www.MarketWatch.com, November 2, 2010
Net income of $39.6 million; Diluted EPS of $0.52
Net operating income of $40.9 million; Diluted Operating EPS of $0.54
– 14% increase in investment and savings products sales year over year
Primerica, Inc. (PRI 22.21, +0.11, +0.49%) announced today financial results for the third quarter ended September 30, 2010. Total revenues were $241.2 million for the third quarter of 2010. Net income was $39.6 million for the third quarter of 2010, or $0.52 per diluted share.
Operating revenues were $240.2 million for the third quarter of 2010, up 1%, and operating income before income taxes was $63.9 million, up 2% compared to the year ago period. Results were driven by stable term life performance as well as improved investment and savings product activity, partially offset by lower yield on our invested assets. Net operating income was $40.9 million, or $0.54 per diluted share, for the third quarter of 2010 compared with $41.2 million for the third quarter of 2009, reflecting a higher effective tax rate in 2010. Our definitions of operating metrics are included later in this release.
D. Richard Williams, Chairman of the Board and Co-Chief Executive Officer said, "We are pleased to report strong net operating income and earnings per share for the third quarter. We continue to grow our base of long-term recurring revenues in our life business and are experiencing solid momentum in investment and savings product sales, which were up 14% year over year. We believe our capital strength and operational focus will position us to drive higher growth and improved performance going forward."
John Addison, Chairman of Primerica Distribution and Co-Chief Executive Officer said, "We are proud of our performance in what remains a challenging economic environment and are optimistic about the future as we work to enhance Primerica's business opportunity with new incentive programs and product innovations that are designed to drive long-term sales force and revenue growth. Middle income consumers are most focused on paying off debt and having a meaningful savings program. We believe this focus is a natural fit with Primerica's investment and savings products."
Recruiting was flat in third quarter 2010 compared to the same period a year ago. The size of our life-licensed insurance sales force increased modestly on a sequential basis to 96,872 at September 30, 2010 primarily due to a decline in non-renewals partially offset by a lower percentage of new recruits obtaining a life license in the quarter. Late in the third quarter, we introduced the new "Fast Start Bonus," which is focused on enhancing the business opportunity for our newest recruits. Term life net premium revenues grew by 10% in third quarter 2010 compared to second quarter 2010 as we added another quarter of new term life business following the Citi reinsurance transactions. Life insurance issued policies decreased by 6% in third quarter 2010 from a year ago in line with industry term life trends and a year-over-year decline in the size of the life licensed sales force. Sequentially, life insurance issued policies declined 10% in third quarter 2010 largely reflecting the typical seasonality of the business. Total face amount in force increased by 1% to $654.63 billion at September 30, 2010 over September 30, 2009 primarily due to the effect of the stronger Canadian dollar and slightly improved persistency. Investment and savings product sales continued to grow, up 14% in third quarter 2010 from a year ago primarily driven by a 32% increase in variable annuity sales. Growth in variable annuity sales significantly outpaced the industry in third quarter 2010, reflecting our clients' desire to mitigate financial risk with guaranteed life time income. Sequentially, investment and savings product sales declined 11%, reflecting an historical seasonal trend. While the seasonal trend was not apparent in 2009 due to recovering market conditions, we expect this trend to continue going forward. Client asset values were driven higher by improved market conditions, up 8% to $32.60 billion at September 30, 2010 compared to a year ago.
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.
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 were flat and operating income before income taxes decreased by 2%, or $0.9 million, to $42.6 million compared with $43.5 million in third quarter 2009. Term Life earnings were dampened by lower yield on invested assets. Persistency improved modestly over the prior year, resulting in higher reserve increases offset by lower DAC amortization with little net effect on earnings. DAC amortization increased due to a lower interest rate assumed for new sales, reflecting the current interest rate environment.
New Term policies written after the effective date of the Citi reinsurance arrangements accounted for $26.8 million, or 29%, of the total net premium revenues in third quarter 2010. New Term net premium revenues for third quarter 2010 were significantly higher than for the second quarter 2010 as we continued to grow our base of long-term recurring revenues.
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 11%, or $8.5 million, to $83.9 million in the third quarter of 2010 from $75.4 million in the same period last year. Operating income before income taxes increased by 9%, or $2.2 million, to $26.6 million in the third quarter of 2010 compared with $24.4 million in the third quarter of 2009. Operating revenues and income before income taxes were both driven by higher sales and increased client asset values. Operating income before income taxes growth lagged operating revenues growth as the percentage of account-based revenues to total revenues was down year over year. Third quarter 2010 sales force commission expense increased consistent with revenues.
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 9%, or $4.2 million, to $40.4 million in the third quarter of 2010 from $44.6 million a year ago, largely due to continued diminishing loan sales that had little impact on operating income before income taxes. Segment operating loss before income taxes was $5.2 million in the third quarter of 2010, an improvement of 2% from $5.3 million a year ago reflecting lower expenses partially offset by lower allocated investment income. Expenses were lower primarily due to a corporate allocation adjustment from Citi in 2009 of $2.7 million as well as lower incentive compensation expenses in third quarter 2010 as a result of fully amortizing previous Citi equity awards in conjunction with our initial public offering. During the quarter, we continued to transition from Citi provided services. Year over year we reduced payments to Citi by $0.8 million while our stand-alone public company expenses were $2.1 million. We expect these expenses to continue to emerge over the next several quarters.
Our effective income tax rate for third quarter 2010 was 36.0% compared to 34.1% for the same period a year ago, impacted by recurring permanent items, foreign investment income taxed in the United States that may reverse in the near term if certain expired provisions in U.S. tax law are extended and other items that were offset by a decreasing tax rate in Canada.
Capital and Liquidity
Investments and cash totaled $2.28 billion as of September 30, 2010. Primerica continues to hold a high-quality invested asset portfolio, with an average credit rating of "A" on our fixed-income portfolio and a diverse mix among asset classes and sectors. Net unrealized investment gains net of anticipated tax impact and currency translation adjustments grew to $118.1 million at September 30, 2010 as our portfolio continued to experience strong market gains as interest rates and spreads continued to be near record lows.
Cash decreased by $135.7 million in the quarter ended September 30, 2010 to $74.8 million primarily due to $112.4 million of net purchases of investments (net of sales and maturities) as we continued our strategy of investing excess cash to enhance yield. As of September 30, 2010, the book yield on our fixed income portfolio was 5.47%, and including cash it was 5.28%, up from 5.15% at June 30, 2010.
Net realized investment gains were $1.0 million for the quarter ended September 30, 2010, including $0.3 million of other-than-temporary impairments (OTTI), compared with net realized investment losses of $11.2 million, including $18.9 million of OTTI for the same period a year ago.
As of September 30, 2010, our debt-to-capital ratio was 17.7%.
Stockholders' equity was $1.40 billion at September 30, 2010 and adjusted stockholders' equity, which eliminates the effect of net unrealized gains and losses on invested assets, was $1.28 billion. Net operating income return on adjusted stockholders' equity was 13.1% for the quarter ended September 30, 2010. Net income return on stockholders' equity was 11.7% for the same period.
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 approximately 550% as of September 30, 2010, we are well positioned to support anticipated future growth.
Reinsurance and Reorganization Transactions
In connection with Primerica's April 1, 2010 initial public offering, the Company executed a series of reinsurance and reorganization transactions. These transactions had a significant impact on our financial position and will cause our financial results in the current and future periods to be materially different from those reflected in our historical financial statements. Accordingly, management believes that our operating results for third quarter 2009, which reflect the effect of these transactions, represent a meaningful comparison to third quarter 2010 actual results.
Non-GAAP Financial Measures
We report financial results in accordance with U.S. generally accepted accounting principles (GAAP). We also present 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 and the expense associated with our IPO-related equity award transactions for all periods presented. Adjusted stockholders' equity excludes the impact of net unrealized gains and losses on invested assets for all periods presented. Periods ending 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 our financial 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 our results as reported under GAAP. Reconciliations of non-GAAP to GAAP financial measures are attached to this release.
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.