Primerica, Inc. — 2015 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; comparisons are with the same 2014 periods unless noted. Primerica distributes term life insurance and third-party investment and savings products, principally to middle-income households in the United States and Canada. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
Financial performance and condition
| Metric | Third quarter 2015 | Nine months 2015 |
|---|---|---|
| Total revenue | $355.8 million, up 5% | $1,051.2 million, up 6% |
| Net premiums | $193.9 million, up 11% | $555.2 million, up 10% |
| Income before tax | $75.0 million, up 17% | $218.6 million, up 6% |
| Net income | $49.4 million, up 19% | $141.9 million, up 4% |
| Diluted EPS | $0.98, versus $0.75 | $2.73, versus $2.44 |
| Operating cash flow | Not separately reported quarterly | $141.0 million, versus $131.5 million |
- Third-quarter pretax income benefited from higher term-life net premiums and lower operating expenses; reported 2014 expenses included accelerated recognition of management equity-award compensation. Nine-month net income growth was slower than revenue growth as benefits and expenses also increased.
- Term Life Insurance pretax income was $46.5 million in Q3, up 37%, and $127.3 million for nine months, up 13%. Investment and Savings Products pretax income was $34.8 million in Q3, down 6%, and $107.6 million for nine months, up 1%. Corporate and Other Distributed Products reported pretax losses of $6.4 million and $16.3 million, respectively.
- At September 30, total assets were $10.56 billion and stockholders’ equity was $1.15 billion. Cash and equivalents were $160.6 million, down from $192.0 million at year-end 2014. Total investments were $2.12 billion. Separate-account assets and liabilities were each $2.09 billion.
- Debt included $374.6 million of senior notes payable and a $356.0 million surplus note. The senior notes bear 4.75% interest and mature in 2022; the surplus note bears 4.50% and matures in 2029. The company reported compliance with applicable debt covenants and no short-term borrowings.
- Cash used in financing was $207.4 million, chiefly reflecting $181.1 million of share repurchases and $24.9 million of dividends. The company had $168.9 million remaining under its new $200 million repurchase authorization at quarter-end. Parent-company cash and invested assets were approximately $65.6 million.
Material changes and operating trends
- Term-life growth reflected a larger sales force, higher policy issuance and premiums on business not subject to the Citigroup coinsurance transactions, alongside run-off of ceded business. New policies issued increased to 66,658 in Q3 from 55,146; the life-licensed sales force reached 104,702.
- Investment and savings product sales were $1.37 billion in Q3, down 1%. Client account assets ended the quarter at $45.85 billion, down from $49.37 billion at the start of the quarter, mainly from market declines and Canadian-dollar weakness; net inflows were positive at $199 million.
- For the first nine months, total client account assets declined $2.81 billion, despite $768 million of net inflows. The comparable 2014 period had a $2.41 billion increase, supported by market performance.
- The company changed its segment allocation methodology in Q3, shifting investment income, interest expense and invested assets between Term Life and Corporate and Other Distributed Products. Prior-period segment data was recast; the change did not affect consolidated results.
- Other comprehensive loss was $57.4 million for the first nine months, primarily reflecting unrealized investment losses and foreign-currency translation. The company reported no material change in market-risk exposures from year-end 2014.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management expected business cash flows to provide sufficient operating liquidity over the next 12 months and stated that cash flows and potential funding sources should support long-term liquidity needs.
- Management cited continued recruiting and licensing, mortality and persistency experience, interest rates, investment markets, Canadian currency movements and reinsurance performance as factors that can affect results. It expects growth in revenue and earnings from the existing term-life book to decelerate over time as the in-force base expands and incremental sales have a smaller marginal effect.
- The proposed U.S. Department of Labor fiduciary rule could require changes to qualified-account compensation, products or compliance practices. The company said the proposal’s final form and impact were unknown; U.S. qualified retirement plans represented significant portions of 2014 average client assets and investment-product sales.
- Canadian regulators planned a new life-insurance licensing exam in early 2016, which could reduce licensing and sales. Primerica dismissed related court applications in October 2015 after regulators undertook to make changes intended to mitigate the effects.
- Primerica and subsidiaries faced targeted multi-state unclaimed-property audits and a market-conduct examination concerning claims practices, as well as West Virginia litigation involving unclaimed-property laws. The company could not reasonably estimate the likelihood or impact of additional costs or liabilities.
- Other notable items: third-quarter reprocessing of reinsurance transactions increased term-life net premiums by approximately $2.8 million and claims by approximately $1.2 million. A tax benefit from expiring statutes reduced the Q3 effective tax rate by approximately 1.3 percentage points; the nine-month effective rate was 35.1%.
Important facts for investors to verify
- Whether term-life sales momentum and persistency continue, and how actual mortality and claims compare with pricing assumptions.
- The credit quality and concentration of reinsurance recoverables: due from reinsurers was $4.10 billion, including large balances with certain Citigroup affiliates; reinsurance does not remove Primerica’s primary obligation to policyholders.
- Any final DOL rule or Canadian licensing changes, and their effects on qualified-account business, representative licensing, costs and sales.
- How continued repurchases and dividends affect parent-company liquidity and capital, while statutory capital requirements, reserve financing and the $480.2 million letter of credit remain supported.
- Investment-portfolio sensitivity to interest rates, credit spreads and Canadian-dollar movements; the average portfolio rating was A- and 6% of fixed-maturity amortized cost was below investment grade at quarter-end.