Primerica, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Primerica distributes term life insurance and third-party investment and savings products to middle-income households in the U.S. and Canada. Figures below are in millions of dollars except per-share data and where noted.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $312.3 | $300.5 | $620.8 | $587.1 |
| Income before tax | $67.4 | $71.9 | $127.7 | $135.4 |
| Net income | $43.5 | $46.2 | $82.3 | $87.9 |
| Diluted EPS | $0.74 | $0.72 | $1.39 | $1.33 |
| Net income margin, calculated | 13.9% | 15.4% | 13.3% | 15.0% |
Revenue increased 4% for Q2 and 6% for the first half, while net income decreased 6% in both comparisons. Higher commissions and fees and net premiums were offset by higher expenses and lower investment income. The effective tax rate was 35.5% for Q2 and the first half, versus 35.8% and 35.1%, respectively, in 2012.
- Term Life: Q2 revenue rose 4% to $169.2 and pretax income was $51.9, up 1%. First-half revenue rose 8% to $337.0 and pretax income rose 3% to $97.0. New policies issued fell 5% in Q2 and 8% in the first half; face amount in force increased 1% year over year to $674.4 billion. Management cited growth in newer business and modestly improved persistency.
- Investment and Savings Products: Q2 revenue grew 10% to $113.4, but pretax income fell 7% to $27.5; first-half revenue grew 9% to $222.1, while pretax income fell 8% to $53.8. Higher sales and client asset values were offset by expense growth. Client assets at period end were $40.2 billion, up 14% year over year.
- Corporate and Other Distributed Products: Q2 revenue fell 16% to $29.8 and pretax loss widened to $11.9 from $8.7. First-half revenue declined 13% to $61.7 and pretax loss widened to $23.2 from $17.3. Lower investment income, including a loss on the Citigroup reinsurance deposit asset, contributed.
Cash flow: First-half operating cash flow was $52.5, versus $11.7 in 2012; investing cash flow was $129.5 versus $126.7; financing cash outflow was $175.1 versus $166.4. Cash increased $5.9 to $118.1. Management attributed operating cash-flow improvement primarily to timing of reinsurer payments in 2012.
Balance sheet and debt: Total assets were $10.0 billion versus $10.3 billion at December 31, 2012; stockholders’ equity was $1.15 billion versus $1.28 billion. Notes payable were $374.5 million, representing $375 million of 4.75% senior notes due 2022. Debt-to-capital was 24.6%; the company reported compliance with debt covenants and no short-term borrowings. Parent-company cash and invested assets were approximately $43.1 million. Separate account assets and liabilities were each $2.44 billion.
Approximately 89% of direct life insurance in force was ceded to reinsurers. Due from reinsurers was $3.99 billion; two large Citigroup-affiliated reinsurers accounted for $2.87 billion combined and were not rated by A.M. Best. This is a material counterparty exposure to monitor.
Material changes, outlook, and risks
- Primerica repurchased 2.49 million shares and warrants for approximately $154.7 million on June 3, funded in part by a $150 million dividend from Primerica Life. Warburg Pincus no longer held an equity interest. The insurer had approximately $81.3 million of ordinary dividend capacity remaining for 2013 after the payment.
- Investment fair values were pressured by the sharp rise in interest rates during Q2. Available-for-sale fixed-maturity securities had $348.4 million of cost in excess of fair value at June 30, compared with $111.9 million at year-end; management attributed most unrealized losses to interest-rate sensitivity and said it intended and was able to hold the securities. First-half other comprehensive loss was $52.5 million, versus income of $8.9 million a year earlier.
- Management expected operating cash flows and potential funding sources to meet operating requirements over the next 12 months and support long-term liquidity needs. No specific earnings or revenue guidance was provided. Management noted that growth in term-life revenue and earnings is expected to decelerate as the in-force book grows.
- Risks highlighted include sales-force recruiting, licensing and retention; actual mortality, persistency, expense and investment-yield experience differing from pricing assumptions; interest-rate and credit risk; reinsurer performance; regulatory and capital requirements; and legal and regulatory proceedings.
- Legal contingencies include 22 pending FINRA arbitrations and eight pending lawsuits relating to recommendations involving Florida public-employee retirement benefits. The company could not reasonably estimate potential losses and reported significant defense costs. State unclaimed-property audits and insurance examinations are ongoing; the company also could not estimate potential costs or liabilities. A Deutsche Bank letter of credit supports certain reserve obligations, with a maximum amount scheduled to rise to $510 million in 2014 subject to conditions.
Investor verification priorities
- Track whether investment and savings product expense growth moderates and translates into higher segment earnings.
- Review interest-rate effects on investment values, accumulated other comprehensive income, and investment income; confirm the implications of management’s intent to hold impaired securities.
- Assess reinsurer credit concentration, recoverability of the $3.99 billion receivable, and the terms and collateral supporting the reserve letter of credit.
- Monitor term-life policy issuance, persistency, claims experience, and the pace of growth in net premiums as older reinsured business runs off.
- Follow the Florida retirement-plan claims and unclaimed-property proceedings for developments in costs, exposure, or estimable losses.