Primerica, Inc. announced today financial results for the quarter ended March 31, 2015. Total revenues were $345.1 million in the first quarter of 2015 and net income was $43.4 million, or $0.82 per diluted share.
Operating revenues increased by 6% in the first quarter of 2015 to $343.9 million compared with $324.1 million in the year ago quarter primarily driven by solid Term Life performance that includes strong policy persistency, 9% growth in net premiums and a 13% growth in policies issued. Investment and Savings Products (ISP) continued to perform well in the first quarter with a 7% increase in sales and 7% growth in ending client asset values.
While revenue drivers were positive during the quarter, the timing of expense recognition for annual equity awards granted to retirement eligible employees led to a 2% decline in net operating income to $42.6 million from $43.3 million in the year ago period. Retirement vesting provisions included in employee equity awards granted during the first quarter of 2015, consistent with those described in the Current Report on Form 8-K dated September 17, 2014, resulted in the accelerated recognition of approximately $6 million of expense in the first quarter that, under prior award terms, would have been recognized evenly over 3 years.
First quarter results were also modestly reduced by trends in the Canadian exchange rate and lower yield on invested assets. Despite the negative impact of these items, net operating income per diluted share increased 3% to $0.80 and net operating income return on adjusted stockholders’ equity (ROAE) was 14.6% (14.0% net income return on stockholders’ equity) in the first quarter of 2015 reflecting ongoing share repurchase activity. The accelerated retirement vesting expense recognition reduced net operating income per diluted share by $0.07 and ROAE by 1.3% in the first quarter.
Glenn Williams, Chief Executive Officer said, “We started the year with great momentum in key business drivers including Term Life sales and policy persistency as well as Investment and Savings Products sales and client asset values. Sales force results were positive with growth in both recruiting of new representatives and the size of the life insurance licensed sales force compared with the first quarter a year ago. Continued success in executing our organic growth strategy, coupled with our share repurchase program, position us well to continue delivering strong stockholder returns.”
- The size of the life-licensed sales force increased 3% to 98,145 at March 31, 2015 compared with 95,382 at March 31, 2014. Recruiting of new representatives grew 10% year-over-year to 53,300 primarily driven by building on the positive momentum generated at the end of 2014 and complimented by effective short-term incentive programs in the first quarter. New life insurance licenses, which typically lags recruiting growth, increased 1% to 7,486 compared with the year ago quarter. The percentage of license non-renewals and terminations in relation to the size of the sales force declined versus the prior year period. On a sequential quarter basis, the size of the life-licensed sales force remained consistent with the fourth quarter of 2014 while recruiting of new representatives increased 24% primarily due to seasonally slower recruiting levels during the fourth quarter. This lower level of fourth quarter recruits, many of whom get licensed in the first quarter, also contributed to the 12% sequential decline in new life licenses from the prior quarter.
- Term life insurance policies issued were up 13% to 55,677 compared with the year ago period as productivity in the first quarter of .19 policies per life licensed representative per month moved back into the historical range from .17 in the first quarter of 2014 which was impacted by severe weather and other factors. On a sequential quarter basis, the relatively fewer life insurance applications submitted during the slower year-end holiday season led to a 2% decline in term life insurance policies issued compared with the fourth quarter of 2014.
- In the first quarter of 2015, Investment and Savings Products sales grew 7% to $1.51 billion primarily reflecting higher sales of U.S. mutual funds, variable annuities and Canadian segregated funds compared with the first quarter a year ago. Sequentially, ISP sales increased 4% versus the favorable performance in fourth quarter of 2014 reflecting typically higher retirement and saving products sales in the first quarter. Market performance drove client asset values at March 31, 2015 to an all-time high of $49.20 billion, up 7% relative to a year ago and up from $48.66 billion at the end of the fourth quarter.
Term Life Insurance. In the first quarter of 2015, Term Life operating revenues increased 8% to $198.4 million compared to the first quarter of 2014. Term Life operating income before income taxes increased 1% to $47.8 million versus the prior year period, as the strong growth in net premiums was partially offset by higher employee-related expenses including the accelerated retirement vesting of equity awards ($2.9 million for the segment). Growth in allocated net investment income related to the increase in required assets was largely offset by lower yield on invested assets. Strong persistency led to lower DAC amortization in relation to net premium growth. Benefits and claims grew in line with net premiums as the growth from favorable persistency was offset by incurred claims that were slightly below historical levels.
On a sequential quarter basis, operating income before income taxes declined 9% primarily reflecting higher employee-related expenses and lower net investment income from fewer called fixed-income securities. These items were partially offset by strong persistency in the first quarter compared to the seasonally weaker persistency in the fourth quarter of 2014 and a prior period revision to reserve assumptions on certain supplemental policy benefits.
Investment and Savings Products. In the first quarter, operating revenues increased 5% to $129.1 million and operating income before income taxes increased 3% to $35.0 million compared with the year ago period. Results were driven by 7% growth in ISP sales and 8% growth in average client asset values, partially offset by higher employee-related expenses including the expenses related to the accelerated retirement vesting of equity awards ($0.9 million for the segment).
During the first quarter, sales-based revenues increased on a consistent basis with the growth in revenue-generating sales. Average client asset values grew 8% versus the prior year period, driving a 6% increase in asset-based revenue. When considering that asset-based expenses for Canadian segregated funds are reflected in insurance commissions and DAC amortization, asset-based revenues and expenses grew consistently year-over-year. Positive market performance led to a deceleration of Canadian segregated fund DAC amortization in the first quarter.
On a sequential quarter basis, operating income before income taxes decreased 10% compared with the fourth quarter due in part to higher employee-related expenses. As seen historically, ISP sales were higher in first quarter than the fourth quarter due to the Individual Retirement Account and Registered Retirement Savings Plan season in the first quarter. Sequential quarter growth was somewhat dampened by elevated variable annuity sales in the fourth quarter following product offering expansion. The sequential quarter increase in sales-based revenues was consistent with the growth in sales of products that generate sales-based revenue. With regard to asset-based earnings, results were generally flat with the fourth quarter and were consistent with the modest growth in average client asset values. First quarter Canadian segregated fund DAC amortization was slightly lower compared with the fourth quarter due to market performance.
Corporate and Other Distributed Products . Operating revenues of $16.4 million were 8% lower and operating losses before income taxes grew by $2.7 million compared with the first quarter of 2014. Results reflect higher employee-related expenses, including $2.3 million of accelerated retirement vesting expense year-over-year. Allocated net investment income declined primarily due to growth in Term Life required assets and lower yield on invested assets versus the prior year period.
The effective income tax rate for the first quarter of 35.0% was consistent with the first quarter of 2014. Sequentially, the effective income tax rate increased from 34.2% in the fourth quarter related to the recognition of certain tax benefits due to statute of limitations that expire each year in the fourth quarter.
Capital and Liquidity
Consistent with our previously announced plan to deploy $150 million of capital in 2015, during the first quarter we repurchased approximately 740,000 shares of Primerica common stock outstanding for $38.7 million. As of March 31, 2015, our investments and cash totaled $2.06 billion compared with $2.04 billion as of December 31, 2014, excluding the held-to-maturity asset held as part of a redundant reserve financing transaction. The invested asset portfolio had a net unrealized gain of $103.0 million (net of unrealized losses of $19.5 million) at March 31, 2015, up from $101.3 million at December 31, 2014.
Primerica Life Insurance Company’s estimated statutory risk-based capital (RBC) ratio dropped below 400% at the end of the first quarter although we expect the estimated ratio to increase during second quarter and remain above 400% for the remainder of the year.
Non-GAAP Financial Measures
We report financial results in accordance with U.S. generally accepted accounting principles (GAAP). We also present adjusted direct premiums, other ceded premiums, operating revenues, operating income before income taxes, net operating income, adjusted stockholders’ equity and diluted operating earnings per share. Adjusted direct premiums and other ceded premiums are net of amounts ceded to affiliates of Citigroup Inc. under coinsurance transactions that were executed concurrent with our initial public offering for all periods presented. Operating revenues, operating income before income taxes, net operating income, and diluted operating earnings per share exclude the impact of realized investment gains and losses, including other than temporary impairments (OTTI), for all periods presented. Adjusted stockholders' equity excludes the impact of net unrealized gains and losses recorded in other comprehensive income (loss) for all periods presented. The 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 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 the core ongoing business. These measures have limitations, and investors should not consider them in isolation or as a substitute for analysis of the results as reported under GAAP. Reconciliations of non-GAAP to GAAP financial measures are attached to this release.
About Primerica, Inc.
Primerica, Inc., headquartered in Duluth, GA, is a leading distributor of financial products to middle income households in North America. Primerica representatives educate their Main Street clients about how to better prepare for a more secure financial future by assessing their needs and providing appropriate solutions through term life insurance, which we underwrite, and mutual funds, annuities and other financial products, which we distribute primarily on behalf of third parties. In addition, Primerica provides an entrepreneurial full or part-time business opportunity for individuals seeking to earn income by distributing the company’s financial products. Primerica insured more than 4 million lives and had over 2 million client investment accounts at December 31, 2014. Primerica stock is included in the S&P MidCap 400 and the Russell 2000 stock indices and is traded on The New York Stock Exchange under the symbol “PRI”.