Primerica, Inc. announced financial results for the quarter ended September 30, 2014. Total revenues were $339.2 million, net income was $41.6 million, or $0.75 per diluted share, and net income return on stockholders' equity was 12.8% in the third quarter of 2014.
In the third quarter, operating revenues increased by 9% to $339.5 million and net operating income increased by 2% to $41.8 million compared with $310.8 million and $41.0 million, respectively, in the year ago quarter. Operating results were driven by strong product performance including a 10% increase in total Investment and Savings Product sales and a 16% growth in average client asset values as well as a 10% growth in Term Life net premiums year-over-year.
Net operating income was impacted by an acceleration of equity compensation expense related to retirement plan modifications as well as higher incurred claims versus the year ago period. Net operating income per diluted share was $0.76 and net operating income return on adjusted equity was 13.8% for the quarter.
Changes in retirement provisions of employee equity awards issued in February of 2014 accelerated recognition of expenses as discussed in the Current Report on Form 8-K dated September 17, 2014. These changes increased insurance and operating expenses by $5.1 million and reduced net operating income per diluted share by $0.06 and net operating income return on adjusted equity by 1.1% in the third quarter.
During the third quarter incurred claims were higher than historical trends by approximately $3.0 million, or $0.04 net operating income per diluted share. Net investment income continued to be impacted by lower yields on invested assets during the quarter.
Rick Williams, Chairman of the Board and Co-Chief Executive Officer said, Third quarter results were marked by solid growth in recurring life insurance revenues and strong Investment and Savings Products sales, which increased 10% year-over-year. Continued success in executing our organic growth strategy, coupled with our share repurchase program, positions us well to continue to deliver strong return on equity.
John Addison, Chairman of Primerica Distribution and Co-Chief Executive Officer said, We are pleased with the continued growth in the size of the sales force, the increase in Term Life policies issued and the double digit growth in ISP sales achieved in the third quarter.
- The size of our life-licensed sales force grew 4% to 97,966 at September 30, 2014 compared with 94,529 at September 30, 2013. Year-over-year comparisons of recruiting and new licenses are difficult due to post-convention incentives in the third quarter of 2013. On a sequential quarter basis, the size of the life-licensed sales force increased 1% while new life insurance licenses declined 3% due to recent recruiting levels. The size of the licensed sales force benefitted from a slightly lower percentage of non-renewals and terminations in relation to the size of the sales force.
- In the third quarter, term life insurance policies issued grew 2% to 55,146 compared with 53,997 in the third quarter of 2013. Productivity in the quarter of .19X policies per life licensed representative per month was consistent with .19X in the prior year period. On a sequential quarter basis, term life insurance policies issued decreased 7% compared with the seasonally strong second quarter.
- Year-over-year total Investment and Savings Products sales grew 10% to $1.38 billion compared with the third quarter a year ago, primarily reflecting higher retail mutual funds and variable annuity sales aided by favorable market conditions and recent product introductions. Sequentially, total ISP sales declined 4% primarily reflecting the seasonally strong second quarter of 2014. Average client asset values increased 16% to $47.83 billion at September 30, 2014 relative to a year ago and grew 3% from $46.61 billion in the second quarter.
Term Life Insurance
In the third quarter of 2014, Term Life operating revenues increased 9% to $193.6 million primarily reflecting a 10% growth in net premiums compared with the third quarter of 2013. Term Life operating income before income taxes declined 8% to $45.9 million versus the prior year period, as the strong growth in net premiums was more than offset by the acceleration of equity compensation expense ($2.5 million for the segment) and incurred claims that were approximately $3 million above the historical trend.
While the magnitude was larger than normal, the negative claims experience is believed to be a statistical fluctuation consistent with incurred claims volatility experienced in prior periods. Persistency improved slightly versus the year ago period while DAC amortization grew at a faster rate than net premiums due to more commissions being deferred in recent years.
Insurance expenses increased with normal business growth, the run-off of Citi allowances and an annual third quarter accrual true-up for employee healthcare benefits. Allocated net investment income was relatively flat year-over-year as growth from required assets in the segment was offset by lower yield on invested assets.
Sequentially, operating income before income taxes declined 17% reflecting higher employee-related expenses and incurred claims in the third quarter as well as seasonally strong persistency in the second quarter of 2014.
Investment and Savings Products
In the third quarter, operating revenues increased 13% to $129.3 million and operating income before income taxes increased 17% to $36.9 million compared with the year ago period. Results reflect a 10% increase in total product sales and a 16% growth in average client asset values. Year-over-year lower legal fees and expenses were partially offset by growth-related expenses as well as $0.8 million of accelerated employee equity compensation expenses. Canadian segregated fund DAC amortization was consistent with the prior year period.
Sequentially, operating income before income taxes increased 2% compared with the second quarter primarily reflecting growth in client asset values, partially offset by lower sales than the seasonally higher second quarter.
Corporate and Other Distributed Products. Operating revenues declined 9% to $16.6 million primarily due to the decline in allocated net investment income in the third quarter of 2014. Year-over-year allocated net investment income declined due to the lower portfolio yields and a lower return on the deposit asset backing a coinsurance agreement.
Operating losses before income taxes were flat year-over-year. The impact of the accelerated employee equity compensation expense ($1.8 million for the segment) as well as an annual accrual true-up of employee benefits expense in the third quarter of 2014 were more than offset by a $4.4 million increase in policy reserves in the prior year period for certain non-term life insurance products underwritten by our New York subsidiary.
The effective income tax rate for the third quarter of 2014 of 35.0% was consistent with the rate in both the third quarter of last year and the second quarter of 2014.
Capital and Liquidity
A redundant reserve financing transaction was completed on July 31, 2014. Following this transaction and a $68.0 million ordinary dividend payment by Primerica Life Insurance Company (PLIC) to Primerica, Inc. in the third quarter, PLIC's statutory risk-based capital (RBC) ratio increased to an estimated 540% as of September 30, 2014. PLIC's RBC ratio will decline to the low 400% range following an expected $165 million ordinary dividend payment from PLIC to Primerica, Inc. in the fourth quarter, and remain at a sufficient level to support future growth.
Repurchases of $30.5 million, or 620,000 shares, of Primerica common stock were made in the third quarter for a total of $65.5 million or 1.4 million shares repurchased year-to-date. Primerica remains on target to execute $150 million of shares repurchases by year-end.
As of September 30, 2014, our investments and cash increased to $2.23 billion compared with $2.04 billion as of June 30, 2014, primarily due to the $189.8 million asset that was received as part of the redundant reserve financing transaction which was offset by a surplus note in the same amount reflected in liabilities. Our available-for-sale invested asset portfolio had a net unrealized gain of $111.9 million (net of unrealized losses of $10.2 million) at September 30, 2014, down from $138.5 million at June 30, 2014.
Excluding the surplus note referenced above, the Parent Company debt-to-capital ratio was 22.4% on September 30, 2014.