Primerica, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited results; comparisons are with the corresponding 2011 periods. Primerica distributes term life insurance and third-party investment and savings products in the United States and Canada.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $299.1 million | $275.8 million | $886.2 million | $827.2 million |
| Income before taxes | $70.6 million | $55.5 million | $205.9 million | $187.2 million |
| Net income | $45.6 million | $35.1 million | $133.5 million | $120.0 million |
| Diluted EPS | $0.72 | $0.46 | $2.05 | $1.57 |
| Net cash from operating activities | Not presented by quarter | $107.4 million | $13.3 million |
Q3 revenue rose 8% and net income rose 30%; nine-month revenue increased 7% and net income increased 11%. Q3 diluted EPS benefited from substantially fewer weighted-average shares, following repurchases; nine-month weighted-average diluted shares were 63.5 million versus 74.1 million.
For the nine months, net cash from investing activities was $54.3 million (2011: $24.9 million), while financing activities used $112.7 million (2011: $9.4 million). Cash and cash equivalents were $185.8 million at September 30, up from $136.1 million at year-end 2011.
Financial position and capital
- Total assets were $10.43 billion, including $1.99 billion of investments and $2.63 billion in separate-account assets. Total liabilities were $9.10 billion and stockholders’ equity was $1.34 billion.
- Notes payable were $374.4 million. In July, Primerica issued $375 million of 4.75% senior notes due 2022 and used $300 million of proceeds to repay its 5.5% Citi note. The company reported a 21.9% debt-to-capital ratio, compliance with debt covenants, and no defaults.
- At September 30, the Parent Company had approximately $134.9 million in cash and invested assets; approximately $65.2 million was subsequently used for October share repurchases. The filing says U.S. insurance subsidiaries had statutory capital substantially above applicable requirements and the Canadian subsidiary met its minimum capital requirements.
- Due from reinsurers totaled $3.99 billion, including $3.05 billion due from Citi-affiliated reinsurers. Approximately 89% of direct in-force face amount was reinsured; reinsurance does not relieve Primerica of its obligations to policyholders.
Material changes and management commentary
- Term Life Insurance drove much of the growth: nine-month segment revenue rose 17% to $478.5 million and pretax income rose 15% to $144.6 million. Growth reflected new term business and the runoff of older business coinsured with Citi. New policies issued fell 9% for the nine months and 18% in Q3; management attributed the Q3 comparison partly to a recruiting surge after the 2011 sales convention.
- Investment and Savings Products nine-month revenue was broadly flat at $304.3 million, while pretax income rose 2% to $89.9 million. Q3 pretax income increased 18%, supported by higher average client asset values and product sales. Client asset values ended the period at $36.9 billion, up 17% year over year, reflecting favorable markets as well as inflows.
- Corporate and Other Distributed Products reported a nine-month pretax loss of $28.6 million, versus a $26.4 million loss. Revenue declined 9%, principally reflecting lower allocated investment income, the discontinued loan business, and lower short-term disability business.
- Net investment income declined 8% to $76.6 million for the nine months. Management cited lower portfolio yields and invested-asset sales used to fund repurchases. The fixed-maturity portfolio’s average book yield was 5.30%, down from 5.52% at year-end 2011; average duration increased to 3.8 years from 3.5 years.
- Management cited lower persistency in recent policy issue years as a factor in higher DAC amortization. The 2012 adoption of ASU 2010-26 retrospectively reduced reported 2011 nine-month net income by $17.1 million and diluted EPS by $0.22; it had no cash-flow impact.
Outlook, risks, contingencies, and unusual items
- The filing gives no specific earnings or revenue guidance. Management said it anticipates operating cash flows will be sufficient for operating requirements, while noting that insurance growth requires significant upfront commissions and underwriting cash outflows. It expects to continue ceding approximately 90% of U.S. and 80% of Canadian mortality risk on new business.
- Peach Re’s Deutsche Bank facility supports certain statutory reserves: an initial $450 million letter of credit may rise to a maximum of $510 million in 2014. Peach Re must reimburse draws, subject to stated conditions; the facility is non-recourse to Primerica, Inc. and Primerica Life, but the Parent Company guarantees facility fees.
- Primerica disclosed 21 pending FINRA arbitrations and six lawsuits alleging improper recommendations involving Florida Retirement System benefits, with 65 claimants. Hearings were scheduled for 15 arbitrations in 2013; management could not reasonably estimate a loss range and warned of significant defense costs and possible liabilities. An appealed dismissal on statute-of-limitations grounds was also noted.
- Unclaimed-property audits were underway in 11 states and the District of Columbia; potential costs or liabilities could not be estimated. The company also identified ordinary-course litigation and regulatory risks.
- Market-risk sensitivities: a hypothetical 100-basis-point increase in interest rates was estimated to reduce fixed-maturity fair value by about $66.8 million, or 4%, before any liability offsets. A 10% decline in the Canadian currency was estimated to reduce pretax income by $1.6 million for Q3 and $4.6 million for the nine months.
- Investment risks include interest-rate, credit, liquidity, and valuation risk. Other stated risks include sales-force recruiting and licensing, differences between actual and assumed mortality or persistency, reinsurance counterparty performance, regulation, capital requirements, and market conditions.
Key facts for investors to verify
- Whether term policy sales, persistency, mortality experience, and DAC recoverability support continued growth in term-life earnings.
- The credit quality and collectability of the $3.99 billion reinsurance receivable, particularly the concentration with Citi-affiliated reinsurers.
- The effect of lower investment yields, interest-rate changes, and asset sales on investment income and portfolio values.
- The ultimate costs and outcomes of the Florida retirement-plan claims and unclaimed-property audits.
- Post-quarter share repurchases: Primerica completed an approximately $60 million repurchase from Warburg Pincus in October; the $75 million program was discontinued after total program repurchases of approximately $74.3 million.