Primerica, Inc. — Q2 2014 Form 10-Q
Business context and period: Primerica distributes term life insurance and investment and savings products to middle-income households in the U.S. and Canada. This unaudited filing covers the quarter and six months ended June 30, 2014; comparisons are with 2013. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $331.1 | $303.5 | $655.5 | $601.9 |
| Income from continuing operations | $49.3 | $43.2 | $92.8 | $81.3 |
| Net income | $49.3 | $43.5 | $94.4 | $82.3 |
| Diluted EPS | $0.89 | $0.74 | $1.69 | $1.39 |
| Calculated pretax margin | 22.9% | 22.1% | 21.8% | 20.9% |
| Calculated net margin | 14.9% | 14.3% | 14.4% | 13.7% |
- Revenue and earnings: Q2 revenue rose 9% and continuing income rose 14% year over year. Net premiums increased 10% and commissions and fees increased 13%. Growth reflected term policies not subject to the Citigroup reinsurance transactions, higher investment-product sales and stronger client asset values.
- Segments: Q2 Term Life revenue increased 9% and pretax income increased 6%; Investment and Savings Products revenue increased 13% and pretax income increased 31%. Corporate and Other revenue fell 11%, and its pretax loss widened to $15.4 million.
- Cash flow: For the first half, operating cash flow was $70.5 million, versus $52.5 million in 2013. Investing activities used $17.4 million, compared with providing $129.5 million; financing activities used $51.2 million, versus $175.1 million. Cash increased $1.4 million to $150.6 million.
- Balance sheet and liquidity: At June 30, total assets were $10.59 billion and stockholders’ equity was $1.30 billion. Cash was $150.6 million; due from reinsurers was $4.08 billion. Notes payable were $374.5 million. The company reported a 22.3% debt-to-capital ratio, no short-term borrowings, and compliance with debt covenants. Separate-account assets and liabilities were each $2.58 billion.
- Debt and capital returns: The $375 million senior unsecured notes bear 4.75% interest and mature July 15, 2022. First-half dividends paid were $13.4 million and common-stock repurchases were $41.2 million. The quarterly dividend declared was $0.12 per share.
Material changes and operating developments
- Q2 term-life policies issued increased to 59,569 from 57,622; the average monthly issuance rate per licensed representative remained 0.21. The licensed sales force reached 96,596 at June 30.
- Investment and savings product sales were $1.44 billion in Q2, up 9%; average client asset values rose 16% to $46.6 billion, mainly reflecting favorable markets. First-half product sales increased 6% to $2.85 billion.
- Q2 benefits and expenses rose 8%, below revenue growth of 9%. Higher claims, sales commissions and DAC amortization were partly offset by lower operating expenses, including lower legal costs related to the Florida Retirement System matter.
- First-half net income included $1.6 million after tax from discontinued operations, principally a gain on the sale of the disability-benefit business. Q2 2014 had no discontinued-operations income.
- Investments in available-for-sale fixed maturities and equities had net unrealized gains of $138.5 million at June 30, versus $99.0 million at December 31, 2013. Management attributed most unrealized losses to interest-rate sensitivity and stated it did not intend to sell the affected investments.
Outlook, risks, contingencies and unusual items
- Outlook: No quantified earnings or revenue guidance is provided. Management expects business cash flows to meet operating liquidity needs over the next 12 months and says cash flows and potential funding sources should support longer-term needs. It also expects revenue and earnings growth to decelerate over time as the in-force life book grows and new sales have a smaller marginal effect.
- Reinsurance and reserve financing: Approximately 88% of direct life insurance in force was ceded at June 30. Prime Re, an unrated Citigroup affiliate, accounted for $2.60 billion of reinsurance receivables. Reinsurance does not release Primerica from its obligations to policyholders, leaving counterparty and concentration risk.
- Post-quarter transaction: On July 31, 2014, Primerica Life entered a coinsurance agreement with newly formed captive Vidalia Re. A related financing structure uses notes initially totaling approximately $170.4 million, with maximum principal amounts expected to be about $680 million each based on estimated reserves. The arrangement is non-recourse to Primerica, although the Parent agreed to support Vidalia Re’s credit-enhancement fee.
- Legal and regulatory matters: The company reported targeted unclaimed-property audits by 30 jurisdictions and a market-conduct examination by six jurisdictions concerning claims practices; potential costs could not be reasonably estimated. The West Virginia Treasurer’s suit was dismissed and appealed. The FRS settlement was largely funded or transferred to a third party by June 30; Primerica stated it had not guaranteed the transferred deferred-annuity liability.
- Canadian licensing risk: A planned licensing examination program for Canada in early 2016 could reduce new life-agent licensing and adversely affect Canadian sales. Primerica filed court applications in Ontario and Saskatchewan seeking to invalidate the agreements implementing the program; the impact is not quantifiable.
- Other risks: Results depend on recruitment and licensing, mortality and persistency experience, investment yields and credit quality, reinsurer performance, regulation, market conditions and Canadian-dollar movements. The fixed-maturity portfolio was rated A on average; 48% was BBB and 5% below investment grade.
Key facts investors should verify
- Whether continued revenue and EPS growth is supported by underlying sales and earnings, rather than favorable market movements or discontinued-operation gains.
- Trends in life-force recruitment, licensing, policy issuance, persistency, claims and DAC amortization, including the effects of the Canadian licensing dispute.
- Collectability and concentration of the $4.08 billion reinsurance receivable, particularly exposures to unrated Citigroup affiliates.
- The final terms, reserve support, accounting and economic risks of the Vidalia Re financing established after quarter-end.
- Potential exposure from unclaimed-property reviews, claims-practices examinations and other legal or regulatory proceedings.
- Whether investment yields, credit quality and liquidity remain adequate as the fixed-maturity portfolio’s average duration and unrealized values change.