Good day, and welcome to the Primerica, Inc. first 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 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Kathryn Kieser. Ms. Kieser, the floor is yours, ma'am.
Thank you, Mike. Good morning, everyone. Thank you for joining us today as we discuss Primerica's results for the first quarter of 2012. Yesterday afternoon, we issued our press release reporting financial results for the quarter ended March 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 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 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 a discussion of these risks, please see 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 first quarter 2012 earnings call. During the first quarter, we were pleased to announce that our regulators approved a XXX financing transaction, as well as the payment of a $150 million extraordinary dividend from Primerica Life to our holding company. This dividend facilitated a simple and efficient way for us to return value to shareholders by executing a $150 million share repurchase in April. In support of our capital strategy, Warburg Pincus provided an opportunity for us to repurchase 5.7 million shares with certainty of price without impacting our limited flow. Warburg is a great long-term strategic partner and continues to own 23% of Primerica shares, including warrants.
Primerica Life's payment of the $150 million extraordinary dividend completes our plans with regulators to extract a total of $350 million of excess capital from the life company upon the completion of the redundant reserve financing. At this point, Primerica Life cannot declare additional dividends without prior regulatory approval. As Alison will describe in more detail, we believe Primerica Life will be able to declare ordinary dividends without regulatory approval in 2013. Turning to first quarter results on slide four, you can see our operating revenues increased by 6% to $284.5 million, and our net operating income declined 2% to $42.4 million, while net operating income per diluted share increased 10% to $0.62.
The quarter's results reflect the continued growth in our term life business, the emergence of a normalized expense base over the last several quarters, and lower invested assets following our $200 million share repurchase in the fourth quarter of 2011 that was accretive to operating earnings per share. Net operating income return on adjusted shareholder equity was 13.5%. The over 200 basis point increase in return on equity from the fourth quarter was driven by higher operating earnings and our $200 million share repurchase in the fourth quarter. The April 2012 $150 million share repurchase will be accretive to return on equity and EPS beginning in the second quarter.
If this share repurchase had been executed on January 1st, given effect to the letter of credit expense and loss of income from invested assets, operating earnings per share would have been $0.64, and return on equity would have been 14.6% in the first quarter of 2012. Our investment and savings product sales increased 7% in the first quarter from a year ago quarter, primarily driven by variable annuity sales, which continue to benefit from clients transferring their older variable annuity contracts to the current Prime Elite IV variable annuity that offers an attractive living benefit. Results also reflect $25 million of sales of our recently launched fixed indexed annuity product and $23 million of managed account sales in the first quarter. Managed account client asset values were $275 million at the end of the first quarter.
Our total client asset values were flat with a year ago at $36.3 billion at March 31st, 2012, reflecting market performance in the U.S. and Canada. Sequentially, investment savings product sales increased 24% in the first quarter, reflecting strong retirement savings sales typical of first quarter trends during
Market conditions. Improved market conditions drove client asset values higher by 8% in the first quarter compared with the fourth quarter. In our Term Life business, life insurance issued policies increased by 9% in first quarter 2012 from a year ago, primarily reflecting an increase in the number of applications received and the higher rate of converting applications to issued policies of our new TermNow rapid issue term life insurance product. Sequentially, term life policies issued decreased 9%, largely reflecting fewer applications submitted during the typically slower holiday season and the 5 additional processing days in the fourth quarter. Our average policy issue premium of $797 in the first quarter was flat with both the first and fourth quarter of last year. Now John will walk you through our distribution results.
Thanks, Rick. Good morning, everybody. We kicked off 2012 by engaging in activities and launching initiatives that generated energy and production in our sales force. As I told you in February, we held a series of Regional Vice President meetings in January, where we talked about improving the business opportunity for our sales force, including incentive programs designed to generate current momentum while building long-term distribution growth. In the first quarter, we ran a contest focused on recruiting and life production that provided a longer-term benefit of having more representatives able to use our web-based sales tools. We also raised the value of the Regional Vice President position through messaging, recognition, and broader opportunities for business ownership. During the quarter, we tried to balance the emphasis on recruiting and licensing activities. We feel good about the results.
As you can see on slide five, in the first quarter, recruiting increased 11% over the prior year and was up 34% from the seasonally adjusted slower recruiting in the fourth quarter. The number of new representatives obtaining a life license grew 7% from a year ago and declined 6% from the fourth quarter, when licensing results continued to benefit from the third quarter post-convention recruiting surge. During the first quarter, nonrenewals and terminations were lower by 6% than the first quarter last year. With our positive year-over-year results, you may be trying to figure out why the size of the sales force declined 2% from December 31st, 2011. Well, the reality is that although the first quarter recruiting and licensing were up, we had fewer life license reps leave the sales force in the first quarter a year ago.
We still had 1,500 more reps who did not renew their license than we had reps obtain a new life license. Our end game is to grow the size of the life sales force in a sustainable way. Growing the largest life insurance license sales force in North America is more of a marathon than it is a sprint. The incentive and messaging adjustments we implemented over the past few months have produced positive results on the front end of our business. In the first quarter, we were able to grow the number of new licenses by 7%, even though recruiting declined 12% year-over-year in the fourth quarter. The first quarter was also the second reporting period in a row where we've seen a year-over-year increase in the number of new life licenses.
On a sequential basis, the net license change at the end of the first quarter 2012 improved significantly from the same periods in 2010 and 2011. We are pleased with these positive trends emerging in our licensing metrics. Since becoming an independent public company two years ago, it is important that we ensure our voice is heard on key issues that are important and relevant to our business, our representatives, and our clients. Last week, we sponsored a policy summit hosted by the National Journal called, "Are the Joneses Keeping Up? Policy Prescriptions for Personal Financial Security." This bipartisan event provided the opportunity for us to share with key centers of influence in Washington, D.C., Primerica's mission to help Main Street families become properly protected, debt-free, and financially independent. We also showcased our unique understanding of the financial needs, worries, and dreams of average families all over America.
The event was well attended, and the discussion clearly showed that Main Street families feel more confused and abandoned than ever. We believe Primerica is uniquely positioned to fill this gap for hardworking Americans. As we continue into 2012 and build towards 2013, we'll move into our new home office and host our next big convention. Our goal is to deliver tangible enhancements to our business opportunity, product portfolio, and client experience in order to build long-term distribution growth. With that, I'll turn it over to Alison.
Thank you, John, and good morning, everyone. I'll start today with a brief discussion of the DAC accounting restatement and our recent financing and capital transactions, followed by a review of aggregate operating expenses and invested assets. I will conclude today with a discussion of operating results by segment. Effective January 1st, we adopted ASU 2010-26 and no longer defer certain indirect costs of acquiring life policies or costs attributable to unsuccessful efforts to acquire life policies. We adopted this change retrospectively, and all periods shown in the earnings release and our financial supplement have been restated on a consistent basis. As you can see on slide six, the estimates I gave you in our fourth quarter call for the anticipated impact on full year 2011 results were consistent with the actual impact of the adoption.
For 2011, pre-tax earnings are $32 million lower than reported under the prior accounting standard. This reduction translates into a $21 million reduction in net income for the full year 2011, or $5.2 million for the first quarter of 2011. On our last call, we also anticipated that 2012 pre-tax earnings would be roughly $15 million-$19 million lower or $10 million-$12 million after tax. While we are not presenting any current or future results under the old accounting standard, we do believe the previous estimate to remain accurate. The largest change in deferrals from the adoption of this accounting change comes from unsuccessful efforts in certain indirect insurance expenses. These components are relatively stable and are not anticipated to create variability in earnings between years. However, we do see some variability between periods related to certain agent compensation programs that have evolved with our business needs.
As an example, through much of 2011, we ran the Fast Start bonus program, as well as other special bonus programs, which had had an indirect focus on acquiring life policies and were entirely expensed under the revised accounting policy. Following the recruiting surge coming from our June 2011 convention, we began phasing out the Fast Start bonus and shifted focus towards efforts more directly attributable to getting new agents productive and writing life policies. Although our cash investment in these programs remained consistent, these more recent programs have a much greater percentage of their costs deferred than what had been deferred under some of the previous programs. Outside of these programs, the accounting change had very little impact on accounting for our agent compensation programs as our core compensation revolves around commissions and bonus structures that only pay for direct successful efforts to acquire life policies.
Let me reiterate that the DAC accounting change purely impacts the timing of expense recognition and has absolutely no impact on cash flow, on the fundamental economics of the business or for that matter, statutory earnings. Moving to slide seven, as Rick mentioned, we closed our XXX financing transaction during the quarter and declared a $150 million extraordinary dividend from Primerica Life, enabling us to repurchase 5.7 million shares of our stock from Warburg in April. In connection with the XXX transaction, we formed Peach Re, a special purpose financial captive insurance company and indirect wholly owned subsidiary of Primerica. In March, Peach Re entered into a letter of credit facility for a maximum amount of $510 million to support certain of its obligations for a portion of the redundant reserves related to level premium term life insurance policies ceded to Peach Re by Primerica Life.
On a statutory basis, the letter of credit is an admitted asset for Peach Re and will be used to fund the excess statutory reserve ceded under the coinsurance arrangement. The statutory reserves ceded to Peach Re will increase the statutory surplus of Primerica Life, allowing for $150 million extraordinary dividend and the potential for additional dividends in the future. On a GAAP basis, the only impact of the transaction will be the LOC fees paid to Deutsche Bank, which will be an incremental pre-tax expense of approximately $1.6 million in the second quarter and $5 million for the full year 2012. Our GAAP balance sheet presentation will not be impacted by this transaction. Following the $150 million extraordinary dividend, the statutory risk-based capital ratio for Primerica Life is estimated to be in excess of 560% at March 31st.
The current high surplus levels, combined with 2012 anticipated statutory income, will allow for an ordinary dividend payment in 2013. When determining a potential dividend payment, we consider the surplus necessary to fund our anticipated business growth. The XXX transaction helps fund near-term growth as the amount of the LOC increases. We expect our RBC ratio prior to any future dividend payment to remain stable over the next few years. Considering the requirement to fund long-term growth and the expected impact of decreases in the LOC beginning in 2015, we believe we will have an ordinary dividend capacity for Primerica Life in the range of $130 million-$160 million in 2013. Let me focus on our insurance and operating expenses. You'll see on slide eight that half of the year-over-year expense variance comes from non-recurring prior expense savings, primarily the prior year release of management incentive accruals for 2010.
Setting these aside, expenses grew roughly $2 million related to premium tax growth and allowance runoff, reflecting ongoing growth in our new term business and the runoff nature of our legacy business. As you will recall, economically, we replaced these expense allowances with increasing premiums in our new term business, the pricing of which provides for policy maintenance expenses. You'll also see a $1 million decrease in ISP expenses, which is fully offset by a related decrease in revenues, reflecting certain pricing structure changes in that business. In our ongoing expense base, you'll see a year-over-year $2.1 million increase, primarily related to additional layer of employee stock compensation as well as annual merit increases. As you will recall, throughout last year, we saw our expense base emerge and largely stabilize by year-end.
Our expenses this quarter have decreased $1 million from the prior quarter, primarily due to the fourth quarter charges related to the liquidation plan for Executive Life Insurance Company of New York. While the DAC accounting change reduces the amount of our expense deferrals, it does not meaningfully impact expense variances across periods. Turning to slide nine, invested assets and cash total of $2.17 billion as of March 31st, up from $2.16 billion at year end. The average credit rating of our fixed income portfolio continues to be single A, and 94% of the portfolio was rated investment grade. The average book yield of investments, excluding cash, at quarter end was 5.46%, down slightly from 5.52% at year end.
The new money rate on our purchases for the quarter was 2.69%, down from 3.69% in the fourth quarter, reflecting a higher weighting of purchases in our non-life companies, which generally invest in shorter-term investments. Net investment income during the quarter declined $2.5 million from the first quarter of 2011 as a result of lower assets due to the $200 million share repurchase in November, as well as income from called securities received in the prior year period. On a segment basis, the allocation to term life increased both over the prior year and sequentially due to the growth in the statutory assets required to support the growing term life business. Conversely, the residual net income, investment income allocated to corporate and other was lower by $3.4 million.
We look towards the second quarter, we were able to fund the $150 million share repurchase in April with minimal impact to the quality or duration of our invested asset portfolio. Sales of securities average A single quality and 3.9 years duration, both close to the average of the portfolio at the end of the first quarter. The average book yield of the sales was approximately 3.2%, we were able to slightly increase the average book yield of the remaining portfolio. We therefore expect a reduction to second quarter investment income of approximately $1 million. Turning to our term life insurance segment on Slide 10. Operating revenues grew 18% and operating income before income taxes increased by 8% in the first quarter compared with the same period a year-ago.
Term life net premiums, excluding ceded premium recoveries in the first quarter of 2011, increased 22% as we layered on another year of new term business. Accordingly, growth in the statutory required assets associated with new term life business drove the increase in net investment income in the first quarter. During the first quarter, mortality experience was slightly unfavorable, although consistent with the prior year period. Persistency experience was also consistent with the year-ago period. Expected, legacy term operating income before income taxes declined 6% year-over-year, maintained an operating margin consistent with historical trends. Sequentially, operating income before income taxes increased by 20%, primarily related to a prior quarter change charge reflecting our search of public death records and the continued growth in new term life premiums. Persistency improved relative to unfavorable experience in the fourth quarter, while mortality was unfavorable versus prior quarter favorable experience.
During the quarter, ceded premiums for new term increased by approximately 50% from the fourth quarter. Each quarter, we pay the annual ceded premiums for all policies issued during that quarter. In the first quarter, we paid the annual ceded premium for policies issued in the first quarter for three calendar years, whereas in the fourth quarter, we paid the ceded premiums for policies issued in the fourth quarter for only two calendar years. You can also see this in legacy term. During the first quarter, legacy term net premiums increased compared with the fourth quarter due to lower ceded premiums in the quarter, we pay ceded premiums on an annual basis for all policies issued during that quarter. We generally issue fewer policies in the first quarter compared with the fourth quarter, causing corresponding lower ceded premiums.
The sequential impact of ceded premiums for new term and legacy that I just discussed is offset by a corresponding impact in benefits and claims for the change in ceded reserves with little impact to pre-tax operating income. During the quarter, we entered into a yearly renewable term, or YRT reinsurance arrangement in Canada similar to our U.S. program that reinsured 80% of the face amount for every policy sold beginning January 1st, 2012. We previously used YRT in Canada before discontinuing its use in 2003, when the reinsurance rates available in the market became high relative to our claims experience. The recently quoted rates are in line with our view of claims experience. Given our focus on distribution profits and our desire to minimize underwriting-related volatility, we reinstated the Canadian YRT program this year. Slide 11, you'll see the results for our Investment and Savings Products Segment.
Operating revenues were generally flat with the first quarter of 2011. Sales-based revenue increased 3%, consistent with revenue-generating sales, while asset-based revenue declined 2%, reflecting a slight decline in average client asset values during the first quarter. Account-based revenue declined $1.1 million from the first quarter a year ago, consistent with the expense reduction for the pricing structure change I mentioned earlier. Operating income before income taxes declined 7% from the prior year period, largely related to higher expenses I previously discussed, as well as slightly unfavorable Canadian segregated fund DAC amortization. Sequentially, revenue increased by 7% and operating income before income taxes remained flat between quarters, with both income and sales-based revenue enhanced in the fourth quarter by the variable annuity sales incentive payment. Concerning this payment, sales-based revenue increased 11% from a 20% growth in commissionable sales.
Asset-based revenue grew consistent with the 6% increase in average client asset values. Sequential results also reflect an unfavorable Canadian segregated fund adjustment in the first quarter, compared with a favorable adjustment in the fourth quarter of 2011. On slide 12, you can see that corporate and other distributed products operating revenue decreased by 15% in the first quarter compared with first quarter a year ago, and operating losses before income taxes were $8.7 million in the first quarter and $4.7 million in the same period a year ago. Largely reflecting the $3.4 million lower allocation of investment income I previously discussed. Sequentially, corporate and other operating losses before income taxes were lower than in the fourth quarter, largely due to fourth-quarter charges related to the search of public death records and the liquidation plan for Executive Life Insurance Company of New York.
With that, I will turn the call back over to Rick.
Thanks, Alison. Primerica is a unique distribution company with a conservative balance sheet and a solid source of recurring income. We are proud of the efficient capital actions we've been able to execute during our short time as an independent public company. Our continued focus is on enhancing shareholder value through capital deployment as well as strategic sales force initiatives focused on long-term growth. With that, I'll open it up for questions.
Thank you, sir. 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're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. Again, to ask a question, please press star then one. At this time, we'll pause momentarily to assemble our roster. The first question we have comes from Steven Schwartz of Raymond James. Please go ahead.
Hey, I'm not quite sure how that happened. Good morning, everybody.
Good morning, Steve.
How are you?
Good, great, buddy.
I got a few. First, just Alison, you were going a little faster. The LOC fees that you were talking about in 2012, was that pre-tax or after tax?
That was pre-tax.
Those were pre-tax numbers. Okay.
Yes, they are.
One more number question for you. The Canadian seg fund adjustment that you had.
How much did that take away from earnings?
It wasn't that significant.
Okay.
It was less than $1 million. It's just it was positive in one period and negative in the other.
Okay.
Not outside of normal ranges.
Okay, great. Then, if I may, I'm wondering a couple of things here. First, it was leap year, we had an extra day. I'm trying to figure out how that may affect numbers like productivity and maybe the loss ratio.
It's Rick. On productivity, it really has very little impact. During the course of a quarter to quarter, we often have one additional day or one less day. It's not significant from a production standpoint.
Okay.
Alison, from a loss perspective?
Yeah, we wouldn't have seen anything.
Pardon me?
We wouldn't have seen anything consequential.
That wouldn't have been consequential. Just on, maybe John, you could talk about any new changes you might have in incentive plans for the sales force and Alison, maybe you can chime in if there are any, with regards to the DACable nature of those.
Hey, Steven, one thing I want to do is give you an award. Already started the first leap year question we've ever gotten. You went special.
This is the first leap year as a public company.
You haven't been public during a leap year.
That's right.
Hey, from a standpoint of new incentives and stuff, one of the things that as we looked at the sales force in the first quarter, we were pleased with recruiting, okay? Coming off of the fourth quarter, where after the kind of convention surge, we had an unusually slow fourth quarter. Fourth quarter is always slow. We're pleased with the trends that we see in licensing. As we're looking at new incentives and stuff right now, Steven, one of the things that when we had the surge after the convention and the big recruiting out of that, you and I have had conversations a number of times where this is an aim and adjust business. You're constantly trying to turn the battleship and look at things.
That recruiting, we saw a lot of things in that where there was not enough focus on licensing, that there was a focus on recruiting and kind of immediate production out of that, and that we needed to make some adjustments. In reality, our adjustments right now is we're not doing nearly the amount of month-to-month kind of, let's goose recruiting, let's do a big recruiting surge or whatever. We are very much trying to focus on long-term distribution growth, which means very focused on licensing. We're looking at a lot of things as we head toward later this year to improve the business and stuff.
We're very focused right now on the kind of making sure the long-term incentives are right for the sales force to be very focused on building distribution, building leadership, and growing their business, and are running a lot less of crazy John went insane with month-to-month kind of things, and we're more focused on the long-term. I can tell you right now, anything we're looking at, we're looking at with an eye toward DAC ability, and it's focused on productive agents and producing life insurance and growing the business and growing the sales force. Not because of DAC are we focused on that. We're focused on that for the long-term of the business. I can assure you the direction of things are in a fully DACable manner. I hope that kind of answers your question.
Yes, it does.
The next question we have comes from Sean Dargan of Macquarie.
Good morning.
Hey, Sean. How you doing, buddy?
Good, thank you. I've got a question relating to just the trend in the size of the sales force. I appreciate you have an increased effort in getting new life licensed reps out there, but it seems the non-renewal and terminated rep count kind of is a higher number. Year-over-year, we've seen the sales force contract. Is there any emphasis on trying to reduce the number of non-renewals and terminated reps?
I'll let Rick kind of talk about the Actually, a positive trend in the first quarter was that terminations were down year-over-year from the previous year. I'll let Rick kind of talk first, and then I'll talk more about things we're focused on.
Sean, just talk about terminations. The way that we look at terminations is the terminations in a quarter as a percentage of the balance of agents at the beginning of the quarter. In the first quarter of 2012, 10.1% terminated versus last year, 10.3% terminated. It was a slight improvement in terminations. The dynamic relative to the size of the sales force, and what really happened, you had both improved licensing and improved terminations, although the sales force still declined. The real dynamic behind that relates to the seasonality of the business. In the fourth quarter, as John mentioned, there's typically lower recruiting as a result of the December holidays. What that does is that impacts licensing in the first quarter.
You usually have lower number of licenses in the first quarter than you do for all the other quarters of the year, and therefore, the sales force has a bigger challenge in the first quarter than it does other quarters. Last year, the sales force declined 2,600 agents in the first quarter. This year it was 1,500. That improvement happened because we did better at licensing and better at terminations.
kind of as a follow-up on the question you asked about are there things we're looking at, I can promise you we're looking at everything. We're looking at terminations, we're looking at recruiting, we're looking at licensing. The thing I'll tell you, as you guys get to know more and more and more, and we have our long-term relationship of you following our company and stuff. The reality is, most of our terminations, which I even, in all honesty, I hate the word terminations because it sounds like firing people, but are really non-renewals of licenses. In some states, most states, it's a year, a lot of states it's two years.
by the time that a person gets to that point, they're having to pay to renew that license, and it's the people that have done a few things, and then they're not really productive or doing the business anymore. One of the positive, and who knows, I've quit trying to predict the economy and stuff, but one of the positive things we saw, as Rick said, was that was better this quarter than the same quarter a year ago because we have had pressure there from a standpoint of just people in our market. I've got to write a $300 check to such and such state.
Do I pay that or just say, "No, I'll let it expire." As I look at our incentives and look at our sales force incentives and what we're focused on, the big focus has to be on new licenses and growing new licenses, which again, as we said, we saw good trends in for a couple of quarters in a row now on licensing. Our approach right now is to stay very focused on that.
Okay, great. I think it's a related question. In terms of face amount, I realize there's some foreign currency impact, that contracted from the fourth quarter of 2011. Is there a seasonality in the issued term life face amount? I mean, should we expect that to improve over the course of the year?
Yes. This is a consistent trend. The first quarter is generally a lower issued quarter, actually that ties back into what I was discussing on the ceded premium trends.
Basically, the annual anniversaries of those policies. Very consistent, not unexpected, we would expect to see our normal seasonality, which would indicate higher levels in the next quarter.
Okay, great. Thank you.
Nice talking to you.
You, too.
The next question we have comes from Paul Sarran of Evercore Partners. Please go ahead.
Hey, good morning.
Hey, how you doing?
Good. I was wondering if you could give us any insight into how recruiting and licensing trends are shaping up so far in the second quarter.
Rick, I'll always give my caveat. We don't give guidance. Okay. Licensing trends, which is our main focus, I think we still feel very good about. Okay. I say very. We feel good about our licensing trends. On the recruiting front, as I look at things, it is really way too early to tell as we look at things. I'll just say this to you guys, that one of the things I think that it, again, I'm sure I've used, because I always use the same analogies, the whack-a-mole analogy here of you focus on one thing and something else pops up. We are incredibly focused right now on long-term licensing growth in our sales force. As I said to, I think, Steven's question. We are not doing. For example, we're finishing a contest right now, okay, to the broad more.
In contests the last few years, I was constantly doing things of triple credit recruit month and double credit recruit month and stuff like that. We're not doing that right now, okay. One of the things I reached a conclusion of after the convention and after the surge was that our focus had to be, for our field force, very laser beam-focused on licensing and building distribution. Okay. It's one of these things, the loudest voice kind of thing gets heard. If there's a thing I'm following and looking at right now as I go, "What's going to happen with recruiting with that focus?" It's really too early to tell, okay. The licensing trends continue to be positive. A long-term thing on that is we got to have strong recruiting, too.
It's kind of the walking and chewing gum at the same time sort of thing that makes life tough. I will say that right now, the trends on licensing continue in the manner with what we saw for the first quarter.
Okay. I appreciate that. Another question on life sales. Are you able to quantify the contribution, if there was any contribution of faster application processing with the TermNow product that had on the 8% sales growth year-over-year?
Yes, we are. In rough terms, the 9% year-over-year is about half production volume and about half acceleration of issuance this year versus last year as a result of TermNow.
Okay, great. One last question on mortality. When you use terms like slightly unfavorable this quarter and favorable last quarter, can you help us understand that a little bit more specifically, maybe put in terms of actual versus pricing as a ratio or some other metric?
Yeah, I'm trying to think. I don't think we've actually given you those metrics on an assumed basis. Generally, when I speak in the terms of slightly, I'm talking in the range of one, less than $2 million of variance, which may or may not mean it all happened in this period. It's really looking at the change, the delta year-over-year. You're talking about, generally speaking, the $1 million-$2 million range of exposure. When I use those terms, it's really because I don't see anything that's an outlier or indicative of an ongoing change or anything that we have concerns about. Obviously, there is variability within the business. We minimize that as much as possible through our extensive reinsurance programs.
We do have, especially like I mentioned with Canada, we do have several issue years where we had no reinsurance outstanding. A slight change in experience can cause some volatility. Again, I would reiterate that it's anywhere from a $1 million-$2 million impact and nothing that I would say is indicative of an ongoing trend.
Okay. When you say unfavorable, what are you using as a benchmark? I would think the block as a whole is still favorable to original pricing assumptions.
Absolutely. When we say unfavorable, it's vis-a-vis all of our, I'll call them tabular assumptions, when you look at all the issue years. You have the tabular assumptions versus what we would have assumed as we build our view towards economics, obviously, which changes very much over time. If you look at perhaps what we're using for our current pricing assumption, that might be a decent proxy versus what we may have used as a pricing assumption back in 1992. Vis-a-vis our current view towards pricing or mortality pricing, those are what the favorable versus unfavorable would generally allude to.
Okay, thanks.
The next question we have comes from Jeff Schuman of KBW.
Thanks. Good morning.
Hey, Jeff.
A few questions about the letter of credit. The $5 million cost this year, can you give us any kind of a ballpark for next year? I assume it goes higher, and can you remind us what year the letter of credit and the costs are expected to peak, please?
I'm sorry. I missed the very last part of your question, but I'll try to answer at least what I heard as the first part. The letter of credit will rise to just about $500 million, right over $500 million. It peaks at the end of 2014, beginning 2015, and then will start to come down. What I've quoted you is the rate for 2012. You can expect to see some increases between 2012 and say 2014, and then those fees will start coming down. On the average, I think what we said in our earlier press release was that we think it's about $3 million a year. In the near term, you will see some increases, but they will come back down starting 2015.
Okay, that's helpful. The geography by segment, how much of it hits new versus legacy?
Oh, that's a really good question. It's going to be a mix. It will be largely the legacy piece. I have to give that some thought for a second. It's going to be hard for you to see because we are going to have those fees embedded in our interest expense line. Our investment income line is going to be shifting the allocation between term life and corporate and other just based on the statutory requirements. From a net perspective, I'm not sure you're going to see much of a change, but you will see it coming through interest expense. I would think that since the business that we put in this program covers through 2010, you're going to see most of it going towards legacy.
Okay. You ballparked the potential statutory dividend next year, $130-$160. Can you give us just a reminder on the more comprehensive picture? The other sources would be primarily what, ISP earnings?
Sure.
What are the major uses against that?
Sure. The other sources, obviously, you look at the two segments. Just to be clear on cash flow perspective or free cash flow, our segment presentation does differ from our legal vehicle presentation or true legal vehicle financial statements. We do think that we would have on an ongoing basis, somewhere in the range of $30 plus million of free cash flow, potentially even higher, depending on what we do ultimately with shareholder dividends. At our current dividend pace, it would be in excess of that. That's just what's generated out of those non-life businesses. We also have accumulated some level of excess capital within those businesses as well. I think it'll be fairly transparent as we move forward as we are trying to move all of those funds to the holding company level on an ongoing basis.
I'll be able to disclose to you what we've in fact moved to the holding company to ready ourselves for anything, future capital actions.
I'm sorry. The non-insurance company sources are about $30? Is that what you said?
At today's dividend capacity, I'd say it's dividend. Excuse me. At today's shareholder dividend rate, I'd say it's actually higher than that. With that said, I don't know, per se, we've mentioned in the past that our goal would be to gradually raise our ongoing shareholder dividend to something that's more in line with our peer group. We do have to weigh how much we'd like to use that free capital for a true ongoing shareholder dividend payment versus some kind of other form of capital action.
Okay, that's helpful. The $30 is a net number that's all inclusive of sources and uses outside of the insurance dividend?
That is correct. Again, and it does assume potentially some increase over time in our shareholder dividend payments.
Understood. Thank you very much.
The next question we have comes from Mark Hughes of SunTrust.
Yeah, thank you very much. I don't know if you touched on this earlier, the mutual fund sales, was there any trend through the quarter? Did they get better or worse perhaps? Just any observations you might have about your ability to sell those products with the economy where it is now, where the markets are at now. Just be curious to get your thoughts.
Yeah. Our mutual fund business is related to the retirement business and the IRA business. What you have is it gets just because of the way the IRA and RSP season works. You get stronger months February, March than you have in January. If you're referring to what was happening actually in the marketplace itself, we did not see it strengthen or decrease as it related to what was going on in the marketplace. Again, we do lag the marketplace itself. Three to six months, whatever's happening in the marketplace this month impacts our sales three to six months later on. There was no discernible trends there.
Right. I think one of the things that is on the kind of more macro level, we are spending a lot of effort here to improve and shine a light more on our investment and savings business. As we've told you all before, launching the new annuity with Lincoln, which our sales force really likes and has gone well as we've gone out and launched it. One of the things that we believe as I was mentioning about our event in Washington, D.C., is that focusing and growing and making our business better for our independent representatives to do the investment savings business long term is an incredibly important piece of our plan. Our view is we want to make that a more and more important piece of our business.
As we talked in D.C., having the ability to sit down with families in the true mainstream market and deliver mutual funds, deliver annuities, and build our platform, which makes that business better and better for our regional vice presidents is very important. We talk a lot about recruiting. We talk a lot about life licensing. We talk about all those things so much on these things. Building that business and making it better for our people is an incredibly important piece of what we're working on.
Right. I did want to say, I always thought there was a lot of danger on that February 29th.
Other questions?
I have none, sir. It appears that we have no further questions. We'll go ahead and conclude our Q&A session. I'll go ahead and turn the conference back over to management for any closing remarks.
Okay, thank you very much. We appreciate your following us and we'll talk to you next quarter.
See you later, guys. Talk soon.
We thank you all for your time. The conference call is now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you.