Primerica, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also presents unaudited quarterly results, including the quarter ended December 31, 2013. Primerica distributes term life insurance and investment and savings products, primarily through independent sales representatives, in the United States and Canada.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Total revenue | $1.267 billion | $1.191 billion | Up 6% |
| Income before taxes | $251.2 million | $266.9 million | Down 6% |
| Net income | $162.7 million | $173.8 million | Down 6% |
| Diluted EPS | $2.83 | $2.71 | Up 4% |
| Operating cash flow | $187.9 million | $124.3 million | Up $63.6 million |
- Net income margin was approximately 12.8%, compared with 14.6% in 2012; pretax margin was approximately 19.8%, compared with 22.4%.
- Net premiums increased 9% to $657.9 million, while commissions and fees rose 10% to $471.8 million. Net investment income declined 12% to $88.8 million.
- Term Life segment pretax income rose 6% to $197.2 million. Investment and Savings Products segment pretax income fell 13% to $105.1 million. Corporate and Other Distributed Products recorded a $51.2 million pretax loss, versus a $40.2 million loss.
- Investment and savings product sales rose 11% to $5.2 billion; period-end client account assets increased 20% to $45.0 billion, helped by market performance and higher sales. Term policies issued declined to 214,617 from 222,558; face amount in force grew to $674.9 billion.
- At year-end, total assets were $10.33 billion, including $149.2 million cash and cash equivalents and $1.84 billion investments. Stockholders’ equity was $1.22 billion. Future policy benefits were $5.06 billion.
- Notes payable were $374.5 million, principally $375 million of 4.75% senior unsecured notes due July 2022. Debt-to-capital was 23.5%; the company reported compliance with debt covenants and no short-term borrowings.
- Cash provided by operating activities was $187.9 million; investing activities provided $35.5 million and financing activities used $184.9 million. The company ended the year with $149.2 million cash and cash equivalents. Parent-company cash and invested assets were approximately $73.8 million.
Material changes and notable items
- Revenue growth reflected higher net premiums from newer term-life business, growth in investment product sales and client assets. The legacy block subject to Citigroup coinsurance continued to run off, supporting faster growth in net premiums than direct premiums.
- Despite higher revenue, net income declined as total benefits and expenses rose 10%, including higher claims, acquisition-cost amortization, sales commissions, insurance expenses and operating costs.
- Investment and Savings revenue increased 10%, but segment income fell as expenses grew 20%, including higher legal costs and a $15.7 million charge related to a potential settlement of Florida Retirement System (FRS) claims.
- Primerica repurchased approximately 2.5 million shares and warrants for an aggregate $154.7 million in June 2013. Annual dividends paid were $25.1 million, up from $14.7 million in 2012; dividends declared per share were $0.44 versus $0.24.
- Available-for-sale investment values declined as interest rates rose: net unrealized investment gains in accumulated other comprehensive income, excluding specified items, fell to $67.4 million from $115.0 million. The fixed-maturity portfolio’s average book yield declined to 4.93% from 5.32%.
Outlook, risks and contingencies
- Management gave no specific earnings or revenue guidance. It expected operating cash flows to provide sufficient liquidity for the next 12 months and stated cash flows and potential funding sources should support longer-term needs.
- Management plans to continue ceding approximately 90% of U.S. and 80% of Canadian mortality risk on new business. It intended to consider further redundant-reserve financing, but regulatory approval and availability are uncertain.
- The company depends on subsidiaries for dividends and distributions. Insurance-subsidiary dividends are subject to statutory and regulatory limits; Primerica Life had no ordinary dividend capacity immediately after its May 2013 dividend, though it expected capacity in May 2014.
- Risks include sales-force recruitment, retention and licensing; independent-contractor classification; regulatory and suitability compliance; mortality and policy persistency; investment and interest-rate movements; reinsurer creditworthiness; Canadian-dollar exposure; and cybersecurity or operational disruption. A proposed Canadian licensing examination system could raise agents’ licensing costs and difficulty.
- The FRS settlement remained contingent on acceptance by a minimum number of claimants. The company recorded $9.3 million for estimated claimant benefits and $6.4 million for related costs. Other legal and regulatory matters include multi-state unclaimed-property audits and claims-paying examinations; the company could not reasonably estimate additional exposure.
- In January 2014, NBLIC sold its short-term disability business for $3.0 million and expected to recognize an approximately $2.7 million gain in 2014. That business contributed $36.9 million revenue and $6.2 million pretax income in 2013.
- A 100-basis-point parallel rise in interest rates was estimated to reduce fixed-maturity fair value by $64.2 million. A 10% decline in the Canadian dollar was estimated to reduce FY2013 pretax income by $6.8 million.
Most important facts for investors to verify
- Whether investment-product growth and favorable market returns persist, and how sensitive fee revenue is to asset values and redemptions.
- Whether term-life policy issuance, persistency and claims experience support profitability and the assumptions underlying deferred acquisition costs and reserves.
- The concentration and collectability of reinsurance recoverables: $4.06 billion due from reinsurers, including $2.57 billion from unrated Prime Re, an affiliate of Citigroup.
- The outcome and total cost of the FRS matter and the multi-state unclaimed-property audits and claims examinations.
- Subsidiary dividend capacity, capital requirements and regulatory treatment of Peach Re’s letter of credit, which materially supports its statutory capital.
- Future share repurchases and dividends, and the parent company’s ability to fund them from subsidiary distributions while servicing its debt.
KPMG issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2013.