Primerica, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless stated otherwise. Primerica provides term life insurance and distributes investment and savings products through independent sales representatives in the United States and Canada.
Financial results and condition
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $524.9 million | $495.0 million; up 6% |
| Income before tax | $94.5 million | $102.4 million; down 8% |
| Net income | $72.5 million | $79.2 million; down 8% |
| Diluted EPS | $1.75 | $1.83 |
| Operating cash flow | $131.5 million | $66.4 million |
| Cash and cash equivalents | $273.1 million at March 31 | $256.9 million at December 31, 2019 |
| Total assets / stockholders’ equity | $13.27 billion / $1.53 billion | At March 31, 2020 |
- Net premiums increased 10% to $315.8 million; commissions and fees increased 14% to $190.1 million.
- Term Life Insurance revenue rose 10% to $327.7 million and pretax income rose 18% to $82.9 million. Investment and Savings Products revenue rose 14% to $185.0 million and pretax income rose 12% to $47.7 million. Corporate and Other Distributed Products reported a $36.0 million pretax loss versus a $10.7 million loss.
- Benefits and expenses rose 10% to $430.4 million, outpacing revenue growth. Net investment income fell 36% to $15.4 million; realized investment losses were $10.0 million, compared with gains of $2.8 million.
- Total comprehensive loss was $22.4 million, reflecting $94.9 million of other comprehensive losses, primarily investment valuation and foreign currency movements.
- Investing activities used $0.7 million; financing activities used $112.3 million, including $90.1 million of common-stock repurchases and $16.5 million of dividends paid.
- Debt included $374.1 million carrying value of senior notes and a $1.24 billion surplus note associated with reserve financing. The $200 million revolving credit facility was undrawn; the company reported covenant compliance. Senior notes carry 4.75% interest and mature July 2022.
- Available-for-sale investments had a net unrealized loss of $1.3 million at March 31, versus a net unrealized gain of $82.2 million at year-end 2019. The fixed-maturity portfolio’s average rating was A and duration was 3.6 years.
Material developments, outlook and risks
- COVID-19: Management cited economic, market and operating uncertainty. Market declines reduced client account values and investment portfolio fair values. The filing warns of possible lower investment-related revenues, recruiting and licensing constraints, underwriting delays, lower policy persistency, and increased mortality; reinsurance mitigates much, but not all, mortality exposure. The company said the future impact could not be estimated.
- Client assets ended the quarter at $59.0 billion, down from $70.5 billion at year-end, primarily because of a $11.1 billion decline in fair value; net flows were positive by $542 million. Q1 product sales increased 28% to $2.25 billion.
- New recruits rose to 84,762 from 63,223, and new life-licensed representatives increased to 10,599 from 10,065. The licensed sales force was 130,095 at March 31, slightly below year-end. Management described licensing disruptions and steps to expand online preparation and remote or temporary licensing options.
- Management expected operating cash flows to provide sufficient liquidity for the next 12 months, while noting that COVID-19 could adversely affect cash flows. Potential liquidity measures include selling available-for-sale investments, adjusting repurchases, or drawing the revolving facility. No numerical earnings or revenue guidance was provided.
- The company recognized $3.7 million of credit losses on certain available-for-sale securities, tied to intent to sell securities in distressed sectors, and a $1.6 million provision for expected credit losses on ceded claims involving a reinsurer in receivership. Reinsurance recoverables totaled $4.13 billion; the related credit-loss allowance was $5.5 million.
- Unclaimed-property audits by 30 jurisdictions are examining life-insurance claims practices. The company could not estimate potential costs or liabilities. It also disclosed ordinary-course legal and regulatory matters but said no pending proceeding required disclosure under the stated criteria.
- Reg BI and Form CRS compliance was due June 30, 2020; management anticipated process changes. Canadian rules restricting deferred sales-charge compensation are scheduled to take effect in 2022; the financial effect had not been quantified.
- The company adopted the expected-credit-loss standard on January 1, 2020, reducing opening retained earnings by $1.2 million net of tax. Long-duration insurance accounting changes are scheduled for adoption in 2022; the impact remained undetermined.
Most important facts for investors to verify
- Whether COVID-19 affects term policy sales, persistency, mortality, licensing and recruiting, and the company’s ability to maintain sales-force productivity.
- Whether client asset values and market conditions pressure asset-based fees, product demand, investment marks or additional credit-loss provisions.
- Reinsurer credit quality and recoverability, particularly exposures involving the reinsurer in receivership and the concentration of reinsurance recoverables.
- Actual liquidity and capital needs, subsidiary dividend capacity, repurchase pace, and the terms and obligations associated with surplus-note financing.
- Potential outcomes of unclaimed-property audits and the business or financial effects of regulatory changes in the United States and Canada.