Business Context and Reporting Period
Company: Primerica, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: Primerica is a leading distributor of financial products to middle-income households in the U.S. and Canada, utilizing a network of approximately 95,000 independent sales representatives. The company underwrites term life insurance and distributes mutual funds, annuities, and other financial products. In April 2010, the company completed its Initial Public Offering (IPO) and a corporate reorganization, separating from Citigroup Inc. ("Citi").
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total Revenues | $1,361.9 million | $2,220.4 million |
| Net Income | $257.8 million | $494.6 million |
| Earnings Per Share (Diluted) | $3.40 | N/A (Pro forma basis) |
| Total Assets | $9,884.3 million | $13,715.1 million |
| Total Liabilities | $8,452.8 million | $8,771.4 million |
| Stockholders' Equity | $1,431.5 million | $4,943.8 million |
| Debt (Note Payable) | $300.0 million | $0 |
| Cash and Cash Equivalents | $126.0 million | $602.5 million |
| Net Cash Provided by Operating Activities | $41.1 million | $716.3 million |
Note: 2010 results are not directly comparable to 2009 due to the corporate reorganization and significant reinsurance transactions with Citi affiliates executed in March/April 2010.
Material Changes Versus Prior Period
- Reinsurance Transactions: In March 2010, Primerica entered into coinsurance agreements with Citi affiliates, ceding 80% to 90% of the risks and rewards of term life insurance policies in force at year-end 2009. This resulted in a significant reduction in net premiums, benefits and claims, and deferred policy acquisition costs (DAC) on the income statement, and a substantial decrease in total assets and equity on the balance sheet.
- Corporate Reorganization: The company became a standalone public entity in April 2010. This involved the issuance of a $300 million note payable to Citi (the "Citi Note") and the distribution of significant assets and liabilities to Citi.
- Revenue Decline: Total revenues decreased 39% to $1.36 billion, primarily driven by a 51% drop in net premiums due to the reinsurance cessions and a 53% decline in net investment income due to the transfer of investment assets to Citi.
- Expense Reduction: Total benefits and expenses decreased 34% to $962.7 million, largely reflecting lower benefits and claims and DAC amortization associated with the reinsured business.
- Investment and Savings Growth: Despite the overall decline, the Investment and Savings Products segment saw a 21% increase in revenues to $361.8 million, driven by improved market conditions and higher asset values in client accounts.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects cash flows from existing business and investment products to provide sufficient liquidity for operating requirements. However, the reinsurance transactions reduced operating cash flows from the retained in-force book of term life insurance in the near-to-intermediate term. The company anticipates that growing premium revenue from policies issued after the reinsurance transactions will increase operating cash flows over the next few years.
Key Risks
- Reinsurance Counterparty Risk: Significant reliance on Citi affiliates for reinsurance; failure of these reinsurers to perform could materially adversely affect the company.
- Regulatory Changes: Potential impact of the Dodd-Frank Act, changes in fiduciary standards for broker-dealers, and new licensing requirements (SAFE Act) which have reduced the loan sales force.
- Sales Force Turnover: High attrition rates among part-time sales representatives; failure to recruit and license new representatives could materially affect business.
- Interest Rate and Market Risk: Exposure to interest rate fluctuations affecting the value of the fixed-maturity investment portfolio and foreign currency exchange risk related to Canadian operations.
Unusual Items
- Dividends to Citi: The company paid approximately $3.49 billion in dividends to Citi in 2010, primarily in connection with the corporate reorganization and transactions.
- Goodwill Impairment (2008): A $195 million goodwill impairment charge was recognized in 2008, which impacted the effective tax rate for that year but is not present in 2010.
Important Facts for Investor Verification
- Reinsurance Structure: Verify the terms and stability of the coinsurance agreements with Citi affiliates, as 90% of U.S. mortality risk is ceded, creating significant counterparty dependency.
- Liquidity Position: Confirm the company's ability to meet the $300 million Citi Note obligation (maturing March 31, 2015) and fund new business growth given the reduced cash flows from the reinsured book.
- Sales Force Metrics: Monitor the number of licensed sales representatives (94,850 at year-end 2010, down from 99,785 in 2009) and recruiting trends, as this is the primary distribution channel.
- Pro Forma Comparability: Recognize that historical financial data prior to April 2010 is not indicative of future standalone results due to the reorganization and reinsurance transactions.
- Regulatory Compliance: Assess the impact of new licensing requirements (SAFE Act) on the loan business and potential fiduciary standard changes on the investment products segment.