Primerica, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated results. Primerica distributes term life insurance and third-party investment and savings products to middle-income households in the U.S. and Canada.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $339.2m (+9%) | $310.4m | $994.6m (+9%) | $912.3m |
| Income from continuing operations | $41.6m (+2%) | $40.7m | $134.4m (+10%) | $122.0m |
| Net income | $41.6m (-4%) | $43.2m | $135.9m (+8%) | $125.5m |
| Diluted EPS | $0.75 | $0.78 | $2.44 | $2.16 |
| Operating cash flow | Not separately reported for the quarter | $132.8m | $90.6m |
Q3 pretax income was $64.0m, up 2%; benefits and expenses rose 11% to $275.2m, faster than revenue. Nine-month pretax income increased 9% to $206.6m. The Q3 net-income decline reflects a $2.5m after-tax gain from discontinued operations in Q3 2013 versus a small loss in Q3 2014; continuing-operations income grew.
- Term Life: Revenue increased 9% to $193.6m in Q3 and 9% to $560.9m for nine months. Pretax income fell 8% to $45.9m in Q3, but was up 1% to $148.2m year to date. Q3 claims were above historical trends, and acquisition-cost amortization and insurance expenses increased.
- Investment and Savings Products: Revenue rose 13% to $129.3m in Q3 and 13% to $380.7m year to date; pretax income increased 17% to $36.9m and 25% to $107.0m, respectively. Higher mutual fund sales and client asset values supported revenue.
- Corporate and Other: Q3 pretax loss was $18.8m, broadly unchanged; the nine-month loss widened to $48.6m from $43.6m, reflecting lower investment income and realized gains.
Financial position, debt and liquidity
At September 30, 2014, total assets were $10.74bn, liabilities $9.45bn and stockholders’ equity $1.29bn. Cash and cash equivalents were $165.0m. Investments totaled $2.06bn. Due from reinsurers was $4.13bn, while policy benefit liabilities were $5.21bn. Separate-account assets and liabilities were each $2.47bn.
Debt included $374.5m carrying value of senior unsecured notes ($375m principal), bearing 4.75% and due July 2022, plus a $189.8m surplus note issued by Vidalia Re. The surplus note is matched by an investment of equal principal, bears 4.50%, matures in 2029 and is non-recourse to Primerica, Inc. and Primerica Life; the Parent Company supports the credit-enhancement fee. The filing reports compliance with debt covenants and no short-term borrowings.
For the first nine months, operating cash flow was $132.8m, investing cash flow was a $27.0m use, and financing cash flow was an $88.1m use; cash increased $15.8m. Financing outflows included $71.9m of common-stock repurchases and $20.0m of dividends. Management said business cash flows were expected to meet operating liquidity needs over the next 12 months. Primerica Life paid a $68m ordinary dividend to the Parent Company in Q3; estimated ordinary dividend capacity afterward was approximately $165m.
The fixed-maturity portfolio’s average rating was A, average duration 4.2 years and average book yield 4.62%, versus 4.0 years and 4.93% at year-end 2013. About 48% of its amortized cost was rated BBB and 5% below investment grade.
Material changes and management commentary
- Growth in premiums not subject to the Citigroup reinsurance transactions, higher investment-product sales and higher client asset values drove revenue growth. Net investment income declined 7% in Q3 and 4% year to date, primarily due to lower average yields. Nine-month realized investment gains fell to $0.8m from $5.3m.
- Term policies issued were 55,146 in Q3 versus 53,997 a year earlier; the life-licensed sales force reached 97,966, up from 95,566 at year-end 2013. New recruits and new licensed representatives were slightly lower year over year, which management attributed principally to post-convention initiatives benefiting the prior-year comparison.
- Investment-product sales were $1.38bn in Q3, up 10%. Client asset values ended the quarter at $47.4bn; Q3 values declined 1%, primarily due to Canadian currency effects, while nine-month values increased 5%.
- NBLIC sold its short-term disability business in January 2014 for $3m cash and recorded a $2.4m pretax gain; its results are presented as discontinued operations. NBLIC also stopped marketing and underwriting new student life policies in Q2.
- A Q3 change to management equity awards accelerated approximately $5.1m of compensation expense into the quarter; management said this shifts expense timing rather than materially changing total expected award expense.
- No formal earnings guidance is provided. Management expects cash flows to support long-term liquidity and reports no material change in market-risk exposures since year-end 2013. The company did not expect the revenue-recognition standard effective in 2017 to have a material impact.
Risks, contingencies and unusual items
- Primerica reinsures 89% of direct life insurance in force. The $4.13bn reinsurance receivable includes $2.63bn from Prime Re, an affiliate of Citigroup, which is listed as not rated; the filing notes reinsurance does not remove the company’s primary obligation to policyholders.
- Multi-state unclaimed-property audits and claims-paying examinations are ongoing, and a West Virginia unclaimed-property suit was appealed after dismissal. The company could not reasonably estimate potential additional costs or liabilities.
- FINRA arbitrations and Florida litigation concerning recommendations to transfer Florida Retirement System benefits were largely resolved through a settlement process. After a third party assumed the deferred-annuity settlement liability in June, approximately $0.6m of related contingent liability remained.
- Primerica is challenging Canadian regulators’ planned life-insurance licensing examination program, scheduled for early 2016. Management warned it could reduce new licensed representatives and adversely affect Canadian term-life business; the impact was not quantifiable.
- Other material risks include interest-rate and credit movements, investment valuation, mortality and persistency experience, reinsurer performance, regulation, sales-force recruitment and retention, and Canadian currency fluctuations. Management reported disclosure controls were effective and no material Q3 change in internal financial controls.
Important facts for investors to verify
- Whether claims experience, DAC amortization and insurance expenses normalize after the Q3 increases.
- Reinsurer credit quality and collectability, particularly the large receivable from the unrated Citigroup affiliate, and the terms and capacity of reserve-financing arrangements.
- Developments, potential liabilities and timing of the unclaimed-property audits, market-conduct examinations and related litigation.
- Progress and potential effects of the Canadian licensing-program challenge on representative recruitment and future sales.
- Drivers of investment income and portfolio yield, and the sustainability of client-asset growth amid market and currency changes.
- Remaining share-repurchase authorization: approximately $84.4m at September 30, 2014; confirm subsequent purchases and capital deployment.