Primerica, Inc. 10-Q Summary: Quarter Ended September 30, 2010
Business Context and Reporting Period
This filing covers the quarterly period ended September 30, 2010. Primerica, Inc. is a leading distributor of financial products to middle-income households in North America, operating through two primary segments: Term Life Insurance and Investment and Savings Products. The reporting period is significantly impacted by a major corporate reorganization completed in April 2010, which separated the company from Citigroup Inc. (Citi). This included an initial public offering (IPO), a private sale to Warburg Pincus, and extensive reinsurance transactions where 80% to 90% of the term life insurance risk was ceded to Citi affiliates.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Revenues | $241.2 million | $1.08 billion |
| Net Income | $39.6 million | $204.9 million |
| Earnings Per Share (Diluted) | $0.52 | $2.70 |
| Net Investment Income | $27.9 million | $138.4 million |
| Total Assets | $9.45 billion | (Balance Sheet Item) |
| Cash and Cash Equivalents | $74.8 million | (Balance Sheet Item) |
| Debt (Note Payable) | $300.0 million | (Balance Sheet Item) |
| Stockholders' Equity | $1.40 billion | (Balance Sheet Item) |
Note: Comparisons to prior periods are limited due to the structural changes in the business model and balance sheet resulting from the reorganization.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 56% for the quarter and 34% for the nine-month period compared to 2009. This is primarily due to a 71% drop in net premiums and a 69% drop in net investment income, driven by the ceding of significant assets and premiums to Citi reinsurers.
- Balance Sheet Contraction: Total assets decreased from $13.2 billion at year-end 2009 to $9.5 billion. Investments dropped from $6.5 billion to $2.2 billion following the transfer of approximately $4.0 billion in assets to support ceded liabilities.
- Reinsurance Impact: The percentage of reinsured life insurance in force increased from 64.5% to 91.0%. Consequently, "Due from reinsurers" surged from $867 million to $3.67 billion.
- Investment Performance: Realized investment gains improved significantly, turning from a loss of $11.2 million in Q3 2009 to a gain of $1.0 million in Q3 2010, largely due to reduced other-than-temporary impairment (OTTI) charges.
Guidance, Outlook, and Risks
Management Commentary: Management expects the Term Life Insurance segment's revenues and earnings to grow from current levels as new in-force business is added, though the rate of growth is expected to decelerate as the book size increases. The Investment and Savings Products segment showed strength with a 25% increase in product sales year-to-date, driven by improved market conditions and client demand.
Outlook: The company anticipates that cash flows from existing policies and investment products will provide sufficient liquidity. Future growth is expected to be driven by new sales and the recovery of operating cash flows as the new in-force book matures.
Risks and Contingencies:
- Reinsurance Dependency: The company relies heavily on Citi affiliates for reinsurance. Failure of these reinsurers to perform could have a material adverse effect.
- Accounting Changes: New FASB guidance (ASU 2010-26) regarding Deferred Policy Acquisition Costs (DAC) is expected to accelerate expense recognition starting in 2012, potentially impacting near-term results.
- Regulatory Environment: The Dodd-Frank Act and potential changes to fiduciary standards for broker-dealers could impact the sales model and compensation structure.
- Legal Proceedings: An ongoing FINRA arbitration regarding a representative's recommendation could result in an adverse judgment, though the amount is not estimable.
Key Facts for Investor Verification
- Reinsurance Structure: Verify the terms and stability of the coinsurance agreements with Citi affiliates, which now cover 80-90% of the term life book.
- Debt Obligations: Confirm the status of the $300 million note payable to Citi (5.5% interest, maturing March 2015) and the company's ability to refinance or repay it.
- Pro Forma Adjustments: Review the pro forma financial statements provided in the filing to understand the company's performance on a normalized basis, excluding the one-time impacts of the reorganization.
- Investment Portfolio Quality: Assess the credit quality of the remaining $2.2 billion investment portfolio, noting that 97% consists of fixed-maturity securities with an average rating of single A.
- Canadian Operations: Monitor the impact of foreign currency exchange rates, as Canadian operations contributed 16% of revenues and 22% of pre-tax income for the nine-month period.