Primerica, Inc. — Q1 2014 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. Primerica distributes term life insurance and third-party investment and savings products to middle-income households in the United States and Canada.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $324.3 million | $298.5 million | +9% |
| Net premiums | $165.5 million | $150.3 million | +10% |
| Commissions and fees | $126.9 million | $112.3 million | +13% |
| Income from continuing operations | $43.5 million | $38.1 million | +14% |
| Net income | $45.1 million | $38.8 million | +16% |
| Diluted EPS | $0.81 | $0.65 | +$0.16 |
| Operating cash flow | $37.7 million | $64.4 million | −$26.6 million |
Net income margin was approximately 13.9%, versus 13.0% in Q1 2013. Total benefits and expenses rose 8% to $257.5 million. The company declared a $0.12 per-share dividend, versus $0.11 a year earlier.
At March 31, 2014, total assets were $10.39 billion, cash and cash equivalents were $158.4 million, and stockholders’ equity was $1.25 billion. Notes payable were $374.5 million, consisting primarily of $375 million of 4.75% senior notes due in 2022; the reported debt-to-capital ratio was 23.0%. The company reported compliance with debt covenants and no short-term borrowings. It expected operating cash flows to provide sufficient liquidity over the next 12 months.
Material changes versus the prior comparable period
- Continuing income before tax increased 13% to $66.8 million. Term Life Insurance segment pretax income rose 5% to $47.2 million; Investment and Savings Products segment pretax income rose 29% to $34.0 million. Corporate and Other Distributed Products reported a $14.4 million pretax loss, versus a $12.3 million loss.
- Investment and Savings Products revenue grew 13%, supported by higher mutual fund sales and larger client asset values. Total product sales increased 3% to $1.41 billion, and average client asset values increased 16% to $45.1 billion.
- Term life net premiums grew 11%, reflecting new business and runoff of older business subject to Citigroup coinsurance. New policies issued declined to 49,320 from 50,356; management cited adverse weather. The licensed sales force remained roughly stable at 95,382.
- Net investment income fell 7% to $21.6 million, and realized investment gains declined to $0.3 million from $2.3 million, partly because the prior-year period included a large gain on a tendered security.
- Operating cash flow was lower, primarily due to timing of ceded claims payments from reinsurers. Cash increased by $9.2 million during the quarter, compared with a $90.3 million increase in Q1 2013.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance was provided. Management said revenue and earnings growth are expected to decelerate as the in-force book grows and incremental sales have less impact on its size. It intends to continue ceding approximately 90% of U.S. and 80% of Canadian mortality risk on new business.
- Primerica sold its short-term disability benefit business in January 2014 for $3.0 million in cash and recorded an approximately $2.5 million pretax gain. The sale contributed $1.6 million of after-tax discontinued-operations income in Q1.
- In January, the company’s PFS Investments subsidiary reached a memorandum of understanding to resolve Florida Retirement System-related litigation. A required percentage of claimants signed settlement agreements in April; the company retained a $9.3 million liability for deferred settlement benefits and had paid approximately $5.6 million of estimated related costs by April.
- Multi-state unclaimed-property audits and market-conduct examinations are ongoing. The company could not reasonably estimate the likelihood or impact of additional costs or liabilities. Other legal disputes and regulatory matters also remain, with potential losses not estimable from the filing.
- Reinsurance is a significant exposure: 88% of direct life insurance in force was ceded, and due from reinsurers totaled $4.07 billion. Prime Re, a Citigroup affiliate and the largest listed reinsurer, accounted for $2.60 billion of that receivable and was reported as not rated by A.M. Best.
- Investment risks include interest-rate, credit, liquidity, and foreign-exchange movements. Fixed-maturity investments were rated 47% BBB and 5% below investment grade by amortized cost. Management attributed most portfolio unrealized losses to interest-rate sensitivity and credit spreads and said it had no present intention to sell the affected investments.
Important facts for investors to verify
- Whether growth in investment-product sales, client assets, and term-life premiums continues, particularly given fewer new policies and the weather-related impact cited by management.
- How reinsurer credit quality, concentration, and claims-payment timing affect the $4.07 billion reinsurance receivable and operating cash flow.
- The final cost and resolution of the Florida litigation and the multi-jurisdiction unclaimed-property and market-conduct matters.
- Whether investment yields, interest rates, credit spreads, and the portfolio’s BBB and below-investment-grade exposure affect income or asset values.
- Future capital deployment, including share repurchases: the company repurchased 283,000 shares under its program for approximately $13.1 million in Q1 and had $136.9 million of program capacity remaining at March 31.