Primerica, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless noted. Primerica distributes term life insurance and third-party investment and savings products to middle-income households in the U.S. and Canada through independent sales representatives. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date | Change |
|---|---|---|---|
| Total revenue | $495.0 million | $459.9 million | +8% |
| Net premiums | $287.5 million | $261.8 million | +10% |
| Commissions and fees | $167.3 million | $166.8 million | Approximately flat |
| Net investment income | $24.1 million | $19.0 million | +27% |
| Income before taxes | $102.4 million | $83.0 million | +23% |
| Net income | $79.2 million | $65.7 million | +20% |
| Diluted EPS | $1.83 | $1.46 | +25% |
| Operating cash flow | $66.4 million | $44.3 million | +$22.1 million |
Margins: Calculated from reported figures, pretax margin was approximately 20.7% versus 18.0%, and net margin was approximately 16.0% versus 14.3%. The effective tax rate rose to 22.7% from 20.8%, primarily because the prior-year period included a tax benefit related to the Tax Cuts and Jobs Act.
Cash, liquidity and capital: Consolidated cash and cash equivalents were $279.6 million at March 31, 2019, up from $262.1 million at year-end. Cash flow from investing activities was positive $25.3 million, compared with a $70.0 million outflow in Q1 2018; financing outflows were $75.0 million, chiefly reflecting dividends and share repurchases. The Parent Company reported $167.3 million of cash and invested assets. Management expects business cash flows to provide sufficient operating liquidity over the next 12 months. A $200 million revolving facility was undrawn, and the company reported covenant compliance.
Debt: The company had $375 million principal amount of 4.75% senior notes due July 2022 (carrying value $373.8 million) and a $1.0 billion surplus note due 2030. The surplus note is associated with a matching held-to-maturity LLC note and redundant-reserve financing; the arrangement is non-recourse to the Parent Company and Primerica Life, subject to the Parent Company’s stated support for the credit-enhancement fee. The filing says the surplus-note and LLC-note principal amounts are expected to increase to $1.5 billion each as supported reserves develop.
Balance sheet: Total assets were $13.08 billion and total liabilities $11.56 billion at March 31, 2019, versus $12.60 billion and $11.13 billion, respectively, at December 31, 2018. Stockholders’ equity was $1.52 billion, up from $1.46 billion. Reinsurance recoverables were $4.20 billion; 87% of direct life insurance in force was ceded.
Changes, drivers and management commentary
- Term Life Insurance segment revenue increased 10% to $296.8 million and pretax income rose 18% to $70.3 million. Growth in direct premiums and lower ceded premiums as older coinsured business ran off lifted net premiums. Claims experience was described as in line with historical trends; DAC amortization increased 13% with net premium growth.
- Investment and Savings Products segment revenue was nearly flat at $162.7 million, while pretax income increased 7% to $42.7 million. Annuity sales supported sales-based revenue; lower average account values and the completed transition of Freedom Portfolios to the Lifetime Investments Platform weighed on asset- and account-based revenues.
- Corporate and Other Distributed Products revenue increased 29% to $35.5 million, and its pretax loss narrowed to $10.7 million from $16.6 million. Higher allocated investment income and realized investment gains contributed; higher technology and business-development spending partly offset them.
- Net investment income benefited from a stronger return on the deposit asset backing a 10% coinsurance agreement and a larger invested-asset portfolio. Realized investment results swung to a $2.8 million gain from a $1.7 million loss, mainly reflecting equity-security market value changes. No OTTI losses were recognized in Q1 2019.
- Market recovery during Q1 lifted client account values to $63.6 billion from $57.7 billion at year-end. Total investment and savings product sales were $1.76 billion, down 1% year over year; retail mutual fund sales fell 11%, while annuity and other sales rose 23%.
- Sales-force indicators weakened: recruits declined to 63,223 from 76,230, new life-licensed representatives to 10,065 from 11,730, and new term policies to 64,242 from 70,821. Monthly policy production per licensed representative was 0.16, below the company’s cited typical range of 0.18–0.22. The licensed sales force was 129,821 at quarter-end, relatively unchanged from year-end.
- The company repurchased $53.6 million of shares under its program and paid $14.6 million in dividends. The board authorized repurchases of up to $275 million through June 30, 2020; approximately $221.4 million remained available at quarter-end. The quarterly dividend declared per share was $0.34, versus $0.25 a year earlier.
Outlook, risks and unusual items
- No specific quantitative earnings or revenue guidance was provided. Management expects operating cash flows to support liquidity over the next 12 months and says subsidiaries’ statutory capital is substantially above U.S. regulatory requirements; the Canadian subsidiary was in compliance with minimum capital requirements.
- Management cited slower recruiting momentum and lower term-policy productivity, as well as market conditions, interest rates, equity returns, and Canadian-dollar movements as factors that may affect results. Forward-looking statements are subject to the risks described in the filing and the 2018 Form 10-K.
- Regulatory proposals could affect distribution and compensation. The filing discusses the SEC’s proposed best-interest framework, state-level standards, and Canadian proposals that could prohibit upfront mutual-fund sales commissions. The potential business impact and timing were not clear.
- The company was undergoing multi-state unclaimed-property audits by 30 jurisdictions focused on life-insurance claims practices. It could not reasonably estimate potential costs or liabilities. It also reported ordinary-course legal and regulatory matters but did not believe any pending proceeding required separate disclosure.
- ASC 842 lease adoption added $52.7 million to assets and liabilities at January 1, 2019, with no effect on results or liquidity. The company expects the long-duration insurance accounting standard due in 2021 to have a pervasive impact, but could not yet estimate its magnitude. Credit-loss accounting changes were expected to take effect in 2020 and were still under evaluation.
- Available-for-sale fixed-maturity securities had $37.1 million of net unrealized gains at quarter-end, versus $9.2 million of net unrealized losses at year-end. Management attributed loss positions primarily to interest rates and credit spreads and said it could hold affected securities until maturity or recovery.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter. It reported no material change in market-risk exposures since year-end.
Key facts for investors to verify
- Whether the lower recruiting and policy-production metrics persist, and how they affect new business, premium growth, and long-term profitability.
- How much earnings growth reflects recurring insurance and fee income versus investment marks, and how the deposit-asset return and equity-security gains develop.
- Reinsurer and reserve-financing counterparty exposure, including the substantial reinsurance recoverables and the expected growth in Vidalia Re financing balances.
- Developments and potential financial effects of unclaimed-property audits and proposed U.S. and Canadian conduct or compensation rules.
- Capital returned through dividends and repurchases relative to parent-company liquidity, insurer capital needs, and the $275 million repurchase authorization.
- The eventual financial and operational effects of the upcoming insurance and credit-loss accounting standards.