Primerica, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 26, 2015. The filing also reports fourth-quarter results. Primerica distributes term life insurance and third-party investment and savings products to middle-income households in the United States and Canada, primarily through an independent sales force. At year-end, it had approximately 98,000 licensed insurance representatives, insured more than 4.3 million lives, and serviced approximately two million investment accounts.
Financial performance
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $1.340 billion | $1.231 billion | +9% |
| Income before tax from continuing operations | $275.7 million | $245.0 million | +13% |
| Income from continuing operations | $179.8 million | $158.7 million | +13% |
| Net income, including discontinued operations | $181.4 million | $162.7 million | +11% |
| Diluted EPS | $3.29 | $2.83 | +16% |
| Operating cash flow | $237.6 million | $187.9 million | +$49.7 million |
Revenue growth reflected higher net premiums and investment-product commissions and fees. The pretax margin from continuing operations was approximately 20.6%, compared with 19.9% in 2013. Net investment income declined 3% to $86.5 million; realized investment results shifted from a $6.2 million gain to a $0.3 million loss. The effective tax rate was 34.8%.
Segments and operating trends
- Term Life: Revenue rose 9% to $759.3 million; pretax income increased 2% to $201.0 million. Net premiums grew 11% as newer policies not subject to the 2010 Citigroup coinsurance transactions accumulated and ceded premiums on the older block ran off. The company issued 220,984 policies, and face amount in force increased to $681.9 billion.
- Investment and Savings Products: Revenue rose 12% to $512.1 million and pretax income increased 39% to $146.0 million. Product sales grew 9% to $5.68 billion; average client assets increased 14% to $46.9 billion, supported by sales and favorable market returns.
- Corporate and Other Distributed Products: Pretax loss widened to $71.3 million from $57.3 million, mainly reflecting lower investment income and the shift from investment gains to losses.
Balance sheet, debt, and capital
At December 31, 2014, total assets were $10.74 billion, cash and cash equivalents $192.5 million, investments $2.07 billion, and stockholders’ equity $1.25 billion. Assets and liabilities include $2.44 billion of Canadian separate-account assets and matching liabilities. Due from reinsurers was $4.12 billion, while future policy benefits were $5.26 billion.
Parent-company cash and invested assets were approximately $194.5 million. The company reported $375 million principal amount of 4.75% senior unsecured notes due in 2022, and $220 million of subsidiary surplus notes issued in connection with a reserve-financing arrangement. The surplus-note financing is non-recourse to the Parent Company and Primerica Life. The company reported compliance with debt covenants and no short-term borrowings. Insurance subsidiaries reported capital above applicable regulatory thresholds; Primerica Life’s estimated ordinary dividend capacity at January 1, 2015 was approximately $9.8 million, and Primerica Life Canada’s estimated capacity was approximately $114.8 million, subject to regulatory and other conditions.
Cash flow, shareholder returns, and unusual items
- Operating cash flow increased to $237.6 million. Investing activities used $15.6 million; financing activities used $175.9 million, including $147.9 million of share repurchases and $26.5 million of dividends.
- In November 2014, the Board authorized up to $150 million of share repurchases during 2015. The company paid $0.48 per share in dividends during 2014 and declared a $0.16 quarterly dividend for the first quarter of 2015.
- In January 2014, NBLIC sold its short-term disability business for $3.0 million and recognized a $2.4 million pretax gain; the business is reported as discontinued operations. NBLIC also stopped marketing new student life policies but continues to administer the existing block.
- 2014 included $4.0 million of investment impairment losses and accelerated equity-award expense and Co-CEO transition costs. The Investment and Savings segment’s 2013 expenses included approximately $27.1 million related to Florida Retirement System claims and settlement costs.
Outlook, risks, and contingencies
Management stated that business cash flows were expected to provide sufficient operating liquidity for the next 12 months and believed cash flows and potential funding sources would support long-term needs. The filing provides no specific earnings or revenue guidance. Management noted that growth and profitability depend on recruiting and licensing representatives, insurance persistency and mortality, client-asset values, interest rates, and economic conditions.
Key risks include regulatory changes affecting the independent-contractor distribution model; a proposed Canadian licensing examination program that could reduce new licensed representatives; possible changes to fiduciary standards and compensation rules for retirement accounts; dependence on a limited number of investment-product providers; market, interest-rate, credit, currency, and reinsurer risks; and legal, compliance, privacy, and cybersecurity exposures. The company was subject to targeted multi-state unclaimed-property audits and claims-paying examinations; West Virginia’s appeal of a dismissed unclaimed-property suit remained pending. The company said it could not reasonably estimate potential additional costs or liabilities from these matters. It also challenged the proposed Canadian licensing arrangements in court.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls as of year-end.
Important facts for investors to verify
- Whether client-asset growth and investment-product sales persist if market returns weaken, and the effect on fee revenue and redemptions.
- Reinsurance counterparty exposure: 89% of life insurance in force was ceded, and major Citigroup-affiliated reinsurer balances were unrated.
- Progress and outcomes of the Canadian licensing litigation and unclaimed-property audits and examinations, including any resulting costs or changes to claims procedures.
- Parent-company liquidity and dividend capacity, including the extent to which regulated subsidiaries can continue to distribute cash while maintaining capital requirements.
- Execution and funding of the 2015 repurchase authorization, alongside dividend payments and other capital needs.