Business Context and Reporting Period
Company: Primerica, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: Primerica is a leading distributor of financial products to middle-income households in the U.S. and Canada, primarily offering term life insurance (underwritten) and mutual funds/annuities (distributed). The company operates three segments: Term Life Insurance, Investment and Savings Products, and Corporate and Other Distributed Products.
Key Financial Metrics
| Metric (in thousands) | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenues | $276,352 | $606,942 |
| Net Income | $52,467 | $143,286 |
| Earnings Per Share (Diluted) | $0.68 | $0.68 |
| Net Investment Income | $28,626 | $82,576 |
| Total Assets | $10,174,625 | $9,884,306 |
| Total Liabilities | $8,683,983 | $8,452,814 |
| Stockholders' Equity | $1,490,642 | $1,431,492 |
| Cash and Cash Equivalents | $115,277 | $126,038 |
| Long-Term Debt (Note Payable) | $300,000 | $300,000 |
Operating Cash Flow: Net cash provided by operating activities was $3.2 million for Q1 2011, compared to $117.1 million in Q1 2010.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 54% year-over-year. This is primarily attributed to the corporate reorganization and reinsurance transactions executed in March/April 2010, which ceded approximately 80-90% of the term life insurance block to Citigroup affiliates. Consequently, net premiums dropped 67% and net investment income fell 65% due to the transfer of assets backing the ceded policies.
- Profitability: Net income decreased 63% to $52.5 million. Income before taxes fell 63% to $81.1 million. The decline mirrors the revenue reduction caused by the reinsurance structure.
- Segment Performance:
- Term Life Insurance: Revenues dropped 69% and pre-tax income fell 64% due to the reinsurance impact.
- Investment and Savings Products: Revenues increased 16% and pre-tax income rose 22%, driven by improved market conditions and higher asset values in client accounts.
- Corporate and Other: Reported a pre-tax loss of $7.5 million compared to income of $34.6 million in the prior year, largely due to the absence of realized investment gains recognized in Q1 2010 in anticipation of the reorganization.
- Investment Portfolio: Total investments increased to $2.21 billion. The portfolio consists primarily of fixed-maturity securities (98%). Unrealized gains on available-for-sale securities were $155.7 million, with unrealized losses of $5.5 million.
Guidance, Outlook, Risks, and Unusual Items
- Accounting Changes: The company noted the issuance of FASB ASU 2010-26 regarding Deferred Policy Acquisition Costs (DAC). Required adoption begins January 1, 2012. Management expects this update to have a material adverse effect on results of operations by accelerating the recognition of acquisition expenses, though it will not impact cash flows or taxes.
- Reinsurance Impact: The significant decline in reported metrics is structural due to the 2010 reinsurance agreements. Management provides "pro forma" results to show underlying growth; on a pro forma basis, Term Life Insurance net premiums grew 47% and pre-tax income grew 43% compared to Q1 2010.
- Subsequent Event: On April 14, 2011, Citigroup sold 12 million shares of Primerica common stock in a secondary offering. Primerica received no proceeds. Post-offering, Citigroup's ownership decreased to approximately 23%.
- Risks: Key risks include the ability to recruit and retain sales representatives, changes in independent contractor status, mortality and persistency variances, interest rate fluctuations affecting investment portfolios, and foreign currency exchange risk (20% of revenues from Canada).
- Liquidity: The company maintains a $300 million note payable to Citigroup at 5.5% interest, maturing in 2015. Management is evaluating excess reserve financing to generate approximately $300 million in statutory capital.
Investor Verification Checklist
- Reinsurance Structure: Verify the long-term impact of the 80-90% cession of term life policies on future revenue recognition and cash flow stability.
- Pro Forma vs. GAAP: Compare GAAP results with the provided pro forma results to assess the true organic growth of the Term Life segment.
- DAC Accounting Impact: Monitor the implementation of ASU 2010-26 in 2012 and its potential to reduce reported earnings through accelerated expense recognition.
- Sales Force Trends: Review the decline in recruiting (52,813 in Q1 2011 vs. 58,085 in Q1 2010) and licensed sales force size (92,212) as a leading indicator of future sales volume.
- Investment Portfolio Quality: Assess the $40.6 million in cumulative credit-related OTTI losses recognized in income for securities still held as of March 31, 2011.