Primerica, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Primerica distributes term life insurance and third-party investment and savings products through an independent sales force, serving middle-income households in the U.S. and Canada. Figures below are in U.S. dollars; financial statement amounts are unaudited.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $568.5m | $520.7m | $1,619.2m | $1,520.5m |
| Income before taxes | $146.5m | $125.1m | $375.1m | $355.0m |
| Net income | $112.1m | $96.2m | $286.1m | $272.8m |
| Diluted EPS | $2.81 | $2.28 | $7.05 | $6.38 |
| Operating cash flow | Not separately reported | Not separately reported | $404.0m | $321.3m |
Q3 revenue grew 9% and net income 17% year over year; nine-month revenue grew 6% and net income 5%. Calculated Q3 pretax and net margins were approximately 25.8% and 19.7%, respectively, versus 24.0% and 18.5% a year earlier. Nine-month pretax and net margins were approximately 23.2% and 17.7%, versus 23.3% and 17.9%.
- Revenue drivers: Q3 net premiums rose 13% to $342.9m; commissions and fees rose 3% to $185.3m. For nine months, net premiums increased 11% to $973.2m and commissions and fees increased 4% to $547.2m.
- Cash flow and capital returns: Nine-month operating cash flow was $404.0m; investing cash outflow was $58.1m and financing cash outflow was $272.5m. Cash and cash equivalents were $330.9m at September 30, up from $256.9m at year-end. The company paid $48.5m in dividends and repurchased $218.1m of shares during the nine months.
- Balance sheet and liquidity: Total assets were $14.30bn and stockholders’ equity $1.72bn at September 30. Parent-company cash and invested assets were $251.1m. A $200m revolving credit facility was undrawn; management reported covenant compliance and expected business cash flows to cover operating liquidity needs over the next 12 months.
- Debt: Notes payable were $374.3m, including $375m principal of senior unsecured notes bearing 4.75% and maturing July 2022. A $1.3bn surplus note bears 4.50% and matures in 2030; it is tied to reserve financing and is non-recourse to the parent and Primerica Life. The filing states the parent supports Vidalia Re’s credit-enhancement fee obligation.
- Insurance and investments: Net life insurance in force was $114.4bn, with 86% of direct life coverage reinsured. The available-for-sale fixed-maturity portfolio had a $135.0m net unrealized gain at September 30. Its average rating was A, average duration 4.6 years, and average book yield 3.45%.
Material changes versus prior periods
- Term life segment pretax income increased 26% in Q3 to $105.3m and 19% for nine months to $283.1m. Higher sales and persistency lifted premiums; elevated persistency reduced DAC amortization, while claims and reserves increased.
- Investment and Savings Products segment pretax income increased 5% in both Q3 ($51.4m) and the nine-month period ($145.9m). Nine-month product sales rose 4% to $5.77bn; client asset values at period-end were $72.6bn, versus $66.2bn a year earlier.
- Corporate and Other Distributed Products reported losses before taxes of $10.2m in Q3 and $54.0m for nine months, compared with losses of $7.4m and $22.0m, respectively. Nine-month segment revenue fell 23%, largely reflecting lower net investment income and realized investment results.
- Net investment income declined 15% for nine months to $61.1m, partly due to lower yields and a weaker total return on the deposit asset underlying a coinsurance agreement. Nine-month realized investment losses were $7.6m, versus gains of $4.2m in 2019, including equity-security declines and credit losses on selected issuers.
- Share repurchases reduced outstanding common shares; weighted-average basic shares for Q3 fell to 39.6m from 42.0m. The 2020 buyback authorization was $300m, with approximately $81.9m remaining at September 30.
Outlook, commentary, risks and unusual items
- Management said COVID-19 created continuing uncertainty and that its future effect could not be estimated. It cited strong life insurance demand and unusually high persistency to date, but warned that unemployment and lower household income could later weaken persistency and sales.
- COVID-19-related term-life claims exceeded historical trends by approximately $8m in Q3 and $18m for nine months. Management also reported higher reserve increases associated with elevated persistency: $7.9m in Q3 and $12.2m year to date.
- Recruiting and new policy issuance were strong: Q3 recruits rose to 101,861 from 72,345, and new policies issued increased to 100,199 from 73,434. Licensing remained constrained by testing-center closures and backlogs; 5,200 representatives held temporary COVID-19 licenses.
- Management identified market volatility, low interest rates, mortality and persistency experience, reinsurer performance, regulation, and recruiting/licensing constraints as risks. The Canadian mutual-fund deferred-sales-charge ban is scheduled for June 2022 in participating provinces; the company had not quantified the impact.
- The company adopted the expected-credit-loss standard on January 1, 2020, recording a $1.2m after-tax cumulative adjustment to retained earnings. The long-duration insurance accounting standard’s effective date was deferred to January 1, 2023; the company could not yet estimate its impact.
- Management stated that no pending legal proceeding required disclosure as of the report date, while noting ordinary-course disputes and regulatory inquiries for which potential losses generally could not be estimated. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether elevated persistency and life insurance sales continue, and how claims, reserve changes, and DAC amortization evolve as COVID-19 effects change.
- Reinsurer credit quality and recoverability: reinsurance recoverables were $4.23bn, and the reported allowance for expected credit losses was $5.6m.
- Investment portfolio credit exposure, valuation and yield sensitivity, including the 42% allocation to BBB-rated fixed-maturity securities and the 3% below-investment-grade allocation.
- Parent-company liquidity and capital flexibility, including subsidiary dividend capacity, the senior notes’ 2022 maturity, and future share repurchases and dividends.
- The eventual effects of COVID-19, regulatory changes to sales and compensation practices, and implementation of the long-duration insurance accounting standard.