Primerica, Inc. — Q3 2013 Form 10-Q
Business context and period. Primerica distributes term life insurance and investment and savings products to middle-income households in the United States and Canada. This unaudited filing covers the three and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods unless noted.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $319.5 million | $299.1 million | $940.2 million | $886.2 million |
| Income before tax | $66.6 million | $70.6 million | $194.2 million | $205.9 million |
| Net income | $43.2 million | $45.6 million | $125.5 million | $133.5 million |
| Diluted EPS | $0.78 | $0.72 | $2.16 | $2.05 |
| Operating cash flow | Not separately stated for the quarter | $90.6 million | $102.7 million |
- Q3 revenue rose 7%, while pretax income fell 6% and net income fell 5%. Nine-month revenue rose 6%, while pretax income and net income each declined 6%.
- Calculated net margin was approximately 13.5% in Q3 2013 versus 15.2% in Q3 2012, and 13.3% for the first nine months of 2013 versus 15.1% in 2012.
- Q3 diluted EPS increased despite lower net income, alongside a reduction in weighted-average diluted shares to 55.0 million from 61.6 million. The company repurchased shares and warrants during the period.
- At September 30, total assets were $10.20 billion, total liabilities $9.00 billion, and stockholders’ equity $1.20 billion. Cash and cash equivalents were $147.5 million, up from $112.2 million at December 31, 2012.
- Notes payable were $374.5 million, comprising $375 million of 4.75% senior notes due in 2022. Debt-to-capital was 23.9%; the company reported compliance with debt covenants and no short-term borrowings.
- For the first nine months, investing activities provided $125.2 million and financing activities used $180.0 million. Financing uses included $101.1 million of common-stock repurchases, $68.4 million of warrant repurchases, and $18.9 million of dividends.
Business and segment changes
- Term Life Insurance: Q3 revenue increased 9% to $177.8 million and pretax income increased 5% to $50.1 million. Nine-month revenue rose 8% to $514.8 million and pretax income rose 4% to $147.2 million. Growth in newer term policies and better persistency supported results; benefits, claims, and insurance expenses also increased.
- Investment and Savings Products: Q3 revenue increased 13% to $114.7 million, while pretax income was nearly flat at $31.5 million. Nine-month revenue rose 11% to $336.8 million, while pretax income declined 5% to $85.3 million. Product sales rose 14% in Q3 and 13% year to date; average client asset values increased 15% and 13%, respectively, aided by favorable markets. Higher commissions and operating expenses constrained earnings.
- Corporate and Other Distributed Products: Q3 revenue declined 23% to $26.9 million and pretax loss widened to $15.1 million from $8.6 million. Nine-month revenue declined 16% to $88.6 million and pretax loss widened to $38.3 million from $26.0 million, largely reflecting lower investment income and realized gains.
- Term life policies in force ended the quarter at $676.4 billion of face amount, up 1% year over year. New policies issued were 53,997 in Q3, compared with 53,506; year-to-date issuance declined to 161,975 from 170,234.
Outlook, risks, and unusual items
- Management said business cash flows and potential funding sources were expected to provide sufficient liquidity for operating requirements over the next 12 months and long-term needs. No specific earnings or revenue guidance was provided.
- Management cited recruiting, licensing and retention of sales representatives; insurance pricing, mortality and persistency; interest rates, credit and investment valuations; reinsurance performance; regulation; and access to subsidiary dividends as important risks.
- Approximately 89% of life insurance in force was reinsured. Due from reinsurers was $4.03 billion, including $2.56 billion due from Prime Re and $350 million from Financial Reassurance Company 2010, Ltd., both affiliated with Citigroup and not rated by A.M. Best. Reinsurance does not release Primerica from its obligations to policyholders.
- Investment fair values declined as interest rates rose: fixed-maturity securities available for sale had $331.3 million of cost basis above fair value at September 30, versus $111.9 million at year-end 2012. The company attributed most unrealized losses to interest-rate sensitivity and said it had the ability and intent to hold the investments; Q3 recognized $0.35 million of net impairment losses in earnings.
- Legal and regulatory matters include 23 pending FINRA arbitrations and 32 related state-court lawsuits over recommendations involving Florida Retirement System benefits, plus appeals. The company reported 81 total claimants across proceedings, believed it had meritorious defenses, but could not reasonably estimate potential losses.
- Unclaimed-property audits by 30 jurisdictions and claims-practice examinations by six jurisdictions are ongoing; Primerica Life is also a defendant in a West Virginia unclaimed-property suit. Potential costs or liabilities could not be reasonably estimated.
- The company repurchased 2.49 million shares and warrants covering 4.10 million shares from Warburg Pincus for approximately $154.7 million in June 2013. It funded the transaction in part with a $150 million dividend from Primerica Life.
Important facts for investors to verify
- Whether revenue growth in term insurance and investment products translates into sustained profit growth as acquisition costs, claims, and operating expenses evolve.
- Reinsurer credit quality, especially the large affiliated Citigroup exposure, and the company’s capacity to meet policy obligations if recoveries are delayed or impaired.
- Developments, costs, and potential liabilities from the Florida Retirement System proceedings and multi-state unclaimed-property audits and examinations.
- Effects of further interest-rate or credit-spread changes on investment values, investment income, and statutory capital.
- Whether recruiting, licensing, sales-force retention, client asset values, and policy persistency continue to support the company’s operating assumptions and liquidity outlook.