Primerica, Inc. — Q2 2012 Form 10-Q
Business context and reporting period. Primerica distributes financial products to middle-income households in the U.S. and Canada, including term life insurance it underwrites and investment products it distributes. This unaudited filing covers the three and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. The company retrospectively adopted an accounting change for insurance acquisition costs, so prior-period figures presented reflect that change.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $300.5 million | $275.1 million | $587.1 million | $551.4 million |
| Income before taxes | $71.9 million | $58.5 million | $135.4 million | $131.7 million |
| Net income | $46.2 million | $37.6 million | $87.9 million | $84.9 million |
| Diluted EPS | $0.72 | $0.49 | $1.33 | $1.11 |
| Operating cash flow | Not separately shown for the quarter | $12.8 million | $(6.2) million |
- Q2 revenue increased 9% and net income increased 23% year over year; six-month revenue rose 6% and net income 4%. The Q2 diluted EPS increase also reflects a lower share count following repurchases.
- Q2 net premiums rose 23% to $154.3 million, primarily as newer term-life business grew and the older block ceded to Citi ran off. Net investment income declined 13% to $23.6 million, partly reflecting asset sales used to fund share repurchases.
- By segment, Q2 pretax income was $51.7 million in Term Life (up 44%), $29.4 million in Investment and Savings Products (down 3%), and a $9.2 million loss in Corporate and Other Distributed Products. For the six months, those results were $96.0 million (up 12%), $58.3 million (down 5%), and a $18.9 million loss, respectively.
- At June 30, total assets were $9.95 billion, total liabilities $8.67 billion, and stockholders’ equity $1.28 billion. Cash and cash equivalents were $108.1 million, down from $136.1 million at year-end 2011. The balance sheet includes $2.50 billion of separate-account assets and matching liabilities.
- Cash flows for the first half included $12.8 million from operations, $126.7 million from investing, and $(166.0) million from financing. Investing inflows principally reflected securities sales; financing outflows principally reflected the $150 million share repurchase and dividends.
- Debt was $300 million at June 30, represented by the Citi note bearing 5.5%. Debt-to-capital was 19.0%. On July 16, after quarter-end, Primerica issued $375 million of 4.750% senior notes due 2022 and repaid the Citi note; pro forma debt-to-capital at June 30 would have been 22.7%. Management expects future interest expense to be higher because the new principal exceeds the repaid balance.
Material changes, outlook and risks
- In April, Primerica repurchased 5.74 million shares from Warburg Pincus for $150 million, funded primarily by a $150 million extraordinary dividend from Primerica Life and sales of invested assets. The filing says the asset sales reduced investment income. The board authorized a separate repurchase program of up to $75 million on August 6, 2012; the company is not obligated to repurchase shares under it.
- Effective March 31, Peach Re began reinsuring certain level-premium term policies. A Deutsche Bank letter of credit initially totaled $450 million and may increase to $510 million by 2014. Peach Re’s obligations are collateralized by its assets; the arrangement is non-recourse to Primerica, Inc. and Primerica Life for draws, though the parent guarantees facility fees.
- There is no quantified earnings or revenue guidance in the filing. Management stated that term-life revenue and earnings growth are expected to decelerate over time as the in-force book grows and incremental sales have a smaller effect. It expects to continue ceding about 90% of U.S. and 80% of Canadian mortality risk on new business.
- Term-life policy sales increased, supported by the TermNow rapid-issue product, while average policy face amount declined. Recruiting fell versus the prior year, which management attributed largely to strong recruiting around the June 2011 sales convention; new life licenses increased.
- Investment and savings results faced lower average client asset values and fewer recordkeeping accounts. Total product sales rose 5% in Q2, but average client asset values were down 3% year over year. Lower client asset values and fee-structure changes weighed on revenue.
- Management identifies mortality, persistency, investment yields, credit quality, interest rates, reinsurance availability and counterparty performance, sales-force recruitment and retention, regulatory compliance, and Canadian currency movements as risks. A 100-basis-point parallel rise in interest rates was estimated to reduce fixed-maturity portfolio market value by approximately $60.3 million, or 3%. A 10% decline in the Canadian dollar was estimated to reduce pretax income by $1.8 million for Q2 and $3.0 million for the first half.
- Unusual legal exposure includes FINRA arbitrations and three lawsuits alleging unsuitable recommendations concerning Florida Retirement System benefit transfers. Damages are unspecified; Primerica says it intends to defend the claims but cannot assess the ultimate effect. The company also reports that potential losses in certain legal matters cannot be estimated.
- The retrospective acquisition-cost accounting change reduced reported stockholders’ equity at December 31, 2011 by $96.0 million and reduced 2011 net income by $6.4 million for Q2 and $11.6 million for the first half. It had no cash-flow or required-capital effect.
Important facts for investors to verify
- Whether term-life growth and persistency continue to offset claim, DAC-amortization and reinsurance-related cost trends.
- The effect of share repurchases and the post-quarter debt refinancing on future EPS, investment income, interest expense and leverage.
- Exposure and collectability of the $3.90 billion due from reinsurers, including $2.98 billion due from Citi-affiliated reinsurers; 89% of life insurance in force was reinsured.
- Developments and potential costs from the Florida retirement-plan arbitrations and lawsuits, for which the filing provides no clear loss estimate.
- Investment portfolio credit and valuation risks, including that 41% of fixed-maturity amortized cost was rated BBB and 6% was below investment grade.
- Regulatory capital, the Peach Re letter-of-credit terms and fees, and the execution and cost of planned share repurchases.