Primerica Reports Second Quarter 2010 Results
Net income of $22.0 million; Diluted EPS of $.29
Net operating income of $37.2 million; Diluted Operating EPS of $.49
13.6% increase in recruits year over year
26.3% increase in investment and savings products sales year over year
DULUTH, Ga.--(BUSINESS WIRE)-- Primerica, Inc. (NYSE: PRI) announced today financial results for the second quarter ended June 30, 2010. Net income was $22.0 million for the second quarter of 2010, or $.29 per diluted share. Total revenues were $234.3 million for the second quarter of 2010.
Net operating income was $37.2 million, or $.49 per diluted share, for the second quarter of 2010, compared with $45.4 million for the second quarter of 2009. Operating revenues were $233.9 million for the second quarter of 2010, up 3.1% from $226.8 million for the second quarter of 2009.
Net operating income, operating income before income taxes and operating revenues are non-GAAP financial measures that exclude the impact of realized investment gains and losses and other items that management believes are not indicative of our ongoing operating results including the expense associated with the equity awards we granted in connection with our IPO. For periods prior to April 1, 2010, these non-GAAP financial measures also give effect to the reinsurance and reorganization transactions associated with our IPO as described later in this release. Management believes these measures are important for understanding the Company's ongoing business and financial performance. Reconciliations of non-GAAP to GAAP financial measures can be found at the end of this release.
D. Richard Williams, Chairman of the Board and Co-Chief Executive Officer said, "We are pleased with our second quarter results. Investment and savings product sales were up 26.3% in second quarter 2010 compared to a year ago despite the turbulent market environment. Our operating expenses increased largely due to one-time expenses related to launching our new public company. We are optimistic about the future as we complete our first quarter as PRI."
John Addison, Chairman of Primerica Distribution and Co-Chief Executive Officer of Primerica, said, "I am very proud of our sales force and the recruiting momentum generated out of our successful IPO. Second quarter 2010 was the highest recruiting quarter in the history of the company and we are working hard to support and motivate our leaders and get these new recruits licensed as they establish the foundation of the new Primerica."
Second Quarter 2010 Highlights
-- Recruits increased by 13.6% in second quarter 2010 compared to the same period a year ago and sequentially increased by 12.3% compared to first quarter 2010 due to positive momentum generated from our IPO and the new equity-based sales force incentive programs. -- Our life licensed insurance sales force experienced a slight decline of 1.3% to 96,066 at June 30, 2010 from 97,354 at March 31, 2010 impacted by difficult economic conditions and license renewal cycles in certain key states. -- Issued life insurance policies decreased by 2.9% to 60,406 in second quarter 2010 from 62,202 a year ago in line with a year over year decline in the size of the life licensed sales force. Sequentially, issued life insurance policies increased by 15.2% compared to first quarter 2010 reflecting the typical seasonality of the business. -- Total face amount in force increased by 2.2% to $653.5 billion at June 30, 2010 from $639.4 billion at June 30, 2009, primarily due to improved persistency and the effect of the stronger Canadian dollar. Total face amount in force was flat compared to March 31, 2010. -- Investment and savings product sales were up 26.3% to $923.3 million for second quarter 2010 from $730.9 million for second quarter 2009 continuing the growth trend we experienced in the first quarter of 2010. Sequentially, investment and savings product sales declined 5.2% reflecting a seasonal trend due to the U.S. IRA and Canadian RRSP seasons. -- Investment and savings product client account values grew 12.2% to $29.7 billion at June 30, 2010 from $26.5 billion at June 30, 2009 primarily due to improved market conditions and sales volumes over the prior year. Sequentially, client account values declined by 9.0% compared to March 31, 2010 due to changes in market values.
Primerica operates in two primary business segments: Term Life Insurance and Investment and Savings Products, and has a third segment, Corporate and Other Distributed Products.
Actual Operating (1) Q2 2010 Q2 2009 Q2 2010 Q2 2009 Revenues: (In thousands) Term Life Insurance $ 108,389 $ 430,830 $ 108,389 $ 107,930 Investment and Savings Products 88,218 72,489 88,218 72,489 Corporate and Other Distributed 37,692 44,268 37,318 46,365 Products Total revenues $ 234,299 $ 547,587 $ 233,925 $ 226,784 Income (loss) before income taxes: Term Life Insurance $ 44,095 $ 171,865 $ 44,095 $ 43,779 Investment and Savings Products 26,735 20,717 26,735 20,717 Corporate and Other Distributed (34,492 ) 5,752 (9,409 ) 3,724 Products Total income before income taxes $ 36,338 $ 198,334 $ 61,421 $ 68,220 (1) The operating adjustments are included in the Operating Results Reconciliations and the Term Life Insurance and Corporate and Other Distributed Products Operating Results Reconciliations at the end of this release.
Term Life Insurance. This segment includes underwriting profits on Primerica's in-force book of term life policies, net of reinsurance, which are underwritten by our three life insurance subsidiaries and allocated net investment income on the portion of the invested asset portfolio used to meet required statutory reserves and targeted capital.
Operating revenues increased by 0.4%, or $0.5 million, to $108.4 million for the second quarter of 2010, from $107.9 million a year ago due to growth in premium revenue partially offset by a decrease in allocated net investment income.
Direct premium revenues grew by 4.0%, or $20.4 million, primarily due to the growth in face amount of insurance in force. Ceded premium revenues, heavily influenced by the in-force business reinsured with Citi, grew by 4.4%, or $18.7 million, consistent with direct premium growth. Of the total net premium revenues, $17.4 million was attributable to New Term policies written after the effective date of the Citi reinsurance agreements. New Term net premium revenues were significantly higher than the first quarter 2010 as we began rebuilding our base of long-term recurring revenues.
Allocated net investment income declined by 12.7% or $2.3 million primarily due to lower yields on invested assets.
Operating income before income taxes was $44.1 million, virtually unchanged compared to second quarter 2009. The slight increase in operating revenue was offset by a corresponding increase in operating benefits and expenses. While claims remained level, we experienced a $3.7 million increase in benefit reserves due to premium growth and improved persistency. Partially offsetting the reserve increase, DAC amortization declined $1.4 million largely due to favorable persistency. Operating expenses declined by $2.0 million in part due to the prior year expense related to cancelling our 2009 biennial sales force convention.
Investment and Savings Products. The Investment and Savings Product segment includes commission and fee revenues earned from the distribution of mutual funds in the United States and Canada, variable annuities in the United States and segregated funds in Canada and from associated administrative services. These products are distributed on behalf of third parties except for the Canadian segregated funds which we underwrite.
Operating revenues increased by 21.7%, or $15.7 million, to $88.2 million in the second quarter of 2010 from $72.5 million in the same period last year primarily due to an increase of $6.9 million in sales-based revenue and an increase of $9.7 million in asset-based revenue related to improved market conditions and increased emphasis on investment and savings products.
Operating income before income taxes increased by 29.0%, or $6.0 million, to $26.7 million in the second quarter of 2010, compared with $20.7 million in the second quarter of 2009. While second quarter DAC amortization was higher as a result of fluctuations in asset values of our Canadian Segregated Funds, other operating expenses remained level.
Corporate and Other Distributed Products. This segment consists of corporate income, including net investment income, and expenses not allocated to our other segments, realized investment gains and losses on our invested asset portfolio and other distributed products.
Operating revenues decreased by 19.5%, or $9.1 million, to $37.3 million in the second quarter of 2010 from $46.4 million a year ago largely due to continued diminishing loan sales. The corresponding impact to operating income before income taxes was $0.9 million.
Operating loss before income taxes was $9.4 million in the second quarter of 2010, compared with operating income before income taxes of $3.7 million a year ago. The decrease was primarily due to the effect of the decline in sales on revenues and product-related commissions and benefits as well as higher other operating expenses. Other operating expenses were higher primarily as a result of the following: non-recurring public company launch expenses of $5.1 million, the emergence of new public company expenses of approximately $2 million which we expect to develop as we build out our public company structure and a $2.7 million prior year corporate expense allocation credit from Citi which lowered 2009 expenses.
Effective April 1, 2010 we made elections under Section 338(h)(10) of the Internal Revenue Code, which resulted in reductions to stockholders' equity of $177.3 million and corresponding adjustments to deferred tax balances.
Our effective income tax rates for the three and six months ended June 30, 2010 are 39.4% and 35.6%, respectively. Our second quarter rate increase resulted from permanent differences caused by our IPO equity awards granted to Canadian sales force leaders and from other items that may reverse in the near term if certain expired provisions in the tax law are extended as expected. The effect of these items was partially offset by the impact of a decreasing tax rate in Canada.
Capital and Liquidity
Investments and cash totaled $2.3 billion as of June 30, 2010. Primerica continues to hold a high-quality investment portfolio, with an average credit rating on our fixed-income portfolio of "A" and a diverse mix among asset classes and sectors. Net unrealized investment gains net of anticipated tax impact and currency translation adjustments at June 30, 2010 were $93.8 million, which was down from $130.0 million at year-end 2009. The decline primarily reflects the smaller size and the composition of the invested asset portfolio due to the reinsurance and reorganization transactions.
Net realized investment gains were $0.4 million for the three months ended June 30, 2010, including $1.3 million of other-than-temporary impairments (OTTI), compared with net realized investment losses of $9.0 million, including $14.3 million of OTTI for the same period a year ago.
Outstanding debt as of June 30, 2010 consisted of a $300.0 million note we issued to Citi on April 1, 2010. As of June 30, 2010, our debt-to-capital ratio was 18.5%.
Stockholders' equity was $1.3 billion at June 30, 2010 and adjusted stockholders' equity, which eliminates the effect of net unrealized gains and losses on invested assets, was $1.2 billion. Net operating income return on adjusted stockholders' equity was 12.3% for the quarter ended June 30, 2010. Net income return on stockholders' equity was 6.8% for the same period reflecting the equity awards made in connection with the IPO.
Cash decreased by $718.6 million in the quarter ended June 30, 2010 to $210.5 million. This decrease was primarily driven by $675.7 million of cash dividends paid to Citi as part of our reorganization transactions and payments of $125.5 million made to Citi under the terms of the Citi reinsurance agreements related to business ceded for the first quarter of 2010. Net of these two items, cash flow was positive by $82.6 million for the quarter due to $44.5 million of investment maturities and sales in excess of purchases and positive cash flow from invested assets and operations.
Primerica Life Insurance Company, our primary underwriter, had statutory capital in excess of the applicable statutory requirements to support existing operations and to fund future growth. With a statutory risk based capital ratio estimated to be in excess of 530% as of June 30, 2010, combined with our positive cash flow, we are well positioned to support anticipated future growth.
IPO Highlights and Reinsurance and Reorganization Transactions
-- On March 31, 2010, Primerica reinsured between 80% and 90% of business that was in-force at year-end 2009 to various affiliates of Citi and declared extraordinary dividends to Citi. -- On April 1, 2010, Citi contributed the legal entities comprising the Company's business to Primerica, Inc. Primerica issued to Citi approximately 75.0 million shares of common stock and warrants exercisable for approximately 4.1 million additional shares of Primerica common stock. Additionally, Primerica issued a $300.0 million note to Citi, due March 31, 2015 and bearing interest at 5.5% annually. -- On April 1, 2010, Primerica's common stock began trading under the ticker symbol "PRI" on the New York Stock Exchange. -- On April 1, 2010, Citi sold approximately 24.6 million shares of Primerica's common stock (after giving effect to the over-allotment option) to the public in the IPO. -- On April 1, 2010, Citi contributed approximately 5.0 million shares back to Primerica, which Primerica granted in the form of equity awards to certain of its management and sales force leaders. Of these, approximately 200,000 shares were granted to replace unvested Citi awards. -- On April 15, 2010, Citi sold approximately 16.4 million shares and the warrants to purchase approximately 4.1 million additional shares of Primerica's common stock to private equity funds managed by Warburg Pincus LLC ("Warburg Pincus") for a purchase price of $230.0 million (the "private equity transaction"). Following the IPO and the private equity transaction, certain historical Citi equity awards immediately vested. -- Effective as of April 1, 2010, in connection with the IPO and the private equity transaction, elections under Section 338(h)(10) of the Internal Revenue Code were made, which resulted in changes to Primerica's deferred tax balances and reduced stockholders' equity by $177.3 million. -- In connection with the tax separation agreement that we executed with Citi, we prepaid our estimated tax liability through March 31, 2010. These payments exceeded our actual tax liability. As a result, we recorded the overpayment as a return of capital resulting in a reduction of tax assets and a reduction of $14.9 million to stockholders' equity.
In connection with Primerica's April 1, 2010 initial public offering, the Company effected a series of reinsurance and reorganization transactions. These transactions had a significant impact on the Company's financial position and will cause its financial results in the current and future periods to be materially different from those reflected in its historical financial statements. Accordingly, management believes that the Company's operating results for second quarter 2009, which reflect the effect of these transactions, represent a more meaningful comparison to its second quarter 2010 actual results.
Non-GAAP Financial Measures
The Company reports its financial results in accordance with U.S. generally accepted accounting principles (GAAP). The Company also presents operating revenues, operating income before income taxes, net operating income and adjusted stockholders' equity. Operating revenues, operating income before income taxes and net operating income exclude realized investment gains and losses for all periods presented. For the three months ended June 30, 2010, operating income before income taxes and net operating income also exclude the one-time equity award expense incurred in connection with our IPO. Adjusted stockholders' equity excludes the impact of net unrealized gains and losses on invested assets for all periods presented. Periods prior to April 1, 2010 also give effect to the reinsurance and reorganization transactions as if they had occurred at the beginning of the period presented for the statement of income and at the end of the period for the balance sheet. Our definitions of these non-GAAP financial measures may differ from the definitions of similar measures used by other companies. Management uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating the Company's performance. Furthermore, management believes that these non-GAAP financial measures may provide users with additional meaningful comparisons between current results and results of prior periods as they are expected to be reflective of our core ongoing business. These measures have limitations, and investors should not consider them in isolation or as a substitute for analysis of the Company's results as reported under GAAP. A reconciliation of non-GAAP to GAAP financial measures is attached to this release.
Earnings Webcast Information
Primerica will hold a webcast Wednesday, August 4, 2010 at 9:00 am EDT, to discuss second quarter results. This release and a detailed financial supplement will be posted on Primerica's website. Investors are encouraged to review these materials.
To access the webcast go to http://investors.primerica.com at least 15 minutes prior to the event to register, download and install any necessary software.
A replay of the call will be available for approximately 30 days on Primerica's website, http://investors.primerica.com.
Except for historical information contained in this press release, the statements in this release are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements contain known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from anticipated or projected results. Those risks and uncertainties include, among others, our failure to attract large numbers of new recruits, retain sales representatives and maintain the licensing of our sales representatives; our or our sales representatives' violation of, non-compliance with or subjection to specific laws and regulations; incorrect assumptions used to price our insurance policies; the failure of our investment and savings products to remain competitive with other investment or savings options or the loss of our relationship with companies that offer our mutual fund or variable annuity products; our failure to meet RBC standards or other minimum capital and surplus requirements; a downgrade or potential downgrade in our insurance subsidiaries' financial strength ratings; inadequate or unaffordable reinsurance or the failure of our reinsurers, including Citi, to perform their obligations; a discontinuation of custodial or recordkeeping services; the inability of our subsidiaries to pay dividends or make distributions; the loss of key personnel; conflicts of interests due to Citi's and Warburg Pincus' significant interests in us; arrangements with Citi that may not be sustained at the same levels as when we were controlled by Citi and incremental costs that we incur as a stand-alone public company; historical combined and pro forma financial data may not be a reliable indicator of future results; and general changes in economic and financial conditions, including the effects of credit deterioration and interest rate fluctuations on our portfolio. These and other risks and uncertainties affecting us are more fully described in our filings with the Securities and Exchange Commission, which are available in the "Investor Relations" section of our website at http://investors.primerica.com. Primerica assumes no duty to update its forward-looking statements as of any future date.
About Primerica, Inc.
Primerica, headquartered in Duluth, Georgia, is a leading distributor of financial products to middle income households in North America with approximately 100,000 licensed representatives. The Company and its representatives offer clients term life insurance, mutual funds, variable annuities and other financial products. Primerica insures 4.3 million lives and more than 2 million clients maintain investment accounts with the Company. Primerica's mission is to serve middle income families by helping them make informed financial decisions and providing them with the strategies and means to gain financial independence.
PRIMERICA, INC. Balance Sheets (In thousands) June 30, December 2010 31, (Unaudited) 2009 Assets Investments: Fixed maturity securities available for sale, at $ 2,006,795 $ 6,378,179 fair value Equity securities available for sale, at 19,274 49,326 fair value Trading securities, at fair 14,124 16,996 value Policy loans and other invested assets 24,865 26,947 Total investments 2,065,058 6,471,448 Cash and cash 210,506 625,260 equivalents Accrued investment 21,369 71,382 income Premiums and other receivables 188,127 169,225 Due from reinsurers 3,603,532 867,242 Due from - 1,915 affiliates Deferred policy acquisition 745,322 2,789,905 costs Intangible 77,126 78,895 assets Other assets 107,271 59,167 Separate account 2,098,936 2,093,342 assets Total assets $ 9,117,247 $ 13,227,781 Liabilities and Stockholders' Equity Liabilities: Future policy $ 4,286,258 $ 4,197,454 benefits Unearned premiums 3,692 3,185 Policy claims and other 216,457 218,390 benefits payable Other policyholders' 388,158 382,768 funds Income taxes 129,776 890,617 Note payable 300,000 - Due to - 202,507 affiliates Other 376,374 295,745 liabilities Separate account 2,098,936 2,093,342 liabilities Total liabilities 7,799,651 8,284,008 Stockholders' equity: Common stock 727 - Paid-in 870,706 1,124,096 capital Retained 304,075 3,648,801 earnings Accumulated other comprehensive income, net of 142,088 170,876 income tax Total stockholders' equity 1,317,596 4,943,773 Total liabilities and stockholders' $ 9,117,247 $ 13,227,781 equity
PRIMERICA, INC. Statements of Income (Unaudited - in thousands, except share and per-share amounts) Three Months Ended June 30, 2010 2009(1) Revenues: Direct premiums $ 547,455 $ 529,004 Ceded premiums (447,213 ) (158,401 ) Net premiums 100,242 370,603 Net investment income 27,991 89,755 Commissions and fees 93,226 82,690 Realized investment gains (losses), including OTTI 374 (9,003 ) Other 12,466 13,542 Total revenues 234,299 547,587 Benefits and expenses: Benefits and claims 45,124 151,444 Amortization of deferred policy acquisition costs 22,899 86,234 Insurance commissions 4,233 6,396 Insurance expenses 10,083 36,203 Sales commissions 43,511 40,389 Interest expense 6,928 - Other operating expenses 65,183 28,587 Total benefits and expenses 197,961 349,253 Income before income taxes 36,338 198,334 Income taxes 14,330 66,214 Net income $ 22,008 $ 132,120 Earnings per share: Basic $ .29 Diluted $ .29 Shares used in computing earnings per share: Basic 71,843,588 Diluted 72,734,365 (1) Does not give effect to the reinsurance and reorganization transactions.
PRIMERICA, INC. Operating Results Reconciliation (Unaudited - in thousands, except share and per-share amounts) Three Months Ended June 30, 2010 Operating Operating Reported (Non-GAAP) adjustments (GAAP) Revenues: Direct premiums $ 547,455 $ - $ 547,455 Ceded premiums (447,213 ) - (447,213 ) Net premiums 100,242 - 100,242 Net investment income 27,991 - 27,991 Commissions and fees 93,226 - 93,226 Realized investment gains (losses), including OTTI - 374 374 Other, net 12,466 - 12,466 Total revenues 233,925 374 234,299 Benefits and expenses: Benefits and claims 45,124 - 45,124 Amortization of DAC 22,899 - 22,899 Insurance commissions 4,233 - 4,233 Insurance expenses 10,083 - 10,083 Sales commissions 43,511 - 43,511 Interest expense 6,928 - 6,928 Other operating expenses 39,726 25,457 65,183 Total benefits and expenses 172,504 25,457 197,961 Income before income taxes 61,421 (25,083 ) 36,338 Income taxes 24,222 (9,892 ) 14,330 Net income $ 37,199 $ (15,191 ) $ 22,008 Earnings per share - diluted $ 0.49 $ 0.29 Diluted shares 72,734,365 72,734,365 Operating adjustments remove the impact of realized investment gains and the expense associated with our equity award transactions.
PRIMERICA, INC. Operating Results Reconciliation (Unaudited - in thousands) Three Months Ended June 30, 2009 Adjustments Adjustments Operating for for Operating Reported (Non-GAAP) the Citi the adjustments (GAAP) Reinsurance Reorganization Transactions Revenues: Direct $ 529,004 $ - $ - $ - $ 529,004 premiums Ceded (428,660 ) 270,259 - - (158,401 ) premiums Net premiums 100,344 270,259 - - 370,603 Net investment 30,208 51,755 7,792 - 89,755 income Commissions 82,690 - - - 82,690 and fees Realized investment gains (losses), including - - - (9,003 ) (9,003 ) OTTI Other, net 13,542 - - - 13,542 Total 226,784 322,014 7,792 (9,003 ) 547,587 revenues Benefits and expenses: Benefits and 43,061 108,383 - - 151,444 claims Amortization 22,374 63,860 - - 86,234 of DAC Insurance 4,987 1,409 - - 6,396 commissions Insurance 12,341 23,862 - - 36,203 expenses Sales 40,389 - - - 40,389 commissions Interest 6,825 (2,700 ) (4,125 ) - - expense Other operating 28,587 - (25,457 ) 25,457 28,587 expenses Total benefits and expenses 158,564 194,814 (29,582 ) 25,457 349,253 Income before 68,220 127,200 37,374 (34,460 ) 198,334 income taxes Income taxes 22,775 42,466 12,477 (11,504 ) 66,214 Net income $ 45,445 $ 84,734 $ 24,897 $ (22,956 ) $ 132,120 The adjustments reflect the impact of the reinsurance transactions and interest expense on the note payable as if they were executed on the first day of the reporting period. The net investment income adjustments also reflect a pro rata allocation of investment income related to investments transferred in the dividend and return of capital and on the assets transferred to fund the Citi reinsurance transactions along with interest income related to a 10% reinsurance agreement accounted for under the deposit method. Other operating expenses are adjusted to reflect the expense associated with our equity award transactions. Operating adjustments remove the impact of realized investment losses and the expense associated with our equity awards transactions.
PRIMERICA, INC. Reconciliation to Adjusted Stockholders' Equity (Unaudited - in thousands) June 30, 2010 Adjusted stockholders' equity $ 1,223,794 Unrealized net investment gains recorded in stockholders' 93,802 equity Stockholders' equity $ 1,317,596
Term Life Insurance Operating Results Reconciliation (Unaudited - in thousands) Three months ended June 30, 2010 2009 Operating revenues $ 108,389 $ 107,930 Reinsurance transaction adjustments - 322,014 Reorganization adjustments - 886 Total revenues $ 108,389 $ 430,830 Operating income before income taxes $ 44,095 $ 43,779 Reinsurance transaction adjustments - 127,200 Reorganization adjustments - 886 Income before income taxes $ 44,095 $ 171,865
Corporate and Other Distributed Products Operating Results Reconciliation (Unaudited - in thousands) Three months ended June 30, 2010 2009 Operating revenues $ 37,318 $ 46,365 Reorganization adjustments - 6,906 Realized investment gains (losses), including OTTI 374 (9,003 ) Total revenues $ 37,692 $ 44,268 Operating (loss) income before income taxes $ (9,409 ) $ 3,724 Reorganization adjustments - 36,488 Realized investment gains (losses), including OTTI 374 (9,003 ) Other operating expenses-IPO equity grants (25,457 ) (25,457 ) (Loss) income before income taxes $ (34,492 ) $ 5,752
Source: Primerica, Inc.
Released August 3, 2010