Primerica, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unaudited consolidated results compare with Q1 2011; balance-sheet figures compare with December 31, 2011. Primerica distributes term life insurance and third-party investment and savings products in the United States and Canada.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $286.6 million | $276.4 million | +4% |
| Income before tax | $63.5 million | $73.3 million | -13% |
| Net income | $41.8 million | $47.3 million | -12% |
| Diluted EPS | $0.61 | $0.62 | Down $0.01 |
| Net income margin | 14.6% | 17.1% | Down 2.5 percentage points |
| Operating cash flow | -$16.1 million | +$3.2 million | Down $19.3 million |
Revenue growth reflected higher net premiums, partly offset by lower investment income and commissions and fees. Expenses rose 10%, led by higher benefits and claims, DAC amortization, and insurance expenses. The effective tax rate declined to 34.2% from 35.5%. Basic EPS was $0.62 in both periods. Q1 2011 results were retrospectively adjusted for adoption of the new deferred acquisition cost accounting guidance.
Segments and operating indicators
- Term Life: Revenue increased 11% to $151.8 million, but pretax income fell 11% to $44.3 million. New policies issued rose 9% to 56,145, supported by the TermNow product; average face amount per new policy declined to about $244,100 from $260,000. Persistency remained below historical norms, though modestly improved.
- Investment and Savings Products: Revenue was nearly flat at $100.1 million; pretax income fell 7% to $28.9 million. Product sales increased 7% to $1.19 billion, while average client asset values declined 1% to $35.1 billion.
- Corporate and Other Distributed Products: Revenue declined 10% to $34.7 million; pretax loss widened to $9.7 million from $7.5 million, partly reflecting lower investment income and the discontinued lending business.
Financial position, debt and liquidity
- Total assets were $10.07 billion, up from $9.85 billion at year-end; stockholders’ equity was $1.39 billion, up from $1.33 billion. Cash and cash equivalents were $155.5 million.
- The company reported a $300 million Citi note bearing 5.5% interest and maturing March 31, 2015. The reported debt-to-capital ratio was 17.8%; the company said it was covenant-compliant, with no defaults.
- Operating cash flow was negative, which management attributed primarily to the timing of payments due to reinsurers. Investing activities provided $32.0 million; cash increased $19.5 million to $155.5 million.
- Due from reinsurers totaled $3.90 billion. Approximately 89% of direct life insurance in force was ceded. Prime Re, the largest listed counterparty, accounted for $2.46 billion of reinsurance receivables and was not rated by A.M. Best.
Outlook, material developments and risks
- No quantified earnings or revenue guidance was provided. Management said the April 2012 share repurchase would reduce invested assets and was expected to lower net investment income; it expected average book yield to increase modestly.
- Effective March 31, Primerica completed a Regulation XXX reserve financing arrangement through Peach Re. Deutsche Bank issued an initial $450 million letter of credit, potentially rising to $510 million by 2014. Estimated pretax fees are $5 million to $7 million annually in 2012–2018. The arrangement is non-recourse to Primerica and Primerica Life for draws, but the parent guaranteed facility fees.
- Primerica Life received approval for a $150 million extraordinary dividend to the parent, paid in April. Primerica used approximately $150 million to repurchase 5.7 million shares from Warburg Pincus at $26.15 per share, completing the transaction on April 26; Warburg Pincus retained approximately 18% ownership.
- Market risks include interest-rate sensitivity: a hypothetical 100-basis-point parallel rate increase was estimated to reduce fixed-maturity fair value by about $68.1 million, or 3%. A 10% decline in the Canadian dollar was estimated to reduce quarterly pretax income by about $1.6 million.
- FINRA arbitrations and two lawsuits allege improper recommendations concerning transfers from Florida’s defined-benefit retirement plan to its defined-contribution plan. Damages are unspecified; the company said it could not yet estimate the effect, if any, and intends to defend the claims.
- Other key exposures include mortality and persistency experience, reinsurance counterparty performance, investment credit and valuation risk, recruiting and licensing trends, and regulatory or legal actions. Management stated U.S. insurance subsidiaries had capital substantially above applicable requirements and the Canadian subsidiary met minimum capital requirements.
Important facts for investors to verify
- Whether new-policy growth and improving persistency continue, and how mortality, claims and DAC amortization affect term-life profitability.
- The collectability and concentration of reinsurance receivables, especially balances with unrated counterparties, and the operation and cost of the Peach Re facility.
- The impact of the $150 million dividend and share repurchase on liquidity, investment income, capital ratios and share count.
- Developments in the Florida retirement-plan arbitrations and lawsuits, including any estimable loss or material change in exposure.
- Investment portfolio credit quality and sensitivity to interest rates, credit spreads and Canadian currency movements.