Primerica, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Primerica distributes term life insurance and third-party investment and savings products to middle-income households in the United States and Canada.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $308.4 million | $286.6 million | +8% |
| Income before tax | $60.2 million | $63.5 million | -5% |
| Net income | $38.8 million | $41.8 million | -7% |
| Basic / diluted EPS | $0.67 / $0.65 | $0.62 / $0.61 | Higher, despite lower net income |
| Operating cash flow | $64.4 million | $(4.8) million | Improved $69.1 million |
Revenue growth reflected higher term-life net premiums and investment-product commissions and fees. Net premiums rose 12% to $160.3 million; commissions and fees increased 8% to $112.0 million. Net investment income fell 11% to $23.2 million, which management attributed to a smaller average invested-asset base and lower yields. Total expenses rose 11% to $248.2 million, outpacing revenue growth. Net margin was approximately 12.6%, versus 14.6% a year earlier. The effective tax rate was 35.5%, compared with 34.2%.
- Term Life Insurance: Revenue increased 11% to $168.4 million and pretax income increased 3% to $45.8 million. New policies issued declined to 50,356 from 56,145; the average monthly issuance rate per licensed representative fell to 0.18 from 0.21. Face amount in force rose approximately 1% to $670.4 billion. Growth in newer business more than offset runoff of the block reinsured with Citigroup.
- Investment and Savings Products: Revenue increased 9% to $108.7 million, but pretax income declined 9% to $26.4 million, primarily as expenses—including legal, growth-related and compensation costs—increased. Product sales rose 15% to $1.365 billion; average client asset values rose 10% to $38.8 billion, with favorable market performance contributing to asset growth.
- Corporate and Other Distributed Products: Revenue declined 10% to $31.3 million; the pretax loss widened to $11.9 million from $9.7 million, mainly reflecting lower investment income and loan-business termination effects.
Financial position, debt and liquidity
- Total assets were $10.43 billion at March 31, 2013, versus $10.34 billion at year-end 2012. Stockholders’ equity was $1.31 billion, up from $1.28 billion.
- Cash and cash equivalents were $202.5 million, up from $112.2 million at year-end. First-quarter cash flow included $64.4 million from operations, $34.9 million from investing activities and $8.6 million used in financing activities.
- Notes payable were $374.4 million, consisting principally of $375 million of 4.75% senior notes due 2022. Debt-to-capital was 22.3%; the company reported compliance with debt covenants and no short-term borrowings.
- Fixed-maturity securities had a 5.28% average book yield, 3.9-year average duration and A average rating. BBB securities represented 46% and below-investment-grade securities 5% of amortized cost.
- Due from reinsurers was $4.01 billion. Approximately 89% of direct life insurance in force was ceded; large balances were due from Citigroup-affiliated reinsurers, two of which were unrated by A.M. Best.
- Management said operating cash flows and available funding sources were expected to meet liquidity needs over the next 12 months. U.S. insurance subsidiaries had statutory capital substantially above applicable requirements; Primerica Life Canada was compliant with its minimum capital requirement.
Material changes, outlook and risks
- Recruiting declined: new recruits were 46,348 versus 58,551, and new life-licensed representatives were 7,165 versus 7,650. Management cited the absence of a first-half convention incentive competition; the licensed sales force was 90,917 at quarter-end versus 92,373 at year-end.
- Management identified higher revenue-related expenses, legal costs and interest expense as pressures on earnings. Higher interest expense reflected redundant-reserve financing and the 2012 debt refinancing. There was no formal numerical earnings or revenue guidance in the filing.
- On May 7, 2013, Primerica Life paid the parent a declared $150 million ordinary dividend. The insurer reported approximately $81.3 million of remaining ordinary dividend capacity for 2013 and capital above the regulatory-action threshold after payment.
- Twenty-two FINRA arbitrations, seven state-court lawsuits and one federal lawsuit involved allegations concerning recommendations to transfer Florida public employees’ retirement benefits. There were 94 claimants in pending matters; the company reported it could not reasonably estimate a range of loss and intended to defend the claims. It had incurred approximately $3.9 million of related first-quarter expenses and noted possible additional claimants.
- Unclaimed-property audits by 23 states and the District of Columbia, insurance examinations in six states and West Virginia litigation could result in additional payments; potential impacts were not reasonably estimable. A Deutsche Bank letter of credit supporting Peach Re reserve obligations was initially $450 million and could increase to a maximum of $510 million in 2014.
- Key stated risks include sales-force recruiting and retention, differences in mortality and persistency experience from pricing assumptions, reinsurer credit and performance, interest-rate and credit-spread movements, investment valuation, regulatory and legal developments, and the ability of subsidiaries to pay dividends. Management reported no material change in market-risk exposure and effective disclosure controls.
Investor verification points
- Track whether new-policy issuance and recruiting recover, and whether face amount in force continues to grow.
- Assess whether revenue growth converts to earnings as expense growth, investment yields and legal costs evolve.
- Review the size, credit quality and collectability of reinsurance receivables, especially balances due from unrated Citigroup affiliates.
- Monitor the Florida retirement-plan claims and unclaimed-property matters for developments, additional claimants and any estimable exposure.
- Confirm the effect of the $150 million subsidiary dividend on statutory capital, parent liquidity and remaining dividend capacity.