Primerica, Inc. — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results. Primerica distributes term life insurance and third-party investment and savings products to middle-income households in the U.S. and Canada, primarily through independent sales representatives. The company reported approximately 91,000 licensed representatives, insured more than 4.3 million lives, and served approximately 2 million investment-account clients at year-end.
Financial and operating results
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $1.103 billion | $1.362 billion |
| Income before taxes | $275.8 million | $399.1 million |
| Net income | $178.3 million | $257.8 million |
| Diluted EPS | $2.36 | $3.40 |
| Net cash from operating activities | $87.9 million | $41.1 million |
| Cash and cash equivalents, year-end | $136.1 million | $126.0 million |
Reported revenue fell 19% and net income fell 31% year over year, but reported comparisons are materially affected by the 2010 reinsurance and corporate reorganization transactions. Against management’s pro forma 2010 comparison, 2011 revenue increased 9%, pretax income 4%, and net income 4%. The 2011 net income margin was approximately 16.2% (calculated as net income divided by reported revenue); the filing’s reported 2010 comparison is not like-for-like.
Fourth-quarter 2011 revenue was $275.9 million and net income was $41.2 million, versus $279.4 million and $52.9 million, respectively, in fourth-quarter 2010. Diluted EPS was $0.57 versus $0.69.
- Term Life Insurance: 2011 revenue was $555.0 million and pretax income was $194.6 million. New policies issued increased to 237,535 from 223,514. Face amount in force rose 1% to $665.0 billion. The company ceded approximately 89% of life insurance in force at year-end.
- Investment and Savings Products: Revenue was $396.7 million and pretax income $117.1 million, up 10% and 3%, respectively. Product sales increased 18% to $4.27 billion; average client account assets increased 9% to $34.87 billion, while year-end assets declined 3% to $33.66 billion.
- Corporate and Other Distributed Products: Revenue was $151.4 million; pretax loss widened to $35.8 million from $13.4 million. Lower investment gains and commissions, along with higher claims and expenses, contributed to the loss.
At year-end, total assets were $10.00 billion, total liabilities $8.58 billion, and stockholders’ equity $1.42 billion. Investments were $2.02 billion. Future policy benefits were $4.61 billion, and amounts due from reinsurers were $3.86 billion. The parent company’s $300 million Citi note bears 5.5% interest, matures March 31, 2015, and produced a 17.4% debt-to-capital ratio. The company reported compliance with note covenants and no short-term borrowings. Its fixed-maturity portfolio had an average rating of A, duration of 3.5 years, and book yield of 5.52%.
Material changes, outlook and risks
- Reorganization and comparability: In 2010, Primerica ceded 80%–90% of risks and rewards on its year-end 2009 term-life block to Citi affiliates and transferred approximately $4.0 billion of supporting assets. This substantially changed revenue, investment income, claims, acquisition-cost amortization, and the balance sheet. 2010 actual results include three months before the transactions; pro forma results are management estimates, not actual results.
- Capital actions: Primerica Life paid a $200 million dividend to the parent in November 2011, funding a $200 million repurchase of approximately 8.9 million shares from Citi. Primerica Life’s dividend required Massachusetts regulatory approval. The parent depends on subsidiary distributions, which are subject to regulatory and statutory limits.
- Business trends: Management attributed higher 2011 life policy issuance to the TermNow rapid-issue product and post-convention activity. Recruiting increased, but the licensed life sales force declined to 91,176 from 94,850, reflecting lower licensing pull-through and higher terminations. Management expected growing premiums from post-transaction policies to strengthen cash flows over time and considered cash flows sufficient for operating needs; no specific earnings or revenue guidance was provided.
- Accounting change: Primerica planned to adopt ASU 2010-26 retrospectively from January 1, 2012. It estimated a $140–$160 million reduction in the DAC asset and a $27–$33 million reduction in 2011 pretax income under the new cost-deferral rules; implementation remained in progress.
- Claims and contingencies: The company recorded approximately $4 million in the term-life segment and $1.1 million in other products for potential claims identified through public death-record searches. It also recorded an unspecified charge for its estimated share of a New York insurer liquidation plan. Pending arbitration claims and a court case allege improper recommendations regarding Florida Retirement System pension transfers; damages are unspecified, and the company said it could not yet estimate the effect. Management stated that, based on information then available, pending matters were not likely to have a material adverse effect.
- Key risks: Heavy reliance on a large, high-turnover independent sales force; licensing and conduct regulation; potential fiduciary-rule changes affecting IRA compensation; mortality, persistency, and investment-yield assumptions; dependence on third-party product providers; investment and interest-rate risk; and reinsurer counterparty exposure. Prime Re, the largest reinsurer exposure at approximately $2.44 billion, was unrated, though trust assets, contractual safeguards, and a Citi capital-maintenance agreement were disclosed. A 100-basis-point rate increase was estimated to reduce fixed-maturity fair value by about $61.6 million; a 10% Canadian-dollar decline was estimated to reduce pretax income by about $6.6 million.
- Other developments: Primerica Mortgages stopped U.S. loan-brokering activity effective December 31, 2011 and planned to surrender its licenses after pending requests were processed. A new 15-year home-office lease is expected to begin with occupancy in 2013. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Reconcile reported 2011 results with the transaction-adjusted 2010 pro forma figures, including the assumptions and one-time items underlying that comparison.
- Review the $3.86 billion reinsurance receivable, reinsurer concentration and collateral protections, particularly the exposure to unrated Prime Re and the terms for recapture.
- Assess statutory capital, risk-based capital, and dividend capacity after the $200 million subsidiary dividend; confirm the parent’s ability to service and refinance the $300 million note by its 2015 maturity.
- Track sales-force licensing and retention, TermNow policy persistency and claims experience, and whether product-sales growth translates into recurring revenue and cash flow.
- Confirm the final impact of the 2012 DAC accounting adoption and monitor the Florida retirement-transfer claims, death-record search claims, and New York liquidation-plan charge.