Primerica, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless stated otherwise. Unaudited U.S. GAAP financial statements. Primerica distributes term life insurance and third-party investment and savings products to middle-income households in the U.S. and Canada. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $484.8 | $427.3 | $1,412.5 | $1,246.2 |
| Income before tax | $111.4 | $100.2 | $308.2 | $271.4 |
| Net income | $85.1 | $66.6 | $237.6 | $181.8 |
| Diluted EPS | $1.94 | $1.46 | $5.34 | $3.93 |
| Net margin | 17.6% | 15.6% | 16.8% | 14.6% |
- Q3 revenue rose 13% and net income 28%; nine-month revenue rose 13% and net income 31%. Lower income taxes, primarily reflecting the U.S. federal tax-rate reduction, contributed to earnings growth. Effective tax rates were 23.6% and 22.9% in Q3 and nine months, compared with 33.5% and 33.0% in 2017.
- Net premiums were $279.0 in Q3 (+12%) and $804.6 for nine months (+14%). Commissions and fees were $170.9 in Q3 (+18%) and $505.6 for nine months (+16%). Net investment income was $20.6 in Q3 and $59.7 for nine months, broadly level year over year.
- Q3 segment pretax income: Term Life $74.3 (+12%); Investment and Savings Products $45.1 (+15%); Corporate and Other Distributed Products loss $8.0, versus a $5.4 loss. Nine-month results were $209.8 (+18%), $128.3 (+11%), and a $29.9 loss, respectively.
- Nine-month operating cash flow was $285.3, versus $209.8; investing cash outflow was $132.1, versus $79.2; financing cash outflow was $206.8, versus $166.3. Cash and equivalents ended at $225.4, down from $280.0 at year-end 2017.
- At September 30, total assets were $12,707.5, liabilities $11,264.1 and stockholders’ equity $1,443.5. Investments totaled $2,988.9; separate-account assets and matching liabilities were $2,420.0.
- Debt included $375.0 principal of 4.75% senior notes due 2022 (carrying value $373.6) and $891.7 principal of a 4.50% surplus note due 2030. The surplus note is matched by a held-to-maturity LLC note and is non-recourse to the Parent Company and Primerica Life, subject to the stated credit-enhancement fee support. The $200 million revolver was undrawn; the company reported covenant compliance. Parent Company cash and invested assets were $96.2.
Material changes and business trends
- Term Life revenue growth reflected higher direct premiums and lower ceded premiums as older coinsurance business ran off; net premiums also benefited from recent policy growth. Face amount of term life in force increased 3% year over year to $781.3 billion. Q3 policies issued declined to 74,892 from 78,056, and monthly productivity was 0.19 versus 0.21.
- Investment and savings product sales rose 23% in Q3 to $1.762 billion and 16% for nine months to $5.304 billion. Client asset values reached $64.2 billion, up 10% year over year. Fee-generating positions declined 7% in Q3, primarily reflecting migration to a managed-investment platform that does not generate the same transfer-agent fees.
- Higher expenses partly offset growth: nine-month benefits and expenses rose 13%. Management cited increased transfer-agent servicing costs under revised contracts, employee and growth-related costs, digital development, and community, people and business initiatives funded partly by tax savings. The revised recordkeeping contracts added $1.7 million to nine-month segment pretax income.
- Share repurchases totaled $167.3 under a $275 million program authorized through June 30, 2019; approximately $107.7 remained available at quarter-end. Dividends declared were $0.25 per share in Q3, versus $0.20.
- Other comprehensive loss was $53.5 for the first nine months, mainly reflecting a $56.3 pretax decline in unrealized available-for-sale investment values and foreign-currency translation. The company attributed unrealized fixed-income losses largely to interest rates and credit spreads and stated it did not intend to sell the affected securities.
Outlook, risks and unusual items
- Management expected business cash flows to provide sufficient operating liquidity for the next 12 months and said cash flows and potential funding sources should support long-term liquidity needs. No specific earnings or revenue guidance was provided.
- Primerica Life adopted principle-based reserving in Q1 2018. Management expects it to reduce statutory reserve requirements for eligible new business and lessen future need for redundant-reserve financing. Existing financing remains material: the Vidalia Re surplus note and matching LLC note are expected to rise to approximately $1.3 billion each based on supported reserves.
- Regulatory proposals could affect distribution, suitability requirements and compensation. These include the SEC’s proposed best-interest framework, New York suitability rules scheduled to apply to annuities in 2019 and life insurance in 2020, and Canadian proposals that could prohibit upfront mutual-fund sales commissions. The company said impacts were not yet quantifiable.
- Thirty jurisdictions were conducting multi-state unclaimed-property audits focused on life-insurance claims practices. The company could not reasonably estimate the likelihood or amount of additional costs or liabilities. It also reported ordinary-course legal and regulatory matters and said no pending proceeding required separate disclosure.
- Key risks include recruiting, retention and licensing of the independent sales force; mortality and persistency experience; reinsurance and reserve-financing counterparty performance; investment credit, interest-rate and liquidity risks; market-sensitive investment sales; regulatory changes; and Canadian-dollar movements.
- Accounting changes: 2018 adoption of ASC 606 increased opening retained earnings by $24.7 million; ASU 2016-01 moved equity-security fair-value changes into net income. Management said the long-duration insurance accounting standard due in 2021 is expected to have a pervasive impact, but its magnitude was not yet determinable.
Important facts for investors to verify
- Whether term-life sales productivity and recruiting stabilize, and how policy persistency, claims experience and reinsurance costs develop.
- How much of earnings growth is attributable to the lower tax rate versus underlying operating performance, and whether added spending remains controlled.
- Whether investment account growth and revised recordkeeping contracts sustain fee income, given declining fee-generating positions and market exposure.
- Developments in unclaimed-property audits and U.S. and Canadian conduct, suitability and commission rules, including any resulting compliance or compensation changes.
- Reserve-financing balances, reinsurance recoverables and counterparty exposure; also monitor portfolio unrealized losses, liquidity and the effect of future interest-rate or credit-spread changes.