Primerica, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited results compared with Q1 2014 unless otherwise stated. Primerica distributes term life insurance and third-party investment and savings products in the U.S. and Canada.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total revenue | $345.1 million | $324.3 million; up 6% |
| Income before tax from continuing operations | $66.8 million | $66.8 million; essentially flat |
| Continuing-operations net income | $43.4 million | $43.5 million; essentially flat |
| Net income | $43.4 million | $45.1 million; down 4%, including $1.6 million discontinued-operations income in 2014 |
| Continuing-operations diluted EPS | $0.82 | $0.78 |
| Dividends declared per share | $0.16 | $0.12 |
| Operating cash flow | $66.4 million | $37.7 million |
| Cash and cash equivalents | $180.2 million at March 31 | $192.5 million at December 31, 2014 |
| Total assets / stockholders’ equity | $10.72 billion / $1.24 billion | At March 31, 2015 |
| Notes payable / surplus note | $374.5 million / $238.0 million | At March 31, 2015 |
Calculated pretax margin was approximately 19.4%, versus 20.6% in Q1 2014; continuing-operations net margin was approximately 12.6%, versus 13.4%. Revenue growth did not translate into higher pretax income as benefits and expenses rose 8% to $278.3 million. Net investment income was $21.2 million, down 2%; realized investment gains were $1.3 million.
Business trends and material changes
- Term-life segment revenue grew 8% to $198.4 million and pretax income rose 1% to $47.8 million. Net premiums increased 9%, as new business outside the Citigroup coinsurance arrangements grew and ceded premiums declined with runoff.
- Investment and Savings Products segment revenue rose 5% to $129.1 million and pretax income rose 3% to $35.0 million. Product sales increased 7% to $1.515 billion; average client assets increased 8% to $48.7 billion. Period-end client assets were $49.2 billion.
- New recruits increased to 53,300 from 48,306; new life-licensed representatives were nearly unchanged at 7,486. Life-licensed representatives totaled 98,145 at quarter-end. New term policies issued increased to 55,677 from 49,320.
- Corporate and Other Distributed Products recorded a pretax loss of $16.1 million, compared with a $14.4 million loss.
- Operating cash flow benefited principally from timing of coinsurance payments. Investing cash outflow was $26.6 million; financing cash outflow was $49.7 million, including $38.7 million of open-market share repurchases and $8.5 million of dividends paid.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expects business cash flows to meet operating liquidity needs over the next 12 months and believes cash flows and potential funding sources can support longer-term needs. U.S. insurance subsidiaries had statutory capital substantially above applicable requirements; Primerica Life Canada was in compliance with its minimum capital requirements.
- Management reported a $150 million 2015 share repurchase authorization; $111.3 million remained at March 31. The company repurchased 740,393 shares under the program during Q1.
- Management awards granted in February 2015 included retirement eligibility provisions, accelerating approximately $6.1 million of expense recognition compared with the prior-year quarter. Management said this primarily changes timing, not total compensation expense.
- The DOL’s April 2015 proposed fiduciary rule could require changes to compensation and compliance arrangements for retirement accounts; the impact was not quantifiable. Qualified retirement accounts represented a significant portion of the investment business.
- Canadian regulators’ planned 2016 licensing examination program could reduce representative licensing and affect Canadian sales; the company is challenging the related agreements in court.
- Primerica reported targeted unclaimed-property audits by 30 jurisdictions and market-conduct examinations of claims practices. A West Virginia unclaimed-property suit was dismissed, but the state appealed. Potential costs or liabilities could not be reasonably estimated.
- Reinsurance is significant: 89% of direct life insurance in force was ceded. Due from reinsurers was $4.09 billion, including $2.67 billion due from Prime Re, which was shown as not rated. Reinsurance does not relieve the company of its primary obligation to policyholders.
- Other relevant exposures include interest-rate, credit, foreign-exchange and investment valuation risks; Canadian-dollar weakness reduced reported balances. The filing reported no material change in market-risk exposures since year-end.
Most important facts for investors to verify
- Whether continuing revenue and policy growth can sustain earnings as benefits and expenses rise, and whether the Q1 expense increase from accelerated equity awards is primarily timing-related.
- The quality and collectability of the $4.09 billion reinsurance receivable, particularly the large balance due from unrated Prime Re and related counterparty exposure.
- Developments in DOL fiduciary-rule proposals, Canadian licensing requirements, and the unclaimed-property and claims-practices examinations, including any resulting costs or business changes.
- Cash generation and capital needs relative to dividends, planned share repurchases, debt service, and the growth of the Vidalia Re surplus note, whose principal may increase as supported reserves change.
- Investment portfolio performance and risk: average fixed-maturity rating was A, average duration 4.2 years, and 6% of amortized cost was below investment grade at March 31.