Primerica, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet figures are as of March 31, 2016 unless otherwise noted. Financial statement amounts below are in millions of dollars unless stated otherwise. Primerica distributes term life insurance and third-party investment and savings products in the United States and Canada.
Financial performance and condition
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue | $363.0 | $344.8; up 5% |
| Net premiums | $201.8 | $179.9; up 12% |
| Commissions and fees | $128.8 | $132.8; down 3% |
| Benefits and expenses | $292.8 | $278.0; up 5% |
| Income before taxes | $70.2 | $66.8; up 5% |
| Net income | $45.2 | $43.4; up 4% |
| Basic and diluted EPS | $0.92 | $0.82 |
| Operating cash flow | $34.9 | $63.3 |
| Cash and cash equivalents | $175.7 | $152.3 at Dec. 31, 2015 |
| Total assets / stockholders’ equity | $11,012.8 / $1,172.8 | $10,609.3 / $1,145.8 at Dec. 31, 2015 |
- Profitability and segments: Term Life Insurance revenue rose 13% to $206.3 million and pretax income increased 28% to $46.1 million. Investment and Savings Products revenue fell 3% to $125.0 million and pretax income declined 10% to $31.7 million. Corporate and Other Distributed Products recorded a $7.6 million pretax loss, compared with a $4.3 million loss.
- Margins: Consolidated pretax margin was approximately 19.3% of revenue, versus 19.4% a year earlier; net margin was approximately 12.4%, versus 12.6%.
- Cash flow and capital returns: Operating cash flow was lower year over year, partly because of timing of reinsurance claim receipts and higher acquisition-cost payments. Investing activities provided $48.0 million; financing activities used $60.9 million, including $49.9 million of share repurchases and $8.3 million of dividends. Cash increased $23.4 million during the quarter.
- Debt and liquidity: Notes payable were $372.6 million carrying value; the $375.0 million senior unsecured notes bear 4.75% interest and mature in 2022. The Vidalia Re surplus note was $404.9 million, bears 4.50%, and matures in 2029. The company reported covenant compliance and no short-term borrowings. Parent Company cash and invested assets were approximately $85.7 million. Management said business cash flows were expected to provide sufficient operating liquidity for the next 12 months.
- Insurance and investments: Direct life insurance in force was $708.3 billion and net life insurance in force was $83.8 billion; 88% of direct in-force business was reinsured. The fixed-maturity portfolio, excluding the held-to-maturity security, had an A- average rating, 4.1-year average duration, and 4.46% average book yield. Total investments were $2,197.6 million.
Material changes versus the prior comparable period
- Revenue and earnings increased mainly on higher term-life premiums, reflecting growth in business not covered by the legacy IPO coinsurance transactions and strong recent sales. Net premiums grew faster than direct premiums as ceded premiums declined with the run-off of older coinsured business.
- Term-life policy sales increased: 66,376 new policies versus 55,677; the average monthly issue rate rose to 0.21 per licensed representative from 0.19. New recruits rose to 63,427 from 53,300, and new life-licensed representatives to 9,666 from 7,486.
- Investment and savings product sales fell 9% to $1,376 million. Retail mutual fund sales declined 5%, while annuity and other sales declined 9%. Management attributed weaker sales and lower average client assets primarily to market volatility and currency translation. Client account assets ended at $48,174 million, up 2% during the quarter, including positive net inflows and favorable currency translation.
- Realized investment results shifted to a $0.8 million loss from a $1.3 million gain, including $2.0 million of other-than-temporary impairment losses versus $0.2 million. Management cited market-price declines on securities it intended to sell and credit impairments.
- Operating cash flow fell by $28.4 million year over year. Share repurchases were higher, with $49.9 million of cash repurchases versus $38.7 million in Q1 2015. The company had approximately $100.1 million remaining under its $200 million repurchase authorization at quarter-end.
- Other comprehensive income was $32.5 million, compared with a $11.2 million loss in Q1 2015, reflecting investment gains and a positive foreign-currency translation adjustment.
Outlook, commentary, risks and contingencies
- Outlook: No specific revenue or earnings guidance was provided. Management expects operating cash flows to meet operating liquidity needs over the next 12 months and intends to continue ceding approximately 90% of mortality risk on new U.S. and Canadian business.
- DOL fiduciary rule: The April 2016 rule broadens fiduciary coverage for retirement accounts. The company said changes to its qualified-plan business would be necessary, but it had not finalized plans or quantified the effects. U.S. qualified retirement plans represented an estimated 59% of average client account assets and 55% of investment and savings product sales in 2015. The filing warns of potential higher compliance costs, reduced account activity or revenues, and effects on the sales force.
- Reinsurance and counterparty exposure: Reinsurance supports the business but does not remove Primerica’s primary obligation to policyholders. Due from reinsurers was $4,160.3 million, including $2,720.9 million attributed to Pecan Re, which was listed as not rated by A.M. Best. Pecan Re, a Swiss Re subsidiary, assumed Prime Re’s obligations under the 80% coinsurance agreement effective January 1, 2016; management said the agreement’s material terms were not changed.
- Legal and regulatory matters: Thirty jurisdictions are conducting unclaimed-property audits focused on life-insurance claims practices, and Primerica Life is subject to a related multi-state market conduct examination. West Virginia has brought suit alleging unclaimed-property violations. The company could not reasonably estimate the likelihood or impact of additional costs or liabilities.
- Capital and reserve financing: A $446.4 million letter of credit supports part of the Peach Re Regulation XXX reserves. The company reported compliance with its credit-facility covenants and its U.S. and Canadian insurance capital requirements. Market, interest-rate, credit, mortality, persistency, currency, regulatory and sales-force risks remain relevant.
- Accounting and controls: Adoption of debt-issuance-cost presentation guidance reduced the previously reported December 2015 debt and assets by approximately $2.8 million, with no effect on earnings. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether term-life sales growth continues and how persistency, claims experience and DAC amortization affect margins.
- How the DOL fiduciary rule changes qualified-account sales, compensation, compliance costs and representative participation.
- The credit quality, collateral and recoverability of reinsurance balances, particularly the large Pecan Re receivable, and the consequences of any reinsurer impairment.
- Whether investment impairment losses, market volatility and lower client asset values persist, and how portfolio credit and interest-rate exposures evolve.
- Cash generation after acquisition spending, dividends and repurchases; remaining repurchase authorization; and the development of debt and surplus-note balances.
- Developments and potential financial exposure from the multi-state unclaimed-property audits, market conduct examination and West Virginia litigation.