Primerica, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This annual filing also reports fourth-quarter results. Amounts below are U.S. dollars.
Business context
Primerica distributes term life insurance, which it underwrites, and investment, savings and other financial products, primarily for third-party providers, to middle-income households in the United States and Canada. At year-end it had 116,827 life-licensed sales representatives, insured approximately five million lives and served more than two million investment accounts. Its three segments are Term Life Insurance, Investment and Savings Products, and Corporate and Other Distributed Products.
Financial and operating performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Total revenue | $1,519.1 million | $1,404.2 million | +8% |
| Income before tax | $337.6 million | $291.0 million | +16% |
| Net income | $219.4 million | $189.9 million | +16% |
| Diluted EPS | $4.59 | $3.70 | +24% |
| Operating cash flow | $292.2 million | $259.1 million | +$33.1 million |
- Income before tax was 22.2% of revenue and net income was 14.4% of revenue. The effective tax rate was 35.0%, versus 34.7% in 2015.
- Term Life Insurance segment pretax income rose 23% to $213.4 million on 13% higher segment revenue. The company issued 298,244 policies, up from 260,059; face amount in force increased 5% to $728.4 billion.
- Investment and Savings Products segment pretax income edged down to $144.4 million from $146.1 million. Product sales fell 4% to $5.6 billion, while average client assets increased 2% to $49.4 billion and year-end client assets reached $52.3 billion.
- Consolidated cash and cash equivalents were $212.0 million; total assets were $11.44 billion and stockholders’ equity was $1.22 billion. Future policy benefits were $5.67 billion.
- Senior Notes had $375 million principal outstanding, bore interest at 4.75%, and mature in 2022. There were no short-term borrowings at year-end. A separate $503.2 million surplus note supports a reserve-financing arrangement and is paired with a held-to-maturity LLC note.
- Operating, investing and financing cash flows were respectively $292.2 million, negative $47.9 million and negative $185.1 million. The company paid $33.4 million in dividends and repurchased $150.1 million of stock during the year. A new $200 million repurchase authorization began in January 2017.
Changes versus the prior comparable period
- Revenue growth was led by term-life premiums: net premiums rose 12%, reflecting new policy growth and the run-off of older policies covered by IPO-era coinsurance agreements.
- Net income increased 16%; diluted EPS rose faster, aided by a lower weighted-average share count following repurchases.
- Investment and savings product sales declined, primarily due to industry-wide weakness in variable annuities. Higher average client assets and account-based fees partly offset lower sales-based revenue.
- Client asset values increased 11% during 2016, versus a 3% decline in 2015, reflecting positive market performance, net inflows and a stronger Canadian dollar. Net inflows were $974 million.
- Operating cash flow improved, while cash used for share repurchases and dividends remained significant. The company cited timing of reinsurance payments, checks and Canadian tax remittances as factors in the operating cash flow increase.
Outlook, risks and unusual items
- Management said business cash flows were expected to provide sufficient operating liquidity over the next 12 months and believed cash flows and potential funding sources would support long-term liquidity. The filing provides no quantitative earnings or revenue guidance.
- The Department of Labor fiduciary rule’s status was uncertain after a February 2017 presidential memorandum directed a review; implementation could be delayed, revised or rescinded. Primerica had incurred $3.3 million of 2016 preparation costs and could not quantify the overall business impact.
- Primerica planned to launch an expanded managed-investments platform in 2017. Results remain exposed to market performance, product-provider relationships, sales-force recruitment and licensing, mortality and policy persistency, interest rates, Canadian-dollar movements, cybersecurity and regulatory changes.
- Thirty jurisdictions were conducting multi-state unclaimed-property audits focused on life-insurance claims practices. The company said it could not reasonably estimate potential costs or liabilities.
- Approximately 88% of life insurance in force was ceded to reinsurers. Reinsurance does not remove Primerica’s direct obligation to policyholders; counterparty failure or recapture could materially affect results and capital.
- A 100-basis-point increase in interest rates was estimated to reduce the fixed-maturity portfolio’s market value by approximately $64.1 million. A 10% Canadian-dollar decline was estimated to reduce pretax income by $6.8 million and the translated value of Canadian net assets by $24.3 million.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded controls were effective as of December 31, 2016.
Important facts for investors to verify
- Whether policy sales, persistency and mortality experience sustain growth in term-life earnings and in-force face amount.
- How the DOL fiduciary rule and other regulatory changes affect qualified-account revenue, compensation, compliance costs and representative retention.
- The credit quality, collateral and terms of major reinsurance and reserve-financing arrangements, including the LLC note and related surplus note.
- Dividend capacity of insurance subsidiaries and the parent company’s ability to fund debt service, dividends and repurchases from subsidiary distributions.
- Whether investment and savings product sales and fee-generating client assets continue to grow, and how market performance and currency movements affect reported results.
- Potential exposure from the unclaimed-property audits and other litigation or regulatory matters; the filing does not provide a reasonably estimable loss range for the audits.