Primerica, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparisons are to the corresponding 2014 periods unless otherwise noted. Primerica distributes term life insurance and third-party investment and savings products, primarily to middle-income households in the U.S. and Canada.
Financial performance and condition
| Metric | Q2 2015 | Q2 2014 | Change |
|---|---|---|---|
| Total revenue | $350.9 million | $331.1 million | +6% |
| Pre-tax income from continuing operations | $76.8 million | $75.7 million | +1% |
| Net income | $49.2 million | $49.3 million | Approximately flat |
| Diluted EPS | $0.94 | $0.89 | +6% |
- Six-month revenue rose 6% to $696.0 million; pre-tax income increased 1% to $143.6 million. Net income was $92.6 million, down 2% from $94.4 million, which included $1.6 million from discontinued operations in 2014. Diluted EPS from continuing operations increased to $1.76 from $1.66.
- Q2 pre-tax margin was approximately 21.9% versus 22.9% a year earlier; net margin was approximately 14.0% versus 14.9%. The higher revenue base did not translate into comparable profit growth.
- Six-month operating cash flow was $85.3 million, compared with $70.5 million in 2014. Investing activities provided $6.9 million versus using $17.4 million; financing activities used $128.3 million, mainly reflecting repurchases and dividends. Cash declined $38.6 million to $153.9 million.
- At June 30, total assets were $10.78 billion and stockholders’ equity was $1.20 billion. Cash and investments totaled approximately $2.29 billion. The filing does not provide a conventional current-liquidity ratio.
- Debt included $374.6 million carrying value of senior notes and a $328.0 million surplus note. The senior notes carry 4.75% interest and mature in 2022; the surplus note carries 4.50% and matures in 2029. The company reported compliance with debt covenants and no short-term borrowings.
Material changes and operating trends
- Term Life Insurance revenue increased 9% in Q2 to $201.4 million; pre-tax income rose 4% to $57.3 million. Net premiums grew 10%, reflecting growth in business not subject to the Citigroup coinsurance transactions and run-off of ceded business. Claims rose 15%, partly because Q2 2015 claims were above historical levels while Q2 2014 claims were below them.
- Investment and Savings Products revenue increased 5% to $135.1 million and pre-tax income increased 5% to $37.7 million. Q2 product sales rose 9% to $1.57 billion; period-end client assets were $49.4 billion versus $48.0 billion a year earlier. Q2 market performance was negative, partly offset by positive net inflows.
- Corporate and Other Distributed Products reported a pre-tax loss of $18.2 million, compared with a loss of $15.4 million. Revenue fell 23%, mainly due to lower allocated investment income and a decline in the value of the deposit asset underlying a coinsurance agreement.
- Recruiting and production improved: Q2 new recruits were 60,246 versus 50,024; new life-licensed representatives were 10,439 versus 9,082; and new policies issued increased to 68,097 from 59,569. The licensed sales force reached 101,008 at quarter-end.
- The company repurchased 2.29 million shares for approximately $109.7 million in the first half under a $150 million 2015 program; approximately $40.3 million remained at June 30. Shares outstanding declined, helping support EPS growth despite nearly flat quarterly net income. Dividends declared were $0.16 per share in Q2 versus $0.12.
- Other comprehensive income was negative $18.5 million in Q2, versus positive $21.5 million in Q2 2014, mainly reflecting investment valuation changes. For the first half, other comprehensive loss was $29.8 million, compared with income of $24.4 million.
Outlook, risks and contingencies
- Management gave no specific earnings or revenue guidance. It expects business cash flows to provide sufficient operating liquidity over the next 12 months and believes cash flows and potential funding sources will support longer-term needs.
- Management cited positive recruiting and sales momentum, but identified a proposed Department of Labor fiduciary rule as a material uncertainty for qualified retirement accounts. In 2014, U.S. qualified plans represented an estimated 60% of average client assets and 57% of investment and savings product sales. Final rule terms and business impact were unknown.
- Canadian regulators planned a new life-insurance licensing examination program for early 2016. The company said it could reduce applicants’ ability to obtain licenses; the impact was not quantifiable. The company had filed legal applications challenging the program.
- Primerica relies extensively on reinsurance: 88% of direct life insurance in force was ceded at June 30. Due from reinsurers was $4.14 billion, including $2.69 billion due from Prime Re, which was not rated in the filing. Reinsurance does not eliminate the company’s primary obligation to policyholders.
- Legal and regulatory matters include multi-state unclaimed-property audits, a targeted claims-paying examination, and an appeal in West Virginia concerning unclaimed-property allegations. The company could not reasonably estimate the likelihood or impact of additional costs or liabilities.
- Investment risks include interest-rate, credit-spread, foreign-currency, liquidity and default exposures. The fixed-maturity portfolio’s average rating was A and average duration was 4.2 years; 49% of amortized cost was rated BBB and 5% below investment grade. Management reported no material change in market-risk exposures since year-end 2014.
- Management attributed higher first-half operating expenses in part to accelerated recognition of management equity awards for retirement-eligible employees. The timing provision affected expense recognition, not the total award expense. First-half impairment losses recognized in earnings were $0.9 million versus $0.4 million.
Investor facts to verify
- Whether claims experience normalizes and term-life profitability remains resilient as the in-force book grows and coinsurance business runs off.
- Final DOL fiduciary-rule requirements, related compensation or compliance changes, and any effect on retirement-account sales and representative retention.
- Reinsurer credit quality and concentration, particularly the large receivable from Prime Re and the other unrated reinsurer balances.
- Progress, outcomes and potential liabilities from unclaimed-property audits, the claims examination and West Virginia litigation.
- Capital and liquidity effects of continued share repurchases, dividend payments and the surplus-note financing as its principal amount may change with supported reserves.