Good morning, welcome to the Primerica, Inc. fourth quarter 2012 financial results conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Kathryn Kieser, IRO and SVP of Investor Relations. Ms. Kieser, please go ahead.
Thanks, Amy. Good morning, everyone. Thank you for joining us as we discuss Primerica's results for the fourth quarter of 2012. Yesterday afternoon, we issued our press release reporting financial results for the quarter ended December 31st, 2012. 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 on this call. These non-GAAP measures are provided because management uses them to make financial, operating, and planning decisions 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 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, 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 31st, 2011. This morning's call is being recorded and webcast live on the internet.
The webcast and corresponding slides will be available in the investor relations section of our website for at least 30 days after the presentation. After the prepared remarks, we will open the call to questions from our dial-in participants. Now I'll turn the call over to Rick.
Thank you, Kathryn, and good morning, everyone. Welcome to Primerica's fourth quarter 2012 earnings call. In 2012, we continued to execute our strategy to deliver shareholder value by focusing on initiatives to drive long-term sales and earnings growth while actively managing our capital. During the year, we successfully executed a $375 million inaugural debt offering, which increased our corporate debt by $75 million with only a slight increase in interest expense. With this 25% increase in leverage, our debt-to-capital ratio still remains relatively low at 22.7% as of December 31st. In the first half of the year, we completed a redundant reserve financing solution enabling the redeployment of $150 million to repurchase 5.7 million shares. We continued share repurchases in the second half of the year, including $98.2 million of share repurchases in the fourth quarter.
For the full year 2012, we repurchased 9.5 million shares for $257.3 million, retiring 15% of Primerica's common stock outstanding. Since our IPO a little less than three years ago, we have retired approximately 25% of our common stock outstanding. Our capital redeployment plans are expected to continue in 2013 with a $130 million-$160 million ordinary dividend payment from Primerica Life to the holding company for share repurchases. Our RBC ratio is estimated to be approximately 600% at the end of 2012. Extracting this ordinary dividend will allow us to move toward a longer-term objective of 300%-350% RBC and leave the company well-positioned to fund future business while further enhancing shareholder value. During 2012, we also enhanced shareholder return by raising our quarterly stockholder dividend to $0.09 per share, up from $0.03 per share a year ago, increasing our dividend yield to 1.2%.
Including dividends, Primerica's total shareholder return in 2012 was 30.2%. Another notable event, as many of you have seen, we have just been added to the S&P MidCap 400. In 2012, our 12% increase in net operating income, combined with active capital management, resulted in a 32% year-over-year increase in diluted operating earnings per share. Driving these results were growth in the term life business, coupled with lower non-deferred commissions on issued policies, as well as increased investment in savings product sales and client asset values. Invested assets and net investment income were also lower from share repurchases, while interest expense increased with the redundant reserve financing transaction. Our adjusted book value per share grew 9% to $20.60 in 2012. Turning to the fourth quarter on slide five, operating revenues increased by 12%, net operating income increased 14% over the prior year period.
Net operating income per diluted share increased 36% to $0.69 from a year ago. Net operating income return on adjusted stockholders' equity was 14% for the quarter ended December 31st, 2012, up from 11.2% in the year ago quarter. Results reflect continued growth in the term life business, as well as strong investment in savings product sales and the favorable impact of market performance on client asset values. Net investment income declined compared with the fourth quarter of 2011, largely due to our lower invested asset base following our stock repurchases. Year-over-year, net operating income was impacted by an increase in premium related and employee related expenses, as well as higher legal fees and expenses, partially offset by non-recurring charges from the fourth quarter of 2011.
While Alison will walk you through a more detailed expense discussion, I would like to provide more information about the arbitrations related to the Florida Retirement System matter that impacted net operating earnings per diluted share by $0.03 and ROE by 60 basis points in the fourth quarter. As you may know, these matters have been described in our public filings. The cases concern state employees' choice of retirement plans offered by the Florida Retirement System, commonly known as the FRS. The FRS allows its employees to choose between a traditional defined benefit plan, the FRS Pension Plan, and a defined contribution plan, the FRS Investment Plan, which operates like a 401(k).
Following the recent financial crisis, a South Florida trial attorney began soliciting state employees who supposedly, on the advice of Primerica representatives, chose the FRS Investment Plan and saw the value of their retirement assets decline with the stock market fall. The law firm alleges that the only sound advice would have been to counsel an employee to remain in the pension plan. Well, in reality, there are a host of reasons state employees select the investment plan. In addition, the state provides employees with extensive information and resources to evaluate the plans. We believe the cases are without merit, and we are vigorously defending them. Florida designed its retirement options with two plans to meet its employees' needs and desires. Notably, the employees bringing these cases never invested their retirement assets with Primerica, and their assets largely remain in the FRS administered funds.
As anyone in business knows too well, litigation is expensive and uncertain. We expect our cost in this matter to be meaningful, but we remain optimistic that we will achieve acceptable outcomes when they are adjudicated. Moving to segment results in our Term Life business, issued policies were 15% lower than the prior year period as we return to a normalized range of productivity, with 0.19 policies issued per life license representative per month from the elevated post-convention productivity level of 0.22 in the prior year period. Approximately 6% of the 15% decline in issued policies year-over-year reflect extra processing days in the fourth quarter of 2011. Sequentially, Term Life policies issued were flat with third quarter, while our average issued premium increased 2% to $796. Average issued premium remained flat with the fourth quarter of 2011.
Our investment and savings product sales grew 30% in the fourth quarter from a year ago quarter. Retail mutual fund sales grew 24% as investor confidence continued to build and sales increased from depressed levels in the fourth quarter of 2011. Sales of our new fixed indexed annuity products were $155 million in the fourth quarter, reflecting the popularity of the product with conservative clients interested in capital preservation, as well as the product changes announced in November, pulling some sales forward to the fourth quarter. Managed account client assets grew year-over-year from $154 million at the end of last year to $582 million at the end of this year. Sequentially, investment savings product sales grew 13% from the third quarter.
Growth in our total client asset values at the end of the fourth quarter was in line with the U.S. and Canadian markets, up 11% to $37.39 billion from the prior year period and consistent with September 30, 2012. John will talk about distribution results.
Thanks, Rick. Hey, everybody. It's great to talk to you from Primerica headquarters here. In 2012, we implemented incentives and innovations designed to build product distribution and drive long-term sales force and revenue growth. Last year was our highest year in investment and savings product sales since 2007. The enhancements made in 2012 to our ISP business have positioned us to capitalize on the changing tide in investor confidence. In our investment and savings products business, we continued the implementation of the new managed account product and expanded our product offerings with the addition of fixed indexed annuities. In 2012, we executed several initiatives to grow our ISP business. As part of our ongoing product development process, we assembled a working group of top investment producers to help identify opportunities to enhance our ISP platform to generate incremental growth.
We also systematically targeted top life insurance producers that were relatively small investment producers to explain the missed income opportunity of not fully integrating investment savings products into their sales presentations. We were also proud to learn that Primerica was one of eight firms awarded DALBAR Mutual Fund Service Award for leadership in customer service in 2012, marking the tenth year in a row we have received this esteemed recognition. As we move into 2013, we will build on the new product success achieved in 2012 by expanding our annuity product offering. We are currently working with Lincoln Financial on a new private label fixed indexed annuity product that will be launched later this year. Beginning in July, we have the opportunity to expand our variable annuity product offerings when our exclusive sales agreement with MetLife expires. We are completing extensive research on the variable annuity marketplace.
We will give you more information once we've worked through the details. We're excited to take advantage of these opportunities that will give our clients and our representatives expanded product choices. In 2012, the year-over-year recruiting comparison proved challenging, but positive licensing momentum enabled us to stabilize and slightly increase the size of our sales force by year-end. Several dynamics led to this result. As I mentioned in the past, the post-convention recruiting surge in 2011 generated a lot of recruiting activity that did not result in our desired growth rate in new licenses. We developed a plan to significantly increase the emphasis on licensing and distribution growth. We began this process at the end of the first quarter by making significant adjustments to our messaging and front-end incentives.
In order to reinforce the new focus, we enhanced incentive programs by simplifying qualifications and providing more incentives to train, license, and help new representatives become productive. We also refined the field equity incentive program to focus more on rewarding the development of new productive licensed representatives. We developed a new streamlined process for new recruits by simplifying the licensing process to create one effective licensing system for all new recruits to follow. At the same time, we refocused our licensing instructors and regional vice presidents on helping new representatives through the licensing process. Another significant change we implemented to drive long-term distribution growth was to modify our life insurance compensation system to place more emphasis on developing new leaders and ultimately building distribution, and less emphasis on short-term premium hurdles.
These initiatives drove a 30% increase in the ratio of new recruits obtaining a license in 2012 compared with the prior year. While we are proud of this ratio improvement, our focus on licensing impacted 2012 recruiting levels. 2012 started strong with an increase in recruiting compared to the first quarter of 2011, declined in the second, third, and fourth quarters, ending the year down 22% or 53,004 from 2011. Approximately 30,000 of this year-over-year variance was attributable to the incremental recruits related to our 2011 post-convention recruiting surge. The balance of the decline resulted from our heightened emphasis on licensing beginning in the second quarter of 2012. In the fourth quarter, the size of our life licensed insurance sales force increased to 92,373 from the prior quarter and prior year period.
While recruiting of new representatives declined 16% from the fourth quarter of 2011, our new life licenses increased by 3% during the same period due to a 22% increase in the rate of new recruits obtaining a license compared to a year ago. Non-renewals were lower from the fourth quarter of a year ago, primarily due to Hurricane Sandy related mandated license renewal extensions this year in New York and New Jersey, and a high level of terminations last year in Illinois following the convention recruiting surge. On a sequential basis, recruiting declined 23% and new life licenses were down 3% from the third quarter due to seasonally higher recruiting and licensing levels in the third quarter.
In 2013, we are working to increase quarterly recruiting levels to above last year's recruiting in the second and third quarters, although that rate will be lower than what the first quarter in 2012 was. We want to reach this level of recruiting while maintaining the licensing ratios we achieved in 2012. Typically, the size of the sales force declines in the first quarter following lower recruiting in the fourth quarter, particularly in December. Due to this seasonality and approximately 300 additional non-renewals carried into the first quarter from Hurricane Sandy related licensing extensions, we expect the size of our sales force to be down in the first quarter from the end of the fourth quarter, similar to the sequential decline in the first quarter of 2012. I just returned from an incentive trip in Boca Raton, Florida, with many of our top producers.
Between the Boca incentive trip and our eight-city tour in January, I personally feel that our sales force leaders are incredibly focused on building and growing their businesses in 2013. At these meetings, my message was about building distribution and the need to develop new recruits and focus on building and promoting new leaders to grow the regional vice presidents for our future. I'll turn it over to Alison to go through our financial results.
Thank you, John, good morning, everyone. My remarks today will focus on our segment operating results, followed by an overview of our insurance and operating expenses, as well as invested assets. Starting with slide eight, in the fourth quarter, term life operating revenues increased 14%, driven by a 16% increase in net premium as our new term business continued to build over the prior year period. Accordingly, allocated net investment income increased with the growth in required statutory assets allocated to the term life segment year-over-year. A 19% increase in term life operating income before income taxes over the prior year period was driven by revenue growth and lower non-deferred commissions. Term life results also reflect growth in premium-related and employee-related expenses, as well as higher interest expense associated with the redundant reserve financing completed in March of 2012.
Total incurred claims were slightly lower versus the prior year period, largely due to a $3.9 million charge related to our search of public death records in the fourth quarter of 2011. Excluding this charge, incurred claims increased over the prior year period due to higher experience and the growth in aging of the in-force block. Persistency experience in the fourth quarter improved modestly over the prior year period. On a sequential quarter basis, operating income before income taxes declined by 9%, as growth in net premium was more than offset by higher DAC amortization linked to seasonally worse persistency in the fourth quarter. The previous quarter also reflected non-recurring favorable items, including an annual true-up of employee benefit accruals and higher net investment income from called securities and previously defaulted investments.
Turning to slide nine, new term pre-tax operating income has moved from breakeven a year ago to a positive 11% of direct premium in 2012. The leveraging of our fixed expenses should continue to positively impact new term profit margins. The growth in new term profit margins was also driven by lower non-deferred commissions in 2012 due to the compensation changes we made at the end of 2011. Commission deferrals normalized in the fourth quarter of 2012 and should remain in the current range through 2013. We expect to see continued improvement in new term profit margins, noting that from quarter to quarter, you will see some fluctuations in this metric, primarily related to mortality, persistency, and expenses. Legacy direct premiums have been running off by approximately 4%-5% per year, while operating income before income taxes has been running off at about 8% per year.
This dynamic is the result of lower margins on post-end of term conversions and renewals. The resulting profit margin has declined from 8.9% of direct premium in full year 2010 to 8.5% in 2011, and then to 8.1% in 2012. 2012 was moderately impacted by the increase in interest expense associated with first-quarter reserve financing. The legacy profit margin of 7.4% in the fourth quarter of 2012 also experienced downward pressure from higher claims. We anticipate legacy's full-year margin to continue to slowly decline over the next several years, with some quarter-to-quarter fluctuations related to mortality, persistency, and expenses. On slide 10, you'll see our investment in saving products operating revenue increased 17%, and operating income before income taxes grew 8% year-over-year.
Our 30% sales growth in the quarter resulted in a 25% increase in sales-based revenue, driven by growth in retail mutual funds and fixed indexed annuities, offset somewhat by a $1.3 million lower volume-related incentive payment for variable annuity sales in 2012 compared with 2011. Asset-based revenues grew 14% over the prior year period, in line with an 11% increase in average client asset values. DAC amortization was higher by $1.5 million in the quarter compared with the fourth quarter a year ago, as market returns on the invested assets underlying our Canadian segregated funds were lower than the favorable market gains experienced in the prior year. ISP results were also impacted by the legal fees and expenses related to the FRS matter that Rick previously discussed. Excluding these expenses, ISP operating income before income taxes would have increased 18% to $34.1 million.
On a sequential basis, ISP revenue increased 8%, and operating income before income taxes remained consistent with the third quarter. Results reflect sales growth, higher average client asset values, and the annual variable annuity incentive payment in the fourth quarter. These positive items were offset by the FRS legal fees and expenses, as well as higher Canadian segregated fund DAC amortization. On slide 11, you can see that corporate and other distributed products operating revenues decreased $3.9 million from the prior year period, and the operating loss before income taxes increased $2.5 million. These trends reflect lower net investment income of $3.1 million following our cumulative share repurchases. Expenses were slightly lower due to some specific charges a year ago, partially offset by higher employee-related expenses in 2012.
Turning to a more detailed review of insurance and operating expenses on slide 12, you see that the prior year expenses were elevated by a one-time charge of $3 million for a New York State Guarantee Fund assessment, capital action-related charges, and other items. Absent these, our expenses increased $2.1 million year-over-year related to employee merit increases and an additional layer of management stock compensation awards, and $1.5 million for premium growth-related expenses. Fourth quarter results in our ISP segment also include $2.9 million in legal fees and expenses associated with FRS. Comparison to the third quarter, our overall fourth quarter expenses increased $5.3 million, reflecting an employee healthcare accrual release last quarter, as well as increased legal fees and expenses.
In looking at the full year of 2013 versus 2012, we expect an increase to our core insurance and operating expenses for annual adjustments to salaries and benefits, IT and other infrastructure investments, and general inflation. Our expense base will also continue to grow due to the runoff of legacy expense allowances and growth in premium-related taxes and fees of about $5 million, as well as the third and final layer of stock compensation to correlate with our three-year vesting provision of about $3.4 million. In 2013, we will see the last of the increases from coming off Citi structure contracts , particularly in the IT area, of about $2 million. In March, we will move to our new campus, which will increase our 2013 cost by $4.6 million, half of which will be one-time in nature.
We anticipate higher legal fees and expenses to continue throughout 2013 related to the Florida Retirement System matter. Hearings begin in February and are scheduled to run throughout 2013. We will recognize FRS-related fees and expenses as they are incurred. On a sequential basis, we expect first quarter 2013 insurance and operating expenses to increase by $3.5 million over fourth quarter levels for employee-related expenses, mainly payroll taxes on stock vesting, campus moves, IT, and growth-related expenses. First quarter FRS legal fees and expenses are also expected to increase to be approximately $1 million higher than they were in the fourth quarter. Turning now to slide 13, our investments in cash total $2.07 billion as of December 31st, 2012, down from $2.18 billion at September 30th, 2012, largely reflecting the cumulative $98.2 million of share repurchases during the quarter.
At the end of the fourth quarter, our debt-to-capital ratio remained low at 22.7%, up slightly from 21.9% at September 30th, reflecting share repurchases during the period. The average book yield of our fixed income portfolio remained fairly consistent with the prior period, as the average book yield of sales and maturities during the quarter were similar to the new money rate of 2.94%. The liquidity profile of our holding company continues to be very good. As of December 31st, 2012, the holding company had invested assets in cash of $63 million. Our capital position is also strong, with an RBC ratio estimated to be approximately 600% at year-end. With that, I'll turn it back over to John.
Thanks, Alison. Primerica is a strong company with significant competitive advantages. As the largest independent financial services marketing organization in North America, we are uniquely positioned to effectively assist Main Street families with their personal finances. There has never been a bigger need for what Primerica does to help underserved middle-income families become properly protected, financially independent through our product offerings and our business opportunity. In 2012, we delivered over $1 billion in death claims to our clients from Primerica Life Insurance Company that is rated A+ by AM Best. AM Best also named Primerica a top industry innovator in 2012 for our cutting-edge use of technology and our TermNow rapid issue product. We offer clients a broad selection of investment products through our partnerships with companies including Invesco, Legg Mason, American Funds, MetLife, and Lincoln Financial, and our mutual fund offerings include 148 Morningstar four- and five-star-rated mutual funds.
We are proud of our sales force leaders and how we position Primerica for future growth. Rick and I continue to be confident in the strength of our business and our ability to execute a strategy that positions Primerica for future success. With that, I'll turn it over to questions, operator.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Paul Ferrin with Evercore Partners. Go ahead.
Good morning. Thanks. I was wondering first if we could get an update on capital plans for 2013, if you're still expecting $130 million-$160 million ordinary dividends from the Life Co., and any other sources or uses of capital, kind of in major buckets.
At this point, we're looking at, as we said, $130-$160. That'll become available in the second quarter. At this point, our plan is to go ahead and utilize that for stock repurchases. That is the extent of the capital plans in 2013.
Okay. On the recruiting results for the quarter, I guess in the past, you've talked about running the sales forces, kind of compared it to steering a battleship.
Yeah.
Did you oversteer in your focus on licensing versus recruiting?
Maybe. Let me kind of give you the answer. I mean, walk you through some dynamics of how I really look at that. Look, as I've said many times, Primerica is. You have to steer things, you have to chart a course, then you have to see where results take you in that I think as I look at the company right now, looking at the fourth quarter, really December was a low recruiting month, the other months were not as much as December. As I look at the thing, I would say right now we're on a run rate of kind of a 14,000 recruit a month company. As I said, in getting the thing back to the second and third quarter of a year ago, that means we need to get it to a 16,000 recruit. January was better. Okay?
As I look, though, the important thing of where we're at is we have significantly increased licensing. Significantly. We want to grow recruiting, not goose recruiting. If we wanted to come up with something where I just goosed up recruiting so you guys go, "Oh, wow. Great recruiting," we could do that. We don't want to do that. We want to grow recruiting and keep our licensing ratios strong so that we're growing the sales force. As I'm looking at this quarter, this is me kind of talking to y'all. I'm not comparing it to the first quarter of a year ago. I'm comparing it to our run rate coming off of last year and getting toward that rate I'm talking about of kind of at the second and third quarter of last year and having our licensing rate pull through.
As I look at things, right now, we have clearly with the messaging, with what we did at our conventions and stuff, what we did at Boca, I believe we have put a healthy focus back on recruiting, but keeping strong emphasis on licensing. I think as we head toward the convention and get towards the Dome in Atlanta, I think I'll have a very much clearer picture of kind of where exactly we steered it to. I think at this point, clearly we made a major improvement in licensing. We got that message through. We didn't want to just recruit a ton of people and have them turn into sales leads. I think we've got to really observe kind of how this quarter compares to last quarter and what we're driving toward at the Dome in our recruiting.
That's the best way I could give you to kind of compare it right now.
All right, good. Thanks.
Our next question is from Jeff Schuman with KBW. Go ahead, please.
Hey, Jeff.
Hey, how are you? Good morning.
Doing awesome. How you doing, buddy?
Okay. I absolutely appreciate that you don't want to speculate on any outcomes from the arbitration, I was wondering if I could just ask a few sort of factual questions about the process.
Of course.
I assume these arbitrations are just all sort of individual customer by individual customer. Is that how it works?
Actually, no. Let me just provide a little bit more detail on that. We have 22 pending arbitrations, five state court cases, and one federal court case. Those proceedings represent 94 individual clients. There are some arbitrations where there's just one or two clients. There's others where there's groups of five and seven clients. It's not one and one. They have put some together. If you look at those cases, 15 of the arbitrations are scheduled for 2013. Let me just give you a little bit more detail. Two in the first quarter, seven in the second quarter, four in the third quarter, and two in the fourth quarter to give you a little bit of the timing dynamic as to how we see things.
The other thing to know is the law firm that has solicited or advertised for these clients has told us that they have 150 additional clients where no cases have been brought at this point in time. It's unclear how many will be brought. Not typically, I'm going to take the not usual non-John. Usually I'm the liberal arts and Rick's the specific. When he's saying clients, these are the attorney's clients, not Primerica's clients. Okay? Most of these are people that never had anything with Primerica. They were people that saw one of our representatives. Make sure you understand what he means when he's saying client.
Right.
It's an attorney's client, not a Primerica client.
Okay. That's helpful. I'm not familiar with FINRA arbitrations generally. Are these things that you sit down, you have a hearing, and then there's a decision in fairly short order, and then there's no recourse from there, or how does that work?
Yeah. You have a hearing. There are typically three arbitrators that listen to the hearing, and they go ahead and make a ruling, and that ruling pretty much stands.
Okay. Thank you. Then I think Alison was providing a lot of good figures. I didn't keep up with all of them. Alison, did you give us an estimate of what the legal expenses were going to be in the first quarter?
What I said was that we felt we would be about $1 million higher than we were in the fourth quarter. Simple math there, I think the answer would be yes.
Okay. Thank you. I think that'll do it. Thank you.
Our next question is from Dan Bergman with UBS.
Hi, good morning.
Good morning. How you doing, Dan?
Good. I just wanted to see if there's any color you could provide on how you expect VA sales to trend after the exclusive deal with Met expires in July. I know a number of VA providers have been pulling back in this area. I think Met was projecting a 40% drop in 2013. I just wanted to see if you could give some color on where you see that going.
Sure. Just a couple of comments on that. One, we have continuing discussions with MetLife about our production plans and what we're expecting to do. Although they've announced sort of the 40% cutback, we have not had any sort of allocation or a cutback relative to our expected volumes. Our exclusive contract ends with them mid-year, we are in the process of actually doing an exhaustive study of other VA producers, and intend to take advantage of that exclusivity ending and offering additional products. We feel pretty confident that the additional products will be exciting to our sales force. I don't see a negative impact after that contract ends.
Okay, great. Just moving to the fixed indexed annuity product. I know sales grew nicely in that quarter. I think they were up about 37% sequentially after a smaller increase of just 10% last quarter. Just now that we're about a year removed from that product launch, I just want to see if there's any more color you can give on what drove the strong growth this quarter and what type of growth in that product that you might expect ahead.
I think in just growth in that business has been several things. One, just the biggest being the focus of our sales force. One of the things that we have consciously driven is, one of the things we saw as kind of a weakness in the system after the loss of the SMART Loan business and the significant amount of cash, forget the marketing of to a client and stuff, the significant loss of cash to our sales force is what we saw and what we wanted to sell our sales force on. It was the stability of recurring income coming from the ISP business.
I believe that the biggest thing that drove the increase was, A., messaging and marketing from here, but more importantly, adoption by our senior sales force leadership, that this is a very important tool to not only serve their clients, but to build their businesses and build recurring income for their sales forces. Not specific to the fixed indexed annuity, but one of the examples I just used quite a bit in our regional vice president meetings was one of our senior, really good securities producers who now has over $15 million of assets under management through the managed accounts program. That's about $150,000 a year of residual income for him when the year starts. It really is a rising tide lifts boats. The market's been good. Hallelujah.
The focus of our senior leadership, many of whom, it's not just the focus of the guys who are our natural securities producers, is the focus of our builders and our sales force of implementing these products into their business so that it drives and grows cash flows for their team, I believe is the biggest. The good Lord's willing, the markets cooperate, we're able to continue to drive that, we feel very good about those businesses.
Another item that occurred in the fixed indexed annuity is there was a product change announced in the fourth quarter, we did receive incremental volume on agents trying to get access to the old product versus the new product. There was somewhat of a spike in volume in the fourth quarter. We do feel, as John said, very good about the product. For our conservative clients, it provides a great deal of value.
Okay, great. Any sense on just how much of that pull forward was in that sales number, or is it hard to ferret that out?
It's hard to ferret it out. There is a lot of excitement around the product and the sales force. As John said, it's very much focused on it. It's hard to distinguish, but I do think there was some volume from that pull forward.
Okay, great. Thanks very much for the responses.
Our next question is from Sean Dargan with Macquarie. Go ahead.
Thank you, and good morning. Just as I think about your capital position, 600% RBC is twice the bottom end of your long-term range. I think new production has been lower than maybe was assumed at the time of the IPO. Is there any sense that maybe you could speed up the amount of time it takes to get to your long-term goal of 300%-350% RBC?
Well, just to be clear, one of the reasons that it popped up a bit in the fourth quarter, and we didn't go into this in a lot of detail because it's pretty technical, but it had to do with just X factors on deficiency reserves. For all you actuarial folks out there, you'll know what I'm talking about. It was really because of some statutory rules. We've had pretty, in recent past, a stronger mortality experience, so we were allowed to remove some of the excess reserves, if you will, associated with mortality through the deficiency reserve component. A little bit of that wasn't necessarily expected till we got to the year-end calculations.
When we do the dividend that Rick described, that is really in hindsight or in foresight in our attempt to go ahead and bring that RBC ratio closer to where we think we need to be on a longer-term basis. The one thing that I'll remind you of that I think we've discussed in the past is we're in a slightly different situation than what you would see with some other insurers who are doing triple X transactions. We basically took a mature block of business that was near the peak and did that transaction early last year. We will need to start funding, if you will, the economic reserves, basically over the course of the next few years. We do need to hold the capital in order to do that.
We have considered all of that and our long-term targets in the decision to come up with this 130-160 that Rick mentioned earlier, and thinking about our long-term business plans.
Okay. Thank you. That was very helpful. I'm just thinking about the tension between recruiting and licensing. Do you ever get the sense that you're hitting a saturation point at which the people out there in the population that you've reached who can pass the exams is maybe not what it used to be? A follow-up question, have you had any success in convincing any state departments to establish a term life only exam?
Go to the first is, of the things I worry about, which by the way are immense. One of the strengths of Rick and I is he worries about everything I don't worry about, and I worry about everything he doesn't worry about. Between the two of us, we worry about everything. That absolutely. Just walk out of wherever you live. Next time you go to a Home Depot, Walmart, just ask people, "You ever heard of Primerica?" 95% never have heard. Saturation is not our issue. Okay? If you look out right now, I believe one of the things I just did a whole presentation on is I believe our opportunity to bring young people into this business. Anybody that has kids in their twenties, my boys, the world is full of more college-educated bartenders than at any time in my lifetime. That is not the issue.
The issue, in all honesty, is focus and what is a recruit. What is a recruit? Is a recruit a lead? Okay. Because it needs to be both things. Clearly, you want to make sales with a new recruits market. We clearly saw after the convention and Crazy John went insane, and it's two-for-one recruiting and all that stuff, we saw that we had truly steered too far that direction, and we needed to make an adjustment. Saturation, I got to tell you, of the issues that I ever worry about, you look at the number of people that are recruited and that people need opportunity now. That's not the concern. On the second thing, we've been having significant improvement in state licensing all around where it's just gotten better and easier for someone to get a license.
States have responded to there aren't enough insurance agents, and that has been improving. Still ongoing discussions on the term license component of it. Nothing has happened. No state has come in with that yet, but we feel very good about where it's at. Just one editorial comment I would ask you all to look at, just if you want to understand what I believe our opportunity is. In just the other day's Best Review on life and health, there was an article by a gentleman basically saying, the headline was, "More Agents Are Not the Solution." He goes through a mathematical proving point of insurance agents can't make money selling term insurance. That after 10 years, you would need 1,840 clients to earn $75,000 a year. His answer is sell term at kiosks at Walmart or on the Internet.
I could not have written a better article for us than this guy that's some expert on brokerages wrote there. We believe there is a huge and immense need, and that people will always be sold life insurance. Less than 4% of policies are bought on the Internet. So of the things I worry about, that's a long answer, but of the things I worry about, that absolutely is not on the radar screen to worry about.
Thank you.
Thank you.
Our next question is from Steven Schwartz with Raymond James. Go ahead, please.
Hey, good morning, everybody.
Hey, Steven. How you doing, buddy?
I am good. You reminded me of Walmart kiosk. Remind me of socks and stocks.
Yep. It didn't work then, I don't think it's going to work now.
If I may, Alison, it was mentioned, I don't think a number was put on it, I don't know if you want to put a number on it, but the VA incentive payments, could you maybe say how much that was? Then I want to ask some more questions about FRS.
Sure. The number, it came in about $1.3 million less than it was last year. This year it was a little over $1 million. The year before it was a little over $2 million. That's the relative range.
Okay, thanks. Then just to go back to FRS here, just so I understand what's going on. I'm not getting it. These are agents of yours. Right. They haven't sold any product of yours?
Nope.
No insurance, no ISP products or anything like that to any of these people. How did they get involved in all this?
Let me just sort of give a little bit more color on that, because at first glance, it is quite hard to understand. Our agents do serve the middle income market, and in Florida, they often meet with government employees who are very much middle income. Part of when they're talking with government employees, one of the questions that government employees have is about their state pension plan and the choice they have of switching from a pension plan to an investment plan. Just in the nature of being in the house, our agents answer those questions to the extent that it's appropriate. That's how we come about talking about it. What you have is a law firm that went out and advertised for any person who spoke to a Primerica agent, please come forward.
They have this theory that it was inappropriate to switch from the pension plan to the investment plan, and they're saying that our agents are the ones that advised the client to do that, even though they never became our client. That's sort of the broad background under the allegation.
How that could happen, a lot of our agents are retired state troopers or retired people that were teachers, and they talk to people they know. It's a very unique case. We've never had anything like it. Okay? I think other than that, Rick described it very well.
Okay. Your lawyers, I don't know if you're willing to say this out loud, but your lawyers suggest, what is your defense?
Okay. It's probably not appropriate to go into sort of legal theories, but just again, just providing a little bit more color on it. The state of Florida devised its retirement program very specifically having two programs, a Pension Plan and an Investment Plan. The Investment Plan option's been available for 11 years. The state of Florida has placed no limitations regarding when employees can make an election to go from the pension to the Investment Plan. There's a host of reasons employees might do that. As an example, if an employee has a desire to leave their retirement funds to their children in a lump sum, they can do that in the Investment Plan. They can't do that in the Pension Plan. There's many other reasons why it makes sense for them to be in the Investment Plan.
The state provides all sorts of information, 800 numbers. These clients have taken advantage of that information. Again, the attorneys are doing a mathematical exercise, not taking into account the other considerations out there. We feel pretty good about our-
I really think that's about as far as we should talk about or whatever.
Okay. That's fair. If I can ask just one more, it sounds like you've got individual cases, individual arbitrations, little groups. Is there a class action possibility?
No. These are arbitrations, and our plan is to defend vigorously. Really, Steven, I think that's as far as we need to go.
Okay. All right. I'll leave it there. Thank you, guys.
Our final question is from Mark Hughes with SunTrust. Go ahead, please.
Yeah. Thank you. I guess you could take it as a testament to the persuasiveness of your sales force that they have such a broad impact in Florida.
Yeah. Also, it's a testament to attorneys.
That goes without saying. Alison, you had discussed operating expense up tick. You had mentioned $3.5 million. Was that inclusive of the extra $1 million in legal expenses, or was that just some underlying compensation and that sort of thing?
That was a great question because actually, as I was reading it, I realized it was not particularly clear. I think the best way to look at it would be to add those two numbers together. Most likely, given what we know today, with the expenses on the legal side and some of the other things we just know are planned in the first quarter, expenses will probably go up about $4.5 million in total.
How much of that, I think with the equity compensation, you pulled that out for adjusted EPS.
Yeah. Actually, when it's equity compensation, it's specifically a payroll tax item. The equity compensation is obviously accrued throughout the year. When we go ahead and do those vets, there's a rather large component that's associated with all the fronting, if you will, for the year, payroll taxes. I'd say about $1 million of it was that.
$1 million of that $4.5 million will be kind of adjusted out.
I wouldn't say adjusted out. It just won't repeat, per se.
Okay. I think I understand. You talked about the legacy term business, the margin might decline going forward. The pace over the last year looks like it's about 300 basis points. Is that a reasonable pace to think about for 2013? Is that ballpark-ish?
300 basis points? I have to go look in the supplement. I think that sounds a little bit steep. The margin's gone from, I think, somewhere in the mid-eights to the low eights type of trend. There's definitely month-to-month fluctuations. It's going down more in that sort of range. Maybe you meant 30 basis points. I don't know. Did you mean 30 basis points?
No, I'm looking at the, well, I've got operating income for the term life legacy business. We can talk about it offline. From your perspective, the magnitude of the margin decline, was it similar to what we would've seen over the last year?
Yes, it is.
Got it.
The only increase, which is what I highlighted, is that we did do the redundant reserve financing in 2012, that did increase our expenses that obviously you didn't have in 2011.
Right. Okay. John, final question for the convention.
Yep.
What will we see in terms of recruiting? Is this going to be another big recruiting event like we had in 2011? It sounds like you probably intend to be a bit more selective. How should we think about that?
Selective masses. We want the convention to be gigantic, okay? We're moving into right now just geared up in Boca promoting two things. Number one, the grand opening of our new headquarters. We're running a contest for people to come in for the intergalactic ribbon cutting and the opening of the new theater in the home office and all of that. We're driving towards that event, and we're going to drive like crazy toward the Dome. We want to have a big crowd and launch the greatest contest ever run in the history of America. Okay? We want to drive in a healthy way toward recruiting, trying to, as I've said many times to you on here, the hardest thing in the world to do, walk and chew gum.
Where both oars are hitting the water instead of just paddling on one side and spinning in circles. We want to have healthy growth in recruiting, but we want to use that convention as a giant magnet to draw in a lot of people. No, it's not like we're going, "Hey, this year, we just want half the people there, and it ought to be okay." I'm about to pump up the volume in a pretty major and a massive way.
Okay, great.
You guys will have a great time.
Just to elaborate, if you were referring to the promotion that we had coming out of the convention where we had the half-price. At this point, we don't have any intention of doing that again. We'll make that judgment as we get closer.
Yeah.
Right. Well, I'll be there if you'll have me.
Yeah. We'll have you reserved a seat. Guys, if that's all, thank you so much for your time, and I hope the ones of you in the Northeast bought lots of bread and milk so you don't freeze to death over the next few days. Everybody have a great day. See you guys.
Bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.