retirement plans. The calculations of asset-based net revenues and account-based net revenues have been revised to include certain fees that are categorized as other operating expenses but, similar to commissions, are highly variable. We have added a breakout of other operating expenses to show, first, fees that vary with average client asset values for advisory services on Managed Accounts and administration of Canadian Segregated Fund products.
Second, fees that vary with revenue-generating accounts for the administration of client accounts on our record-keeping platform. We believe these revised metrics provide enhanced clarity on the variability of earnings in relation to average client asset values and accounts, and combined with sales-based net revenue metrics we continue to provide in the supplement, are useful tools in analyzing the business. We have also added country-level breakouts for sales, average client asset values, and the corresponding net revenue metrics. Note that account-based information is provided for the U.S. only, as we do not have account-based earnings in Canada. Turning to slide eight, we have provided the breakout of our 2014 sales and average client asset values between geographic region and qualified retirement versus non-qualified plans. 60% of both our revenue-generating sales and average client asset values in 2014 were attributable to U.S. qualified retirement plans.
We do not believe that sales-based and asset-based net revenue percentages for the U.S. of 1.41% and 0.15%, respectively, vary significantly between qualified and non-qualified plans. While there still is a lot of uncertainty about the proposed rule, to the extent new investment advice is not being provided, existing client asset values and earnings thereon may be largely unaffected, given the rule's transition provisions and other language. With regard to U.S. qualified retirement plan sales, it is important to remember that the DOL's stated intention is to preserve common forms of compensation consistent with those we receive. Note that roughly 10%-15% of our U.S. qualified retirement plan sales in 2014 went through automatic monthly saving plans based on previously given advice. It is likely that sales such as these will fall under the transition provisions and other language in the rule, and therefore will not be impacted.
With regard to acquiring new clients or providing new advice to existing clients, to the extent necessary based on where the rule ultimately lands, we will explore structural or procedural adjustments to our business to minimize any long-term impact on sales and financial results. Moving to the corporate and other distributed products segment, on slide nine, you can see that operating revenues declined $1.4 million from the prior year period, primarily due to a $1 million decline in allocated net investment income from higher Term Life allocations, ongoing capital deployment, and a lower portfolio yield. This decline, combined with a $1 million increase in insurance and operating expenses, resulted in a $2.7 million increase in the operating loss before income taxes. In our N.Y. subsidiary, benefits and claims slightly increased, primarily reflecting favorable claims experience in the year-ago quarter.
Slide 10 provides a more detailed review of insurance and operating expenses. You see that year-over-year operating expenses grew by approximately $10 million to $79.3 million in the first quarter of 2015. $6.1 million of this increase related to the accelerated expense recognition on the grant date of management equity awards granted to retirement-eligible employees in February of 2015. Management equity awards granted in February of 2014 did not have a similar accelerated recognition of expense, as those awards did not contain a retirement eligibility provision until modifications were made to include such a provision in the third quarter of 2014. The grant date fair value of the management equity awards issued in 2015 was consistent with the total grant date fair value of the management equity awards granted in February of 2014.
As such, the impact of the retirement eligibility provision included in equity awards granted to management primarily affects the timing of expense recognition and not the total amount of expense to be recognized. Expenses also increased $1.6 million for premium and growth-related expenses related to growth in our Term Life and ISP segments. Finally, year-over-year cost of living adjustments to salaries and related items led to the bulk of the remaining $2.3 million increase. Compared to the fourth quarter of 2014, expenses increased by $10.2 million, primarily due to employee-related costs, including payroll taxes and employee benefit costs that taper off later in the year, the cost of living adjustment to salaries, and the accelerated expense recognition from the first quarter equity award grant to retirement-eligible employees.
Looking forward, we expect our second quarter insurance and other operating expenses to decrease by between $5 million-$7 million, primarily reflecting the absence of the equity award expense for the retirement-eligible equity awards granted in the first quarter. Turning to slide 11, our investments in cash show $2.06 billion as of March 31st, 2015, compared with $2.04 billion as of December 31st, 2014, excluding the held to maturity asset held as part of a redundant reserve financing transaction. The invested asset portfolio had a net unrealized gain of $103 million, net of unrealized losses of $19.5 million at March 31st, 2015, up from $101.3 million at December 31st, 2014. The average credit rating of our fixed income portfolio continues to be single A, and 94% of that portfolio was rated investment grade.
The average book yield of investments, excluding cash at quarter end, was 4.53%, down slightly from 4.61% at year-end. The new money rate on our purchases for the quarter was 2.47%, down from 3.04% in the fourth quarter, reflecting generally lower market rates than the prior quarter and a higher proportion of purchases in our holding company, which typically invest in shorter duration assets. We continue to expect downward pressure on investment income going forward, given the low rate environment and our plans to continue to return capital to shareholders. The Canadian exchange rate continued to be a modest headwind in the first quarter. The Canadian dollar dropped 11% on average versus the U.S. dollar from the prior year average and impacted pre-tax earnings by approximately $2 million. The liquidity profile of our holding company continues to be very strong.
As of March 31st, 2015, the holding company had invested assets in cash of $154.7 million, down from $194.5 million at year-end 2014, primarily as a result of the $38.7 million worth of shares we purchased during the period. While our general expectation is to return capital to shareholders 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. Primerica Life Insurance Company's estimated statutory risk-based capital ratio was estimated to be in excess of 380% at the end of the first quarter, although we expect the estimated ratio to increase during the second quarter and remain above 400% for the remainder of the year. With that, I'll turn it back over to Glenn.
Thanks, Alison. In the first quarter, we effectively executed a leadership transition plan that built on the momentum in the fourth quarter to drive year-over-year growth in sales and distribution, as well as solid financial performance. As we head into the second half of 2015, we're developing enhancements to our business opportunity, product portfolio, and client experience. Our focus is on driving organic earnings growth and providing meaningful long-term shareholder value. Now we'll open it up for questions and answers.
We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Daniel Bergman of UBS. Go ahead.
Hi. Good morning. You mentioned that if the Department of Labor rules were enacted, that Primerica would expect to undertake structural and procedural changes to preserve long-term performance. I was hoping you could give a little more color on what those changes might be. Is it fair to assume, based on your comment, that near or medium-term performance could be negatively impacted by the rules? If so, how should we think about that potential pressure? I guess, big picture, I'm just trying to get a sense of how we should try to size the risk to current revenues and the potential for increased expenses. Thanks.
Yeah, Dan, that's a great question and a pretty obvious one. We've tried to provide you with the additional information that Alison covered to give you a better understanding of what the revenues are and where they come from. We're relying on the DOL's stated intention to preserve the common forms of compensation consistent with those we receive. Based on where the rule ultimately lands, we're going to explore those adjustments that you talked about. The challenge is that what the DOL states and has stated and what the rule actually contains has some disconnects that we're going through the evaluation process or trying to reconcile those right now. So as we go through that exercise, obviously using internal and external resources to help us, it's a little difficult to draw the level of detail that you just asked for, short-term and long-term.
That's what we're working through right now. We tried to relate to you our early indications, our early feelings, that over the long term there's some possibilities that we could pursue. There are specifics that we've discussed in the past. For example, we have 2,600 Series 65 licenses in our sales force already, and that was originally a business that we added as an offensive approach to expand our business to a higher income edge of the middle market. At the same time, as we look forward under a fiduciary rule, that could become a more important part of our business. They're already responsible. That group of leaders is responsible for a tremendous amount of our business. Already 40% of our U.S. sales come from that 2,600 Series 65 license subset of our sales force.
It's already an important part of what we do, could become a more important part of what we do. That could be one of the structural adjustments that we make, is to put more emphasis on that business since it already lives in the fiduciary world. Those are some of the things that we are taking a look at to determine what could we do over the long term. Fortunately, there is some time to manage the reaction to the rule, provide input on the rule so that ultimately we believe it needs to become a better rule, as we've stated, and then have time to implement before the rule becomes effective. There's not a lot of clarity there, but hopefully that gives you just a little bit more.
That's helpful. Thanks. Maybe just to follow up, I appreciated all the color on some of the different revenue sources. Maybe you could also talk a little bit on the expense side. Is there any sense you can give on what you might need to do from a compliance standpoint to meet the proposed rule? My sense is there's a view in the market, the industry-wide compliance cost could be meaningful. Any color on the potential impact on your business, for example, whether you need to add new staff. Any way to think about those potential incremental costs would be very helpful.
Okay. Glad to do that. When I think of compliance, I actually think of it in several buckets. One is supervision of the sales force. Obviously, we have a tremendously robust compliance structure in place today to deal with that, and I don't think we're anticipating that there's a lot of change on that front. The other definitions of compliance would be client communication and point of sale, where to stay in compliance with the new regulations. We have to communicate with our clients differently, either annually or at the time of sale. Those are the areas where we already, all of our IRA holders today, we provide an annual statement for if they're on our platform. We may have to change the contents of that statement in order to have the disclosures. That doesn't sound like a major change.
At the point of sale, you've got some requirements in the current version of the rule that would require some changes to what we deliver to the client at the point of sale. Those are the things that I think will be part of the discussion in the comments on how doable is what the DOL proposed rule has asked for. Is that information readily available? We obviously do some disclosure at point of sale, but that might be the area where there would be the most significant change, in my opinion, and my understanding of the proposed rule. As I see that, since we're already doing a number of those things, it's an adjustment to what we're already doing rather than having to create an entirely new procedure. Hopefully that helps give you some color around whether that's significant or not.
Okay, thanks. I'll get back to the queue.
Okay, thanks.
The next question comes from Steven Schwartz of Raymond James & Associates. Go ahead.
Hey, everybody. This is just going to go on and on and on, I'm afraid. On the DOL. How many people currently do you have in your compliance department, Glenn? There's a rumor on the street it's only about 20. I really don't know if that's enough, but it doesn't sound like enough.
Oh my gosh.
No, it's circling on each other. I think anybody in our marketing department would argue that they're completely outnumbered. There's probably around 200 or so people, especially when you consider the fact that some of it happens through things like field audits. We have folks throughout the country and Canada that their entire job is to basically get in people's offices and check how procedures are being handled, et cetera. We actually have a very robust group of folks that cover that aspect. I don't know where the 25 came from, but it is not accurate.
Yeah. Okay. I'm sorry, Glenn.
Of course, that's one of the things that we do best. When you look at our track record and the size of our sales force and the low level of complaints, it's obvious that not only is it large, much larger than the rumor would indicate, but also it's very effective. So that's one of the areas that I draw the most comfort from.
Okay. Great. Then, I guess, you referenced the 2,600 people who have Series 65 licenses. Is that a worst case that just everybody, the 22,000 people, however many are in the U.S., I guess, of those 22,000 people have to start selling as if they were RIAs?
Yeah, let me give you some of the numbers in the background so you kind of understand how that 2,600 fits in. In the U.S., we have 16,900 mutual fund licensed reps, of which that 2,600, you add to that number, okay? I'm sorry. That number is a subset of the 16,900. About 15% of our total U.S. sales force for securities is Series 65 or managed account fit, because in some states they don't require a Series 65 license, so we call them fit. It's a pretty significant part of our U.S. sales force. That means our Canadian sales force is about 5,700 that has the mutual fund license. That's the breakdown, which might be helpful for you in understanding that. That 15%, as I said, they are significant players. They provide about 40% of our total U.S. sales.
To go directly to your question, as I said earlier, we entered that business as an offensive strategy to capture a piece of a market that we were not in, and we believe we've been successful at it. It's also helped us understand both that market a little better, but more importantly to your question, the licensing process a little better. There's clearly more room to get more of our people Series 65 licensed or managed accounts fit, just by the general nature of our ongoing business to maximize that opportunity, but also as a defensive strategy, as you indicate, that's one of the levers we could pull. I think that will be something that's consistent with our overall business strategy, so it's not an outlier at all.
I think the challenge with that is really bigger for Primerica than it is for Primerica, because that is a business with a fairly high minimum account size, $25,000, even some of the most aggressive companies down to $10,000 maybe or even five, but there's no room for the middle-income client, the Main Street client that's got $50 a month to invest. While we're viewing that as a potential lever that we could pull to change our business and adjust into the rule, at the same time, our commentary to the DOL is going to include how it disaffects the middle-income marketplace. The DOL has stated, again, as I said, there's a disconnect between what they said and the specifics of the rule, but we believe during the comment period, we can move those two closer together. That's our attempt.
There's a consumer message here as well. I think that's one of the levers. I don't think that's the only thing that we could do if absolutely nothing changed to the rule as it is today, but it's clearly one of the plays that we'll call as needed.
Okay. Raymond James, of course, agrees with you about the small accounts and the issues with regards to fees versus commissions. Dee, I just want to follow up on this one more time. In such a world, again, looking at a worst case, realizing that you think there are other things that you can do, but looking at this as a worst-case scenario that somehow or other, maybe it's the tort lawyers who are now going to be involved in this for the first time ever, maybe force you to move to an RIA type of selling process. Does that negatively affect recruiting or licensing? My thought here is if somebody can get an upfront commission and the type of people that you recruit and your clients, that's important. If they're only going to get a percentage of that upfront, maybe they're less interested.
Yeah, that's a great question. Let's go back and talk about how our people enter the business, and remember that generally, a recruit sees the Primerica opportunity first as a life insurance opportunity. That's appropriate because our life insurance commissions are advanced. The insurance business has more upfront cash flow. It's a much better way to establish and start a business and start to create some upfront cash flow. Our recruits don't traditionally come to Primerica and say, "What I see there is an opportunity to get in the investment business and build a block of assets that creates a stream of income for me and my family over the long term," even if it does have some upfront sales compensation in it in the current model. That is generally not what's out there at the front end of our recruiting message.
The vast majority of people, including all of that 2,600 who today are our Managed Accounts fit group, entered the business the way I just described. We still have a very effective and attractive front-end recruiting model for our business overall. The question is: after people enter the business that way, will the path they take to get into the investment business change as a result of the DOL rule? I don't think it's a front-end impact as much as it is a process, a year or two or three. Generally, we say that a normal recruit is going to be about two years before they get into the investment business. During that time, based on what happens on the DOL rule, we may have a different path for them in the future than we have for them today.
I don't think it really impacts the front-end message of our business.
Okay. Thank you. I'll hop back in line. I don't want to monopolize you.
The next question comes from Mark Hughes of SunTrust. Go ahead.
Thank you. On that same topic, the 17,000 or so Mutual Fund licensed reps, I assume most of those are serious? They're generating a pretty meaningful income from the securities. How many marginal producers are in that group that if they had to get some more certification or take the tests, how many of those people might be knocked off? What percentage of your sales force would be accounted by those folks who would be perhaps less willing to dedicate a little more time to meeting these new requirements?
Well, first of all, even in today's environment, that group of 17,000 in the U.S., that's a subset of our life insurance licensed sales force, which is obviously much larger in the 80s. It has already been over a commitment hurdle that's pretty significant. They've been through a licensing process. They enjoyed the results of that licensing process if they're productive. They already are, I believe, a highly committed group of our people. Now remember, though, they're not all personal producers. As people enter our business and become successful in building an organization, they generally migrate from personal production to leading a team. You've got some set of that group that are minimal producers because they're not active. That's the group that I think you asked about that perhaps some of those people could fall by the wayside.
You've got a group that doesn't make personal sales, but they're leading a team of big producers. They're licensed and therefore earning quite a bit of income. That's perhaps our most committed group of people. They'll do whatever it takes to make sure that they preserve their income and their business health. I would say that compared to something that would be closer to the front end of this business, this is a very committed group overall. They're either actively personal producing, or they're overriding an organization that is. In either case, their license is very important to them. If the licensing requirement changed, they would be very motivated to move to the next level of licensing as necessary. Again, remember, the DOL, what they said was that they wanted to preserve current business models.
We really are talking about one of the worst-case scenarios if, in spite of what they said about preserving current business models, the rules didn't give a way to actually preserve it. The rules weren't changed as a result of the comment period, then these are some of the worst-case scenarios. We don't believe at the moment that you're going to need a Series 65 to comply. That's not what's indicated. That truly is kind of something we hold out there and talk about in a worst-case scenario, but we haven't broken the glass and pulled the alarm on that one yet.
Right. The worst-case scenario is people who've already been very committed to the business maybe have to take an additional test, which is not ideal, but they still would be highly incented to get those credentials.
Absolutely. Just like the 2,600 that did it because of the opportunity, you would have a large block that would do it as a defensive strategy and gain an opportunity at the same time. Yeah, that's something that could happen. We don't believe at this point that's going to be necessary.
Right. Maybe some additional forms you'd have to take with you to your meeting.
That's the point of say, when we had the compliance discussion, that is one of the things that we're talking about now is what does have to happen at the point of sale in order to comply with the disclosure, and the product comparisons and all of that. Fortunately, a lot of these things are not Primerica problems, they're industry problems, the whole industry will react to this, and work toward a solution, including product providers, by the way. It's not like we're in isolation trying to figure out some of these industry-wide dynamics. There are a lot of folks on call to do that, there are a lot of smart people working on that very issue at this point.
Do you already disclose your compensation to consumers? Do they know how much your reps are getting paid in terms of commissions?
No. In our commission-based, federally regulated business, we don't disclose compensation to the representative. In the prospectus of the product, obviously, the cost of the product, including commissions, are disclosed, but we don't do the calculation and say, "Your representative just made this on that sale," in that non-fiduciary business.
Right. The commissions, at least, are disclosed to the consumers on the Mutual Funds that they buy.
Right. Exactly.
I don't know if you touched on this, I jumped on late, but the productivity of the sales force was up again in the quarter. What was that attributable to?
Yes. Thank you for asking a non-DOL question, by the way. Yes, we had a very strong quarter, building on the momentum of the fourth quarter. We saw a significant momentum shift in the fourth quarter of last year, and we continued to build on that momentum this quarter. The productivity returned to the middle of the range of historical productivity, which was something that we worked hard to achieve and want to continue that and even continue to grow it. What's pretty amazing is we think about that we just executed a leadership transition and changed CEOs for the first time in 15 years, and at the same time, while we were doing that, produced a quarter that was up in every single indicator on the production front, including recruiting, licensing, sales force size, insurance, and securities. We've had a very positive response.
Extremely pleased with the execution of our plan that we could actually build on the momentum while we were spinning that plate on a different stick at the same time. We're very encouraged by it. We believe that we can continue to sustain good momentum. We did compare to a fairly weak first quarter of last year in a few areas because of bad weather, but at the same time, we believe it is organic growth and momentum, and so we're very pleased with it.
Did you comment on or give any body language on the momentum so far in Q2?
I think I had a comment that we had seen April, we were pleased with April results and believed that we were optimistic that the momentum would continue through the second quarter.
Thank you.
The next question comes from Colin Devine of Jefferies. Go ahead.
Hello, Colin.
Good morning.
Morning.
A couple questions. We'll start with one on DOL because, as you noted, it was actually quite a good quarter in terms of core trends. With respect to Canada, if we back out currency, can you give us some sense of what happened to account values, and also sales year-over-year?
Yeah. Well, of course, Canada was positive, and so you've got just a rough estimate of about a 10% discount based on or 8% maybe since.
Yeah, about 8%.
8% would be even eight percentage points better in each sales category if you were in local currency. We had a very strong first quarter in Canada in ISP sales, also in recruiting, and life sales improved in Canada as well. The Canadians are ignoring what the U.S. dollar is doing and continuing to build momentum there. We were very pleased with our Canadian results and sales in the first quarter.
Yeah, I think going forward it might be helpful to start highlighting the impact on earnings from FX, given kind of represents about 26%.
I did actually put it in my comments, Colin. I said it on a pre-tax basis, and it was only about $2 million. I agree that if it got to be something much larger than that, it would be something we'd focus on. With it being on a net basis, less than $2 million, relatively speaking, it's not that impactful.
Yeah. Alison, it'd be helpful to have it in the earnings release beyond just your comments. Okay, why don't we turn to the DOL? In trying to look at the potential impact of this, there's a couple of questions. In terms of your, I guess, revenue sources, perhaps you can shed some light on what Primerica is bringing in, I guess what the DOL is referring to as sort of other fees, but whether those are marketing allowances, distribution allowances. I'd also like to table if you're paying any sort of incentive compensation based on the funds sold.
All right, let's start with the second question first. We absolutely do not pay incentive compensation on the funds sold. If you're familiar with our compensation system, clearly we receive different amounts of compensation by product provider, and that's one of the questions as people consider concepts like levelized commissions. One of the first challenges is what we receive on sales differs by fund company or from one product to another. What we push through our commission grid, the percentage of what we receive is exactly the same, regardless of product. We don't favor any product in our commission percentage. We don't have a tiering of commissions, or a favorite home team or anything like that. On that front, we're already on a levelized basis. Now, if there were-
Okay, Glenn, just for a moment on that. If I understand what you're saying, and I think it's important to clear for everybody on this call, that at the producer level, you're saying they're indifferent to what fund family they're selling. They're not qualifying for trips or anything else by selling one family versus another. What I don't think you were explicit on is in terms of the funds that Primerica focuses on. Let's say the four of them. I think you did say that those funds do pay you a different level of fees. What's really getting on your shelf is impacted by some of these fees that I think the DOL is starting to focus on. Is that fair?
Let me answer part of this. I think your original question asked about revenues and expenses or compensation expense, and Glenn was speaking to you specifically about compensation expense. Just to clarify or agree with what you said, it is in fact true that our agent in our U.S. mutual fund array of products, our agents have no incentive per se to sell A versus B because their compensation is a level percentage of the compensation or the fee that the client pays as a dealer reallowance. Any of our promotional programs do not distinguish one mutual fund product from another. On the revenue side, understand also that we get paid stated amounts of commissions that are in the prospectus, that are not unique to us. They are really done throughout brokerage channels throughout the U.S.
When you look at them from one fund complex to another, they are very similar. While there might be a mild difference between an equity fund and a bond fund, like a fixed income fund, generally speaking, an equity fund from one fund complex and another, a client gets charged about the same fee. What we get in is fairly consistent across all mutual fund complexes. With regard to things like revenue sharing and other forms of compensation, one, I would highlight that the DOL has not precluded those forms of compensation. In and of themselves, they are not problematic.
While those are proprietary, we do not share what we get publicly, I can say that the relationships we have with all of our key mutual fund providers are fairly consistent with regard to profit sharing or other types of fee or relationships.
Yeah. Colin, let's make sure we're clear on that. As Alison stated, we don't have anything in our system, whether it's an incentive or a commission rate that would bias our client from one product to another. You are correct that not every product pays exactly the same commission as the product next to it, but they travel in a very narrow corridor. As the compliance infrastructure that you just talked about looks for and surveils for the kind of activity that might indicate that someone is not taking an objective approach to a client. We can identify that through suitability screens and all kinds of other ways. The DOL rule could impact product providers such that they try to more levelize payments to broker-dealers at the source. That's outside our purview. That's a product provider issue, and we don't have proprietary products.
We don't even have that home team advantage, that psychological or moral suasion that some companies are dealing with. I think it's not perfect, but it's pretty darn close right now on that front of fair commissions.
Okay. Do you think it's going to pose a problem then for Primerica if your reps or for you as a management team, have to go the route of the enhanced fiduciary standard and contract, as opposed to going to the least expensive or lower fee products?
I think, Colin, that's the question that we're wrestling with on buys of the Best Interest Contract Exemptions. That's where the detail of executing the rule is found, and that's where the evaluation is going on right now in the comments, I believe to a great extent will be made during this comment period that ends currently on July 6, although I understand that members of Congress actually petitioned Secretary Perez for more time this week. That's the devil that's in the details because if you're operating under that Best Interest Contract Exemption, there's specific dos and don'ts and specific things that have to be executed. That's what we're working through to determine did what they wrote in the rule match what they said in their description of what the rule is intended to do, and we do believe there's some disconnects.
That's why we said that we believe modifications to the proposed rule are necessary. That said, there's some things in the rule that encourage us and that provide some flexibility, then there's some things in the rule that executing on them make it very difficult. If we did find ourselves having to live under that exemption ultimately, with some changes that we'll comment on, we believe it makes the process less impactful negatively to our business.
Okay. I think the more clarification you can put out on that as this thing unfolds is probably going to be vital, and if you look at why $10 is off your stock in the last month, I think it's pretty clear. Okay, one other question I have for you. We'll jump off the DOL thing for a moment. When I'm looking at your sales for this quarter or last year, both in life and then for funds and annuities, could you put some light on what percentage of those are made to your own recruits versus what percentage are made to clients?
Yep. The internal consumption number, is the way we define it, of life insurance sales is around 20% to those who are currently members of our sales force or that are in the process of becoming members of our sales force. It's a little less than that on the security side, between 15%, 17%, in that range. It's an important number, but it's a fairly low number, considering some of the other discussions that happen in similar industries, direct sales companies. Those are the numbers that we've identified and shared.
Okay. That might be a helpful number if you would consider putting it out on a regular basis each quarter. Thanks.
Okay.
Thank you.
Yes.
Okay. That concludes our question and answer session for today. I would now like to turn the conference back over to Kathryn Kieser for any closing remarks.
Okay. I'll just take it, Kathryn. Thank you for that opportunity, Robert. Hey, we appreciate the fact that the DOL rule and the recent dropping of the rule has created a tremendous amount of focus, we understand the frustration that it causes when imperfect information is available. In fact, us working through the process of reconciling what was said versus what the details of the rule said is a challenge and a frustration for us, as well as the rest of the industry. We're working through that, and obviously, we believe that there is a solution. What I'd like to point out in closing, though, is in spite of that is you do have to go back, as Colin mentioned, and look at the results for the quarter.
As I said, we've been through the most significant leadership change in the company in 15 years, and we put together a very positive quarter on the heels of a strong fourth quarter of last year. I just want to make sure that among all the DOL discussions, it doesn't get lost that we've got strong fundamentals of the business and that the momentum continues to show growth and strength. We've done that with what would normally be outside the DOL, a pretty significant number of distractions anyway. We feel confident about the business model and the strength of it and the integrity of it, and we just wanted an opportunity to make sure that there was some focus on that, as well as all the discussion with the DOL rule. Thank you very much for your time today. Talk to you again soon.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.