Good morning everyone, welcome to the Primerica Incorporated first quarter 2013 financial results webcast conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then 1 using a touch-tone telephone. To withdraw your question, you may press star and then 2. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Ms. Kathryn Kieser, Senior Vice President of Investor Relations. Ma'am, you may begin.
Good morning, everyone. Thank you for joining us today as we discuss Primerica's results for the first quarter of 2013. Yesterday afternoon, we issued a press release reporting financial results for the quarter ended March 31, 2013. A copy of the press release is available in the investor relations section of our website at investors.primerica.com. With us on the call this morning are Rick Williams, our Chairman and Co-CEO, John Addison, Chairman of Primerica Distribution and Co-CEO, and Alison Rand, our CFO. We reference certain non-GAAP financial measures in our press release and on this call. These non-GAAP measures are provided because management uses them in making financial, operating, and planning decisions and in evaluating the company's performance. We believe these measures will assist you in assessing the company's underlying performance for the periods being reported.
These non-GAAP measures have limitations, reconciliations between non-GAAP and GAAP financial measures are attached to our press release. You can see our GAAP results on page three of the presentation. On today's call, we will make forward-looking statements in accordance with the safe harbor provision of the Securities Litigation Reform Act of 1995. Forward-looking statements include any statements that may project, indicate, or imply future results, events, performance, or achievements and may contain words such as expect, intend, plan, anticipate, estimate, and believe, or similar words derived from those words. They are not guarantees, such statements involve risks and uncertainties that could cause actual results to differ materially from these statements. For a discussion of these risks, please see the risk factors contained in our Form 10-K for the year ended December 31, 2012. This morning's call is being recorded and webcast live on the internet.
The webcast and corresponding slides will be available in the investor relations section of our website for at least 30 days after the presentation. After the prepared remarks, we will open the call to questions from our dial-in participants. I'll turn the call over to Rick.
Thank you, Kathryn, and good morning everyone. As you can see on page four, during the first quarter of 2013, our operating revenues grew 8% to $306.2 million, driven by the continued growth in term life premium and strong investment and savings product sales and client asset values, seeing income per diluted share to $0.66 in the first quarter, compared with $0.62 in the prior year. As we look at other drivers of this quarter's results, we see a $2.9 million decline in net investment income year-over-year, which is highly correlated to our successful repurchase of 9.5 million shares to PRI. We also continue to recognize legal fees and expenses associated with the Florida Retirement System arbitrations, which impacted net operating earnings by $3.9 million or $0.04 per diluted share. Net operating income return on adjusted stockholders' equity was 13.3% as of March 31st, 2013.
ROE should expand as we redeploy excess capital in 2013. In May, we paid a $150 million ordinary dividend from Primerica Life Insurance Company to Primerica, Inc. and expect to use the proceeds to repurchase Primerica's common stock. Following the $150 million ordinary dividend payment, Primerica Life Insurance Company remains well-positioned to support existing operations and fund new business growth with a pro forma RBC ratio estimated to be in excess of 480%. Now turning to segment results. Term life net premium revenue increased 13% in the first quarter of 2013. Although term life insurance policies issued were down 10%, consistent with productivity levels in the first quarters of 2010 and 2011, but down from 0.21 in the first quarter of 2012, which benefited from strong recruiting results.
Sequentially, term life insurance policies issued were 4% lower than the fourth quarter, largely reflecting fewer applications submitted during the typically slower holiday season. The average premium per policy issued in the quarter was consistent with both the first and fourth quarters of last year. Year-over-year, our investment savings product sales increased 15%, reflecting 16% growth in retail mutual fund sales and a significant year-over-year increase in the sales of fixed indexed annuity products launched in the first quarter of 2012. Managed account client assets grew year-over-year from $275 million at the end of the first quarter a year ago to $721 million at the end of the first quarter of 2013. Client asset values at the end of the first quarter reached an all-time high of $39.85 billion, up 10% from March 31st, 2012.
John will talk more about initiatives driving momentum in our ISP business in a minute. Sequentially, investment and savings product sales grew 10% from the fourth quarter of 2012, primarily reflecting strong mutual fund sales in the first quarter, aided by typically higher retirement savings sales in the first quarter during the IRA and RRSP seasons. Sales of new fixed indexed annuity products declined from the fourth quarter, which benefited from product changes announced in November that pulled some sales forward to the fourth quarter. Going forward, we expect quarterly fixed indexed annuity sales to be more in line with the second quarter of last year. Total client asset values were up 7% from year-end 2012.
Now John will discuss Distribution results.
Thanks, Rick. Good morning, everybody. Welcome to the first earnings call from our new headquarters. The move went well. We are looking forward to the official ribbon-cutting ceremony next week, where we'll be joined by approximately 400 of our senior sales force leaders. Our organization is very excited to see the building that was designed to showcase Primerica's business, including a new interactive tour, a state-of-the-art TV studio and theater. Our TV broadcast that we'll host on opening day will set the stage for our biennial convention at the Georgia Dome in June. One of the beauties of the Primerica business model is that we can monitor the business and effectively implement significant change to make these adjustments, like the recent compensation change, and manage through periods of sluggish recruiting and life insurance sales without having a significant impact on short-term earnings.
Our large block of in-force policies generates recurring income regardless of whether life insurance sales are up or down within a given quarter. The recent changes we made to incentives and compensation has focused our sales force on growing their insurance-licensed representatives, as well as building their investment in savings products business. These enhancements have manifested themselves in improving life licensing ratios and higher ISP sales. This year, we enhanced our ISP business by launching a streamlined securities licensing system and an incentive for representatives to obtain securities licenses. The improved securities licensing system includes free online exam preparation materials, personalized study plan development. We are in the initial stages of using classroom education to increase student success. In addition, we are conducting weekly securities licensing seminars. We have reached out to reps that are having difficulty passing the securities exam.
This year, we also implemented an incentive program to create a sense of urgency to get a securities license. We launched an incentive trip competition to The Breakers resort for our more seasoned representatives. The results have been positive. Along with an increase in ISP sales, year-to-date through April, we have experienced a 13% increase in our new securities licenses compared with the same period a year ago. We have also been working to enhance our ISP product platform. Last year, we added managed accounts and fixed indexed annuities. Recently, we announced that we will be expanding our annuity product offerings this summer to include a new variable annuity and a new proprietary fixed indexed annuity underwritten by Lincoln Financial. As I mentioned last quarter, our plan was to increase recruiting in the first quarter to the level above last year's recruiting in the second and third quarters.
We came close to achieving this goal, but we are still not where we want to be. As you can see on slide five, first quarter recruiting increased 27% to 46,348 from seasonally slower recruiting results in the fourth quarter, but declined 21% from the year ago period. These results were due in part to not running an incentive trip contest in the first half of 2013. In non-convention years, we typically run two incentive trips, and in convention years, we typically only run one trip contest due to the cost. During the quarter, recruiting continued to be impacted by sales force leaders adapting their businesses to the new life insurance compensation program implemented in the second half of 2012. As I have told you in the past, the new comp program was fairly significant cultural change we made to generate long-term, healthy distribution growth.
We feel good about how the sales force has adapted so far and about the recent pickup in activity we've been seeing. We are proud of the strides we have made to improve the ratio of new recruits obtaining a life license. The licensing ratio in the first quarter of 2013 increased compared with the first quarters of the past three years. The number of new representatives obtaining a life license terminations normalized during the first quarter, with a 6% improvement over the first quarter of last year. Consistent with seasonal trends, the size of our life-licensed insurance sales force declined to 90,917 in the first quarter compared with December 31st, 2012, and increased from 89 in the first quarter following lower recruiting in the fourth quarter, particularly in December. We believe the size of our sales force will slightly increase at the end of the second quarter.
As we head towards the convention, we are developing enhancements to our business opportunity, product portfolio, and client experience. We are encouraged by the activity levels we saw in April and hope they carry through to May and June so that we can build on that momentum and generate growth in the second half of 2013. With that, I'll turn it over to Alison.
Thank you, John. Good morning, everyone. My comments today will cover the earnings results for each of our segments, followed by a company-wide review of insurance and operating expenses and invested assets. Starting with Term Life on slide six, year-over-year operating revenues growing component of the total in force block. Term Life operating income before income taxes increased $1.5 million or 3% over the prior year period. There are a couple of dynamics that complicate this quarter's year-over-year trends that will not continue into future quarter comparisons. As an example, interest expense increased $1.5 million, largely related to the redundant reserve financing executed on March 31st, 2012. This is the last quarter that we will see higher year-over-year interest expense related to this transaction.
Had we not been building up cash to fund the $150 million dividend from Primerica Life, both overall net investment income and the correlated allocation to Term Life would have been higher. As a reminder, we allocate net investment income to Term Life based on the proportion of required statutory assets to total assets in cash, with the remainder reported in the Corporate and Other segment. While the percentage of our invested assets allocated to Term Life continues to grow, the associated increase in allocated net investment income was largely offset by the lower effective portfolio yield during the quarter from our substantial cash accumulation. We deploy the cash we built up, the effective rate earned on the assets allocated to Term Life will normalize.
Let's move on to Term Life's core performance dynamics are increasing as the in-force block grows and effectively leverages the fixed costs within our expense base. Legacy profit margins are decreasing due to lower margins on post end-of-term conversions and renewals. Term Life's core economics also experienced quarterly fluctuations, primarily related to mortality, persistency, and expenses. First quarter new term results were positively impacted by the evolution of our agent incentive programs, resulting in a higher % of compensation costs to be deferred. Persistency for new term improved year-over-year, which reduced the amount of DAC amortization incurred. New term pre-tax operating income increased to 14.5% of direct premiums in the first quarter of 2013 from 4.7% in the first quarter of 2012. We expect to see continued improvement in new term profit margins due to the impact of leveraging our fixed costs.
On a year-over-year basis, Legacy results were negatively impacted by the allocated net investment income. As a result, Legacy pretax margins decreased to 6.8%. We've previously mentioned, Legacy margins will fluctuate with mortality and will experience downward pressure over time. While we expect the decline to be gradual, the unusual drop in margin from fourth quarter to the first quarter was driven by the previously discussed impact of our cash build up on the net investment income allocation and the unfavorable incurred claims experienced in the quarter. Without these two items, the Legacy margin would have been at a level consistent with the fourth quarter. We expect Legacy margins will return to the mid 7% range in the near term.
On a sequential quarter basis, Term Life operating income before income taxes increased 3%, primarily due to continued growth in net premiums and better persistency relative to seasonally lower persistency in the fourth quarter. Total incurred claims were slightly higher versus the prior quarter. On slide seven, you'll see our Investment & Savings Products operating revenue grew 9% year-over-year. Sales growth in the quarter drove an 11% increase in sales-based revenue, largely reflecting strong retail mutual funds and the addition of our fixed indexed annuity product. Asset-based revenues increased 9% over the prior year, in line with average client asset values. The year-over-year increase in sales-based commission expense is in line with the related revenue growth, while the increase in asset-based commission expense is consistent with the asset-based revenue growth when excluding segregated funds.
The relevant costs associated with segregated fund revenues are recorded in insurance commissions and amortization of DAC. The increase in operating expenses over the prior year period is largely related to the FRS legal fees and expenses that Rick previously discussed. Operating income before income taxes declined $2.5 million to $26.4 million year-over-year. Excluding the FRS legal fees and expenses, a 5% year-over-year increase would have been achieved. On a sequential basis, ISP operating income before income taxes declined 15% from the fourth quarter as the increase in sales and client asset values were more than offset. When comparing periods, we also need to consider shifts in our mix of business. Mix of sales, and to a lesser extent, the mix of assets, will change from period to period, resulting in fluctuations to revenue and earnings patterns.
For example, variable and fixed indexed annuities have stronger sales-based earnings, while mutual fund sales-based earnings are more moderate, and managed accounts and segregated funds have no sales-based earnings at all. The opposite weighting is generally true for ongoing asset-based earnings. The shift we saw in the mix of business, especially from the fourth quarter to the first quarter, translates into relatively lower immediate earnings but provides for a higher pattern of earnings over time. On slide eight, you can see that Corporate and Other Distributed Products operating revenues declined $3.5 million from the prior year period, and the operating loss before income taxes increased $2.4 million.
Results reflect a $3.5 million decline in net investment income due to a higher allocation to Term Life in line with that segment's higher required assets, a smaller overall portfolio following our cumulative share repurchases, as well as lower yield put pressure on the effective yield this quarter. Results for the segment were positively impacted by approximately $2 million of lower claims, largely associated with the state disability product underwritten by our New York subsidiary. Slide nine provides a more detailed review of insurance and operating expenses. You can see that year-over-year expenses grew by approximately $9.2 million. $3.9 million of the increase comes from legal fees and expenses related to the FRS matter. Cost of living adjustments to salaries and related items led to an increase of $1.4 million year-over-year, while our third layer of management stock compensation awards led to an $800,000 increase.
As our stock compensation awards operate under a three-year vesting schedule, annual costs should be relatively consistent year-over-year from here on out. Expenses increased $2.1 million for premium and growth-related expenses coming from growth in our new term business as well as growth in our managed accounts and other ISP products. During the quarter, we also incurred approximately half a million dollars in costs associated with the move to our new corporate headquarters. Compared to the fourth quarter of 2012, company-wide expenses increased by $3.8 million. $2.5 million of the increase came from employee compensation, mostly driven by payroll taxes and employee benefits that taper off later in the year, cost of living adjustments to salaries that occur annually in March, and the third layer of management stock compensation awards granted in February.
Move-related costs and the $1 million increase in legal fees and expenses related to the FRS matter also contributed to the increase. Other increases and decreases within the segments occurred but largely offset on an aggregate company basis. We expect our ongoing defense of the FRS matter, combined with certain known emerging expenses, to result in second quarter 2013 insurance and operating expenses in the $73 million-$75 million range, an increase of between $3 million and $5 million over first quarter levels. At this time, we expect FRS-related legal fees and expenses to be at levels consistent with those incurred in the last two quarters. It will be one time in nature. In addition, the second quarter will include a full quarter of cost of living adjustments to salaries and amortization expense for the third layer of management stock compensation awards, as previously mentioned.
These employee-related costs will increase our expense base by another $1 million. We expect fluctuations in other categories of insurance and operating expenses to be mostly a function of business volumes as well as other ongoing activities more than $2.07 billion at December 31st, 2012. The average credit rating of our fixed income portfolio continues to be single A, and 95% of that portfolio was rated investment grade. The average book yield of investments, excluding cash at quarter end, was 5.28%, down slightly from 5.32% at year-end. The new money rate on our purchases for the quarter was 2.75%, down from 2.94% in the fourth quarter, reflecting a higher weighting of purchases in our non-life companies, which generally invest in shorter term investments. We had very few purchases in Primerica Life in the first quarter as we accumulated cash for the ordinary dividend payment.
As you can see on the chart, the accumulation of cash took our overall portfolio yield down from the 5% range to 4.71% this quarter. Net investment income during the quarter declined $2.9 million from the first quarter of 2012, as a result of both the $257.3 million we spent and per profile of our holding company continues to be very strong. As of March 31st, 2013, the holding company had invested assets and cash of $50.2 million. With that, I'll turn it back over to Rick.
Thanks, Alison. Primerica is a unique distribution company with a conservative balance sheet. Our term life business provides a stable, recurring future earning stream, while our high return ISP business generates free cash flow. As we look to the future, our focus is on driving organic earnings growth and providing meaningful long-term shareholder value. With that, I'll open it up for questions.
At this time, we'll begin the question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. If you're using a speakerphone, we do ask that you please pick up your handset before pressing the keys to ensure good sound quality. If at any time your question has been addressed or would you like to withdraw your question, you may press star and then two. Once again, it is star and then one to ask a question. Our first question comes from Jeff Schuman from KBW. Please go ahead with your question.
Good morning.
Good morning, Jeff.
I was wondering if we could first talk a little bit about the registered reps. John, I think you said that the number of new securities licenses was up 13% year-over-year?
Correct.
Unless I'm mistaken, I don't think I have much context for that. Do I know what the total number of reps is, or can you give us a sense of what the total number of reps is and how the total rep count is evolving?
Rick is staring at a sheet of paper which has every fact known to man on it, so I'll let him give the exact numbers.
Great.
Okay. Well, as of year-end, we had active mutual fund reps of 21,863. That includes both U.S. and Canada. To John's point, we have licensed about 1,700 new reps year to date, but we have also terminated on an annual basis about 1,500 at year-end. The account's up slightly, but what's encouraging to us is the new licensing activity. Right.
Okay. I don't think we've had those numbers historically. The general trend over the last couple of years has been for that rep count to be what? Sort of flattish in general, or?
Yes, it has been. Yes, it has been.
Okay. You've continued to grow that business, I guess.
That business is, Jeff, as we've done investment conferences and stuff, one of the things that we showed in those was the size of our sales force registered reps compared to the other broker-dealers and stuff. Yes, one of the things we have done strategically is we've added products, we've improved the business opportunity for those leaders that are our big securities producers. That was a strategic objective as we became an independent company and became our own business. You combine that with it ain't like the market's done real bad either. Those two things, the productivity has been better. Our goal now is to grow the size of our licensed sales force in addition to having that. That business does have much more of a productivity swing in it, specifically driven by the market conditions.
Okay.
As we add new products as well.
As we add new products. As you follow through what we've done since we became independent, we added managed accounts, we added new annuities, we added improved incentives and compensation for our registered reps. We've wanted to grow that business. Knock on wood, so far that's gone well for us.
Okay. That's great there. I'll ask about one other area. I'll get out of the way. I was just wondering if you can give us an update on the number of pending FRS arbitrations and suits and whether you can confirm our impression that you want a dismissal of the first arbitration that was decided.
Sure. We have 22 pending arbitrations, seven state court cases, and one federal court case outstanding. You are correct. We did have one arbitration. The arbitration panel did not award the claimant any damages in that case. We have completed the second arbitration, no decision has been reached in that one at this point.
What was the date of the second arbitration hearing?
It just finished last Friday.
Okay, great. Thanks a lot.
Our next question comes from Steven Schwartz from Raymond James. Please go ahead with your question.
Hey, good morning, everybody.
What's up, Steve?
Hey. How y'all doing?
Awesome.
Good. I want to talk a little bit about one thing I noticed, ISP expense. I know you've got more from FRS there. Even without that, it looked like it jumped, certainly from the fourth quarter. I was just wondering, the streamlined processing that you have, did that add to expenses or anything else in particular going on there?
That's a great question. The answer to your first part of the question is really no. The cost associated with a lot of the initiatives that John described are relatively de minimis. We've actually hired a handful of people that are really working as coaches and handholding folks. The incremental cost to us was relatively small. I think what you're seeing on a quarter-to-quarter basis has very specifically to do with something that actually happened in the fourth quarter. When I talk about expenses, and especially in my prepared comments, I usually focus on company-wide. Specifically within the segments, in the fourth quarter of last year, we did do a true-up of an accrual we were carrying for out-of-pocket expenses for mutual fund accounts that we administer. We had been over-accruing when we finally got some bills in. We realized that our accrual was too high.
We took that accrual down by over $1 million in the fourth quarter. Sequentially, you see about $1 million or so attributable to is very consistent with what we believe our ongoing expense levels will be. That sequential quarter change, you shouldn't see anything further into the second quarter. The other increase is specifically in ISP had to do with some of the things I already mentioned in my company-wide discussions, which were largely employee-related costs.
Okay. Alison, while I have you, it wasn't clear to me, the $150 million of cash that was built up.
Did that affect interest income in legacy, or did that affect interest income in corporate?
Basically, it moved with the assets required to support the business. If you look at our total asset base, 60-some odd % of the assets support the legacy business. Another, and I'm rounding here, another 14 or so % support the new term business, with the rest is considered excess, if you will, and we keep it in corporate and other. It did impact both term life and legacy, and more specifically, it had a more substantial impact on legacy within term life.
Okay. To think about, obviously it hurt, but you did get some income on that $150. Presumably, it'll be gone shortly as share repurchased. Do you know, Alison, what the income on that $150 was, or how you were holding it or whatever?
Yeah. It was held very short term. It was cash and cash equivalents. In today's marketplace, zero is about as close of an estimate as something else. It was a very small earnings rate. If you look at what we earned on purchases we made in Primerica Life, that we actually placed money on a long-term basis It was in the four and a quarter range. Doing simple math, you could say we lost somewhere around 4% on the assets we were building up and that we chose not to invest long-term for the single quarter. We made that decision because we obviously didn't want to place money and generate losses in the portfolio.
Okay, got it. Thanks a bunch.
You bet.
Our next question comes from Mark Hughes from SunTrust. Please go ahead with your question.
Thank you. Good morning.
Good morning.
John, when you look at the convention for this year, you obviously got tremendous momentum a couple of years ago, both in terms of recruiting and sales growth. Was there anything unusual about that convention that won't be repeated this time? Should we assume or think notionally about similar type of results this year?
Look, if you'll recall at the last convention, one of the things we did was on the last night, Crazy John went insane, we did $50 versus $99 IBA, we had a massive jump in recruiting, which was abnormal of what we get out of a convention. Okay? Let me just give you kind of the context of what we want to accomplish at this event in the Georgia Dome. As I've said to all of you many times, many of you kind of personally as we've talked and done investment conferences, is one of the things that we saw when we did that, I think it was with Jeff Schuman at a follow-up conference out of that when recruiting was going through the roof, his question to me was: Was it sustainable?
I said, "I don't know if it's 5-hour ENERGY drink or whether it is a sustainable trend." It turned out to be 5-hour ENERGY drink. It did drive significant production in life. It's not like it was all negative. Having a jump is not a negative thing. It led to sales. It led to a lot of the things that drove us over into the first quarter of 2012. We, as a management team, could have looked and said, "Let's just keep on this track." What we saw is that we were not driving enough distribution-building behavior. Recruits were becoming more a way to make a sale than a person to get licensed, promoted, and building. That led to our compensation change.
In all honesty to you guys, as a management team, it might have been easier to say, "We're not going to do that." Because of what I said in my prepared statement, the strength of our model and the strength of our business, the fact we are long-term viewers of this business, not short-term harvesters of this business, that we wanted to make sure we had our incentives and our long-term incentives focused on building, we made a significant change to compensation. It's been an adjustment period for us and for our sales force. I believe that compensation change of what we did was one of the things that drove very positive activity in our ISP business. Okay?
As we head into our convention, one of the things that we most want to do at the Dome is that we want to put back a proper level of incentive on pure recruiting activity and have that applied to our improved licensing ratios and get growth, okay, coming out of that Dome. As I said in my prepared comments, we were encouraged by April, okay? Particularly given there's no incentive running right now, we're comparing to a year ago when we had an incentive running. I believe with everything in me when our sales force sees this new headquarters, it is going to infuse belief and pride like nothing we've done probably since the IPO. I believe in coupling that with us making more sustainable, not 5-hour ENERGY drink decisions in the Georgia Dome, we can begin to get the results that we want.
One thing I want to make clear, we're excited about what's happening in ISP, we want to continue to grow that. That is not a shift away from we want to grow the size of our life insurance distribution system. What our goal is this time is to make that more of a sustainable, maybe not quite as big a jump, but a more sustainable move in the business. Hope that answered your question.
It does. Yes, thank you. The mutual fund sales, any strength you saw early, later in the quarter with the market doing well? I think you've made a point.
Well, I think as you saw, we had strong, and as Alison talked about very well in her prepared comments, we had a move from the annuity business towards mutual funds. Because for one of the things that, look, our goal is to sell the right product for our clients, and our sales force's goal is to sell the right product for their clients. As people became a little less fearful of the world, some of the guarantees in the annuity products became less of a important to them and moving more towards just pure mutual fund sales in the market. I believe the thing that drove it is a big piece of it, the things we're doing to just drive the overall ISP business.
I think the biggest thing is, among people, there's more confidence in the market now than there was before.
Yeah. Then a final question Insurance commissions within the new term life segment were a little low this quarter compared to, I guess, the prior trend. How should we think about those going forward?
Yes. Basically, that number continued to evolve as we've changed our compensation programs, if you're marking it more specifically towards generating new premium. I think that you're at a level now that is relatively in the range of what we should see from quarter on out, barring any decisions we make to do something temporary that may not be deferrable. All the core changes in our compensation program really have been flushed through. You're at more of an appropriate relative range from here on out.
Thank you.
Once again, if you would like to ask a question, please press star and then one. Our next question comes from Sean Dargan from Macquarie. Please go ahead with your question.
Thanks, and good morning. Just when we're thinking about the progression of the legacy term life book, I know you said that the pre-tax margins should get back to the mid seven range the rest of the year. How should we think about that running off in 2014 and 2015? I mean, how much of a drop-off from the mid seven range should we be thinking about?
I'm not sure how much of this we've given for that far out, generally speaking, we expect the decline to be pretty gradual. You're seeing it in the mid sevens this year. I would expect it to continue to fall into the low seven range. It will get into the six range. I don't think it's 2014. I think it's sometime later than that. I think that's a relatively normalized level for it. Quite honestly, given how much could possibly happen between now and the time I'm thinking about, I can't say that for certain. I think you're talking about just a relatively slow decline here on out. Again, I don't expect you to get much lower than 7% into next year.
Okay. Thank you. Turning to investment in savings products, given the growth in assets, I would have thought that the asset-based commissions and fees would have gone up more than they did. Is there any margin pressure, or is there anything going on that we should think about in terms of that line?
Yeah, I think the asset base, if I'm correct, the asset-based revenues grew less than the asset-based expenses. There was a little bit of margin compression that you saw.
Okay.
The two things about that, one is some of the commentary that I mentioned to you, which is that we had a shift in some of the business, and Seg funds was, if you take Seg funds out of both of the revenue number, the growth in the revenue was very consistent with the growth in the commission expense. The reason you would do that is because there is no commission expense line, if you will, on Seg funds. It actually runs through insurance commissions and then amortization of DAC. It's a little bit of just the geography of where it hits. The other thing, and we didn't really talk about it too much this quarter, is that in the past, we had a relatively high level of internal exchanges on our variable annuity product.
Those internal exchanges, while they created sales volume, the aggregate dollar profits on those was lower because the commission rate was lower, but the amount retained or the margin was actually a little bit higher than on a new sale. We've been shifting away from those, and so you see a little bit of an impact of that as well.
Okay. Thank you.
Our next question comes from Jeff Schuman from KBW.
Thanks. I had so much fun the first time, I thought I'd come back. Actually, I just wanted to follow up with Alison on the term question, because it seems that to the extent that maybe legacy margins compressed a bit, I assume that's attributable mostly just to negative operating leverage as that book contracts, which is partly a function, I guess, of just how expenses are allocated between new and legacy. I guess coming at it a bit differently, how should we think about operating leverage for term life in its totality?
On term life in its totality, it should be improving. You do get some real noise in these sub-segments, which is what I was focusing on. Specifically, it's a little bit less with expenses. The mortality itself on the legacy business is as priced for or as expected, is going to worsen. These policies are aging. A lot of them are reaching the end of their initial policy term, at which case the old mortality gains that we had over time would no longer emerge. On a more technical basis, this business is basically the DAC's running off to zero, but the reserves are continuing to grow. The interest accruing to the growing liability is actually a negative on the profits in that segment. Other than that, I think it's what we've been saying. Those are the items that will hit legacy on an ongoing basis.
Obviously, from period to period, you'll see things like mortality fluctuations or persistency and expense fluctuations. On the longer term, those are the things that I think will drive down the weight intact. You've seen a pretty dramatic increase already in that, and I think you will continue to see that. I think a way to look at it is to look at what you expect the new term premiums to grow by. Other than the growth-related expenses for things like premium taxes and non-deferred underwriting costs, you can put in a relatively cost-of-living adjustment, if you will, on other fixed items to get a growth rate on expenses.
Okay. I think I understand that. Basically, to the extent that legacy margins suffer a bit from the operating leverage issue, that's offset in new term, which continues to grow.
Absolutely.
There are a couple of other wrinkles in terms of the mortality margin and what happens maybe with investment income that also kind of comes into the mix.
That is correct.
Yeah. Okay. All right. Thank you very much.
You're welcome.
Ladies and gentlemen, in showing no additional questions, I'd like to turn the conference call back over to management for any closing remarks.
Thank you very much for your time. Have a good rest of the day. Goodbye.
See you. Have a good one. Ladies and gentlemen, at this time, the conference has now concluded. We do thank you for attending. You may now disconnect your telephone lines.