Primerica, Inc. — FY 2012 Form 10-K
Business and period. Primerica distributes term life insurance, mutual funds, annuities and other financial products to middle-income households in the United States and Canada, primarily through independent representatives. This summary covers the fiscal year ended December 31, 2012; quarterly data also includes the three months ended December 31, 2012. The financial statements received an unqualified audit opinion from KPMG.
Financial performance and position
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Total revenue | $1,190.7 million | $1,103.1 million | +8% |
| Net premiums | $604.2 million | $526.4 million | +15% |
| Commissions and fees | $427.8 million | $413.0 million | +4% |
| Net investment income | $100.8 million | $108.6 million | -7% |
| Income before income taxes | $266.9 million | $243.9 million | +9% |
| Net income | $173.8 million | $157.2 million | +11% |
| Diluted EPS | $2.71 | $2.08 | +30% |
The diluted EPS increase was aided by a lower weighted-average share count following repurchases. Net income was approximately 14.6% of revenue in 2012, versus 14.3% in 2011. The effective tax rate was 34.9%, compared with 35.6%.
- Segments: Term Life Insurance pretax income was $188.8 million, up 16%; Investment and Savings Products pretax income was $121.1 million, up 3%; Corporate and Other Distributed Products recorded a $43.1 million pretax loss, versus a $35.6 million loss.
- Business indicators: Investment and savings product sales rose 10% to $4.712 billion; year-end client account assets increased 11% to $37.386 billion. Term life policies issued fell to 222,558 from 237,535, while face amount in force rose 1% to $670.4 billion. Licensed representatives numbered 92,373 at year-end.
- Cash flow: Operating cash flow was $120.0 million, compared with $87.2 million. Investing activities provided $66.6 million and financing activities used $211.1 million. Year-end cash and cash equivalents were $112.2 million.
- Balance sheet and debt: Total assets were $10.338 billion, liabilities $9.062 billion and shareholders’ equity $1.275 billion. Investments totaled $1.957 billion; future policy benefits were $4.850 billion; amounts due from reinsurers were $4.005 billion. Notes payable were $374.4 million. The debt-to-capital ratio was 22.7%.
- Quarterly results: Q4 2012 revenue was $304.5 million, pretax income $60.9 million, net income $40.3 million and diluted EPS $0.67. Q4 2011 net income was $37.2 million and diluted EPS $0.51.
Material changes versus 2011
- Term life revenue and pretax income grew as newer retained business accumulated and the older block subject to Citigroup coinsurance ran off. Ceded premiums declined 2%, while net premiums increased 15%.
- Term life benefits and claims rose 21% and DAC amortization rose 17%, reflecting business growth and higher incurred claims; management also cited reprocessed reinsurance transactions that increased both premiums and claims.
- Investment and savings sales benefited from new fixed indexed annuity and managed-account offerings, higher mutual fund sales and improved markets. Average client assets rose 3%; year-end assets rose 11%.
- Recruiting fell to 191,752 from 244,756, following a 2011 surge after convention incentives. Licensed representative count nonetheless increased, which management attributed partly to improved licensing conversion.
- Net investment income declined with a smaller average invested asset portfolio. The fixed-maturity portfolio’s average book yield decreased to 5.32% from 5.52%.
- In July, Primerica issued $375 million of 4.75% senior notes due 2022 and repaid its $300 million, 5.5% Citigroup note. Share repurchases totaled approximately $268 million in cash during 2012; dividends paid were $14.7 million.
Outlook, risks and unusual items
- Outlook: The filing gives no quantified earnings or revenue guidance. Management expected business cash flows and potential funding sources to cover liquidity needs over the next 12 months. It warned that prolonged low interest rates could reduce portfolio yields as investments mature and are replaced at lower rates.
- Reinsurance and capital: Approximately 89% of life insurance in force was ceded. The $4.005 billion reinsurance receivable includes $2.505 billion from Prime Re, which is not rated; the filing describes collateral, recapture rights and Citigroup support arrangements. Reinsurer nonperformance remains a significant exposure. In 2012, Peach Re obtained a 14-year Deutsche Bank letter of credit initially sized at $450 million, potentially increasing to $510 million, to support Regulation XXX reserves.
- Market and currency risk: A hypothetical 100-basis-point parallel rise in interest rates was estimated to reduce fixed-maturity fair value by $66.5 million, or about 4%, before any liability offset. A 10% decline in the Canadian dollar was estimated to reduce annual pretax income by $6.1 million. Canada generated 19% of 2012 revenue excluding realized investment gains.
- Legal and regulatory contingencies: The company reported 22 pending FINRA arbitrations, eight state-court lawsuits and one federal lawsuit involving allegations about recommendations to transfer Florida Retirement System benefits; 94 claimants were identified, with additional claims possible. Management said it would defend the claims but could not reasonably estimate a loss range. Unclaimed-property audits by multiple jurisdictions and West Virginia litigation were also ongoing; potential costs or liabilities could not be estimated.
- Accounting and other items: Retrospective adoption of ASU 2010-26 reduced reported prior-period DAC and net income; the filing states adoption had no cash-flow or required-capital impact. The company also cited $2.9 million of Q4 legal expense related to the Florida retirement-plan claims. The new Duluth headquarters was expected to be ready in the first half of 2013, under a 15-year lease.
- Other risks: Key risks include recruitment and licensing, independent-contractor classification, sales-practice compliance, suitability and fiduciary-rule changes, client-data security, mortality and persistency deviations, investment credit quality, regulatory capital and dividend restrictions, and economic conditions.
Most important facts for investors to verify
- Whether term-life growth and higher claims develop in line with pricing assumptions, persistency expectations and reserve adequacy.
- The credit support, collateral sufficiency and performance of major reinsurers, particularly Prime Re and other Citigroup affiliates.
- Developments, legal costs and potential outcomes in the Florida Retirement System cases and unclaimed-property audits and litigation.
- Whether investment and savings sales and client assets continue to grow, and how market performance, redemptions and product mix affect recurring fees.
- Insurance-subsidiary statutory capital, dividend capacity and the terms and continuing availability of the Peach Re letter of credit.
- Impact of low reinvestment yields, interest-rate changes and Canadian-dollar movements on earnings and capital.
- That 2012 results are affected by retrospective DAC accounting changes; comparisons with periods before the 2010 reorganization and reinsurance transactions are not directly comparable.