Primerica, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. Primerica distributes term life insurance and third-party investment and savings products to middle-income households in the U.S. and Canada. This unaudited filing covers the three and nine months ended September 30, 2011. Comparisons with 2010 are affected by the March–April 2010 Citi reinsurance and corporate reorganization transactions.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenues | $275.8 million | $241.2 million | $827.2 million | $1,082.5 million |
| Income before taxes | $63.9 million | $61.9 million | $213.2 million | $318.6 million |
| Net income | $40.6 million | $39.6 million | $137.1 million | $204.9 million |
| Diluted EPS | $0.53 | $0.52 | $1.79 | $2.70 |
| Operating cash flow | Not separately presented for the quarter | $7.4 million | $21.5 million |
- Q3 revenue rose 14% and net income rose 3%. The reported pretax margin was approximately 23.1%, versus 25.7% a year earlier.
- Nine-month revenue declined 24% and net income declined 33%; reported comparisons reflect the prior-year transactions and lower investment gains and investment income. Excluding revenue that would not have been recognized had the transactions occurred January 1, 2010, management said nine-month revenue increased approximately 13%.
- At September 30, 2011, total assets were $10.0 billion, stockholders’ equity $1.57 billion, cash and equivalents $154.0 million, and note payable $300.0 million. Debt-to-capital was 16.0%. The note bears 5.5% interest and matures March 31, 2015; the company reported covenant compliance.
- Due from reinsurers was $3.82 billion. About $2.91 billion was due from related-party reinsurers, including Prime Re, which was not rated by A.M. Best. Reinsurance does not release Primerica from its obligations to policyholders.
Material changes and operating trends
- Term Life pretax income rose 13% in Q3 to $48.1 million, supported by growth in new term business, lower ceded premiums as the Citi-reinsured block ran off, and improved persistency. Benefits and claims increased, including slightly unfavorable mortality experience.
- Investment and Savings Products pretax income was nearly flat in Q3 at $26.7 million; nine-month pretax income increased 12% to $88.3 million. Nine-month product sales rose 22% to $3.31 billion, while client account values ended at $31.6 billion, down 3% year over year, reflecting market declines.
- Corporate and Other Distributed Products reported a Q3 pretax loss of $11.0 million, versus a $7.3 million loss a year earlier. Drivers included weaker loan-related commissions, higher claims in short-term disability and run-off insurance blocks, and a $2.7 million charge to eliminate print inventories.
- Life-licensed representatives numbered 91,970 at quarter-end, down from 96,872 at year-end 2010. Q3 recruiting rose 43% year over year to 83,074, but management said licensing conversion lagged after the recruiting surge. Term policies issued increased to 65,067 in Q3.
- Operating cash flow for the first nine months was $7.4 million. Investing cash flow was $24.9 million and financing cash outflow was $5.3 million. Management noted approximately $33.5 million of investment purchases had not settled by quarter-end; if settled, reported period-end cash would have been about $120.5 million rather than $154.0 million.
Outlook, risks and unusual items
- Management expects growth in the post-Citi-reinsurance term book to continue increasing operating cash flow, but expects revenue and earnings growth rates to decelerate as the in-force book expands. It said unusually high term-sales productivity following the June convention and launch of TermNow is expected to return to historical levels.
- Primerica expects to retrospectively adopt ASU 2010-26 in 2012. The company anticipates a material adverse effect on results from accelerated expense recognition and possible reversals of prior DAC deferrals; the change is expected not to affect cash flows or required capital. The full impact was not yet quantified.
- The DOL withdrew its proposed fiduciary rule in September 2011 but indicated it would propose a similar rule in early 2012. If adopted, restrictions on compensation or added licensing requirements could materially affect qualified-account business. The company could not estimate the impact.
- Other disclosed risks include recruitment and licensing, mortality and persistency assumptions, investment credit and interest-rate risk, reinsurer performance, regulation, and legal or regulatory proceedings. Management said pending matters were not likely to have a material adverse effect based on information then known, but could not estimate possible losses.
- A 100-basis-point increase in interest rates was estimated to reduce fixed-maturity portfolio market value by approximately $66.2 million. A 10% decline in the Canadian dollar was estimated to reduce nine-month pretax income by approximately $5.0 million.
- Subsequent events: Primerica Life paid a $200 million extraordinary dividend to the parent on November 8, funded by asset sales and available cash. Primerica agreed to repurchase about 8.9 million shares from Citi for approximately $200 million, or $22.42 per share, expected to close November 15. The transaction was to be funded with the dividend proceeds; Citi was expected to retain approximately 12% afterward.
- The company signed a 15-year build-to-suit office lease, with occupancy expected in Q2 2013 and estimated annual rent ranging from $4.5 million to $5.6 million. It reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- How much of reported year-over-year earnings movement reflects underlying performance versus the 2010 reinsurance and reorganization comparability effects.
- The credit quality, recoverability, and concentration of the $3.82 billion reinsurance receivable, particularly amounts due from related parties.
- The eventual earnings and equity impact of ASU 2010-26 adoption and any reversals of previously deferred acquisition costs.
- Whether recruiting converts into licensed representatives and sustained term-policy sales as management’s expected productivity normalization occurs.
- The capital and liquidity effects of the $200 million insurer dividend and share repurchase, including the resulting investment income and statutory capital position.
- Developments in fiduciary-rule proposals, other regulatory inquiries, and legal contingencies.