Primerica, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Primerica distributes term life insurance and third-party investment and savings products to middle-income households in the United States and Canada. Unless noted, amounts are in U.S. dollars.
Financial results and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $275.1M | $234.3M | $551.4M | $841.2M |
| Income before taxes | $68.2M | $36.3M | $149.3M | $256.7M |
| Net income | $44.0M | $22.0M | $96.5M | $165.3M |
| Diluted EPS | $0.58 | $0.29 | $1.26 | $2.18 |
| Operating cash flow | Not separately reported for the quarter | $(10.3)M | $59.2M |
- Q2 revenue rose 17% and net income doubled year over year. Derived pretax margin was 24.8%, versus 15.5%; derived net margin was 16.0%, versus 9.4%.
- First-half revenue and net income declined 34% and 42%, respectively. These comparisons are materially affected by the 2010 Citi reinsurance and corporate reorganization transactions, which left three months of pre-transaction operations in the prior-year period. Management says that excluding specified transaction-related effects, first-half revenue would have increased about 12% and expenses about 10%.
- Investment and Savings Products segment pretax income increased 14% in Q2 and 18% in the first half. Term Life pretax income increased 4% in Q2; first-half results were lower largely because of the reinsurance transactions and resulting comparison effects.
- At June 30, total assets were $10.17B, liabilities $8.62B, and stockholders’ equity $1.55B. Cash and cash equivalents were $114.1M; total investments were $2.18B, including $2.10B of fixed-maturity securities.
- Debt was $300M under a Citi note bearing 5.5% interest and maturing March 31, 2015. The debt-to-capital ratio was 16.2%; the company reported compliance with note covenants and no short-term borrowings.
- First-half investing cash flow was $2.7M and financing cash flow was $(3.0)M; cash decreased $12.0M to $114.1M. Operating cash flow was negative, partly due to $13.5M of net purchases of trading securities.
Material changes and operating trends
- Q2 net premiums rose 25%, reflecting growth in post-transaction new business, lower ceded premiums as the Citi-reinsured block ran off, improved persistency, and currency effects. First-half net premiums fell 48% as the prior-year comparison included pre-transaction business.
- Investment and Savings Products sales increased 23% in Q2 and 19% in the first half. Client account assets ended the period at $36.0B, up 21% year over year; Q2 market value change was negative $185M.
- New term policies issued declined to 111,107 for the first half from 112,851. The life-licensed sales force was 90,519 at June 30, down from 94,850 at year-end 2010; first-half recruiting also declined year over year.
- Management cited lower Q2 operating expenses, in part because the comparable 2010 quarter included IPO-related equity-award expense. Q2 insurance expenses included about $3.2M of convention-related items, including a write-off of obsolete medical-testing materials following the TermNow launch.
Outlook, risks and contingencies
- No formal earnings or revenue guidance is provided. Management expects cash flows from existing business and growing premiums on post-transaction policies to support operating needs, while noting that the Citi reinsurance transactions reduced near- to intermediate-term operating cash flows.
- The company is evaluating financing for redundant Regulation XXX reserves and other capital options; execution, structure, timing, and proceeds are uncertain. Management says a portion of available capital could fund share repurchases if such financing is completed.
- ASU 2010-26 is required beginning January 1, 2012. The company expects the revised DAC rules may materially adversely affect results by accelerating expense recognition; the impact has not been quantified, and management expects no effect on cash flows or required capital.
- Approximately 90% of life insurance in force was reinsured. Due from reinsurers was $3.80B, including $2.89B due from related-party reinsurers; certain major related-party reinsurers were not rated. Reinsurance does not release Primerica from its obligations to policyholders.
- A 100-basis-point increase in interest rates was estimated to reduce fixed-maturity portfolio market value by about $71M, or 3.3%, assuming no offsetting liability change. A 10% decline in the Canadian dollar was estimated to reduce first-half pretax income by about $3.4M.
- Ordinary-course legal disputes, regulatory inquiries, and arbitrations have uncertain outcomes; the company cannot estimate possible losses or a range of loss, though management does not consider material adverse outcomes likely based on currently available information.
Important facts for investors to verify
- How underlying term-life growth, persistency, mortality, and sales-force trends develop as the Citi-reinsured block runs off.
- The quality, collectability, and concentration of the $3.80B reinsurance receivable, particularly amounts due from related parties.
- Whether operating cash flow returns to positive levels and whether the company completes Regulation XXX reserve financing or other capital actions.
- The eventual earnings impact of the 2012 DAC accounting change and any material developments in legal or regulatory matters.
- Investment portfolio credit quality and sensitivity to interest rates and Canadian-dollar movements.