Primerica, Inc. — Q2 2022 Form 10-Q
Business and period. Primerica distributes term life insurance and third-party investment and savings products to middle-income households in the U.S. and Canada through independent representatives. Its Senior Health segment distributes Medicare-related insurance through e-TeleQuote, acquired in July 2021. This unaudited filing covers the quarter and six months ended June 30, 2022; amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $668.7 | $654.7 | $1,359.9 | $1,292.4 |
| Income before taxes | $137.3 | $169.5 | $240.3 | $297.8 |
| Net income attributable to Primerica | $107.9 | $128.2 | $189.4 | $226.0 |
| Diluted EPS | $2.79 | $3.22 | $4.85 | $5.68 |
| Operating cash flow | — | $384.5 | $274.8 |
- Q2 revenue increased 2%, while pretax income fell 19% and diluted EPS fell 13%. For the first half, revenue rose 5%, while pretax income declined 19% and diluted EPS declined 15%.
- Q2 net premiums rose 6% to $389.8 million. Commissions and fees fell 4% to $240.7 million, reflecting weaker investment-product sales; total benefits and expenses rose 10% to $531.4 million.
- Q2 pretax margin was approximately 20.5%, versus 25.9% a year earlier. Higher DAC amortization, insurance and operating expenses, and e-TeleQuote acquisition costs weighed on earnings; lower claims, including fewer COVID-related claims, partly offset these increases.
- Term Life pretax income increased 3% to $119.9 million in Q2. Investment and Savings Products pretax income decreased 17% to $59.0 million. Senior Health reported a $16.2 million pretax loss; Corporate and Other reported a $25.4 million pretax loss.
- Senior Health recorded a $5.4 million negative tail revenue adjustment in Q2 and $24.4 million for the first half, reflecting lower-than-expected renewals and revised retention estimates. Its reported LTV/CAC per approved policy ratio was 0.76 in Q2 and 0.88 for the first half.
Financial position and liquidity
- At June 30, 2022, cash and cash equivalents were $400.1 million; total assets were $15.33 billion and total liabilities were $13.55 billion. Permanent stockholders’ equity was $1.78 billion, down from $2.08 billion at year-end 2021.
- Cash from operations was $384.5 million for the first half. Cash used in investing was $88.8 million and cash used in financing was $287.1 million, including $227.0 million of share repurchases and $42.8 million of dividends. Ending cash increased $7.6 million from year-end.
- Senior unsecured notes had $600 million principal outstanding, 2.80% annual interest and a November 2031 maturity. The $200 million revolving credit facility was undrawn; the company reported compliance with its covenants. A $1.415 billion surplus note supports a redundant-reserve financing arrangement, with a corresponding held-to-maturity note asset of $1.416 billion.
- Fixed-maturity available-for-sale securities had a $223.4 million pretax unrealized loss at June 30, versus an $81.2 million unrealized gain at December 31, 2021. Management attributed the change primarily to rising interest rates and stated it could hold the securities and had no present intent to sell them. The decline contributed to the reduction in equity.
- Approximately 86% of direct life insurance in-force was ceded to reinsurers. The filing says U.S. insurance subsidiaries held statutory capital substantially above applicable requirements and the Canadian subsidiary met its minimum capital requirement.
Changes, outlook and risks
- Term life face amount in-force increased 1% to $914.4 billion during the first half. New policy issuance normalized from elevated pandemic-period levels, while lapses on policies issued during the pandemic were higher than historical trends, increasing DAC amortization.
- Investment and savings client assets ended the first half at $82.3 billion, down 15% from year-end, mainly due to negative market performance; net flows remained positive. Q2 product sales declined 12% year over year.
- Management reported fewer COVID-related claims beginning in March 2022 but said future effects remain difficult to predict. It expected business cash flows to provide sufficient operating liquidity for the next 12 months. The filing provides no quantified earnings or revenue guidance.
- Canada’s ban on deferred sales charges for mutual funds took effect June 1, 2022. Primerica began offering its Principal Distributor model on July 6, after the quarter; regulators may require changes to its advance and chargeback features. The company expects the transition to weigh on near-term pretax income, with potential recovery over time through asset-based commissions, but cannot quantify the impact.
- e-TeleQuote’s Medicare business is seasonal and faces retention, lead-conversion, carrier and regulatory risks. On July 1, 2022, Primerica acquired the remaining 20% interest for no additional consideration under the contractual formula.
- Long-Duration Targeted Improvements accounting is scheduled for adoption January 1, 2023. Primerica expects the transition discount-rate adjustment to significantly reduce AOCI and equity, but had not quantified the impact. The filing also identifies market, mortality, persistency, reinsurance counterparty, regulatory, litigation, worker-classification and cybersecurity risks.
- The company reported ordinary-course legal disputes and regulatory inquiries but said it could not estimate potential losses where otherwise not indicated; it did not identify a pending proceeding requiring disclosure in this filing.
Investor verification points
- Track DAC amortization and term-life persistency as pandemic-era policy lapses develop.
- Verify Senior Health policy retention, tail adjustments, LTV relative to acquisition costs, and the economics of the business through the next enrollment season.
- Monitor the Principal Distributor model and Canadian regulatory changes, including any impact on compensation and segment profitability.
- Assess the implications of unrealized investment losses and the quantified equity impact when LDTI is adopted.
- Review reinsurance recoverables and counterparties, capital levels, and the terms and reserve-linked balances of the surplus-note financing.