Primerica, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. Primerica provides term life insurance and distributes investment and savings products to middle-income households in the U.S. and Canada through independent representatives. This unaudited filing covers the quarter and nine months ended September 30, 2021; comparisons are with the same periods of 2020 unless noted. On July 1, 2021, Primerica acquired 80% of e-TeleQuote, a Medicare-related insurance distributor, and began reporting it as the Senior Health segment.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $693.2 million | $568.5 million | $1,985.6 million | $1,619.2 million |
| Income before taxes | $147.1 million | $146.5 million | $444.9 million | $375.1 million |
| Net income | $111.4 million | $112.1 million | $337.5 million | $286.1 million |
| Net income attributable to Primerica | $112.5 million | $112.1 million | $338.5 million | $286.1 million |
| Diluted EPS | $2.82 | $2.81 | $8.50 | $7.05 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $435.1 million | $404.0 million |
- Q3 revenue rose 22%, driven by higher investment-product commissions and fees, term-life premiums, and the newly acquired Senior Health business. Q3 pre-tax income was nearly flat; net income declined 1%, while diluted EPS increased slightly.
- Nine-month revenue increased 23%, pre-tax income 19%, and net income attributable to Primerica 18%. Higher revenue was partly offset by higher claims, commissions, DAC amortization, acquisition costs, and operating expenses.
- Q3 net premiums were $384.0 million, up 12%; commissions and fees were $269.8 million, up 46%. Net investment income was $20.0 million, down 13%. For nine months, net premiums were $1,116.7 million, up 15%; commissions and fees were $754.5 million, up 38%; net investment income was $60.6 million, approximately flat.
- Cash from operations was $435.1 million for the first nine months. Investing activities used $722.6 million, including $494.5 million for the e-TeleQuote acquisition; financing activities provided $62.3 million. Cash and cash equivalents declined to $325.6 million from $547.6 million at year-end 2020.
- At September 30, total assets were $15.82 billion and total liabilities $13.71 billion. Parent Company cash and invested assets were $192.4 million, per management. Separate-account assets and liabilities were each $2.67 billion.
- Debt included $375 million of senior notes due July 2022, a $15 million seller note due July 2022, and $125 million drawn on a $200 million revolving facility maturing in 2026. The balance sheet reported $389.7 million of short-term notes payable and $125 million of long-term debt obligations. A separate $1.38 billion surplus note supports a reserve-financing arrangement and is scheduled to mature in 2030; the arrangement is described as non-recourse to Primerica’s parent and Primerica Life.
- The available-for-sale fixed-maturity portfolio had an average rating of A, average duration of 4.8 years, and average book yield of 3.23%, versus 3.44% at December 31, 2020. Unrealized losses on available-for-sale securities reduced nine-month other comprehensive income by $43.4 million after tax.
Material changes and segment developments
- Investment and Savings Products segment revenue increased 32% in Q3 and for the first nine months; pre-tax income rose 35% and 40%, respectively. Nine-month product sales increased 50% to $8.68 billion, and ending client asset values reached $91.8 billion.
- Term Life Insurance segment revenue increased 12% in Q3 and 15% year to date. Pre-tax income rose 2% in Q3 and 10% year to date, as claims and DAC amortization increased alongside business growth and elevated mortality.
- Senior Health generated $22.9 million of revenue and an $8.5 million pre-tax loss from July 1 through September 30. The quarter included $23.5 million of contract acquisition costs and $10.0 million of acquisition-related transaction costs at the consolidated level. Senior Health reported LTV of $1,180 and acquisition cost of $1,292 per approved policy, a 0.91 LTV-to-cost ratio.
- Recruiting and licensing weakened from the unusually strong 2020 comparison: Q3 new recruits were down to 91,884 from 101,861, and new life-licensed representatives were 9,381 versus 13,138. The life-licensed sales force totaled 130,023, compared with 136,306 a year earlier. Q3 new term policies issued declined to 75,914 from 100,199.
- Q3 face amount of term life insurance in force increased 1% from the prior quarter to $894.0 billion; the nine-month increase was 4%. Direct life insurance in force was $896.5 billion, of which 86% was ceded to reinsurers.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management said business cash flows should provide sufficient operating liquidity over the next 12 months and that cash flows and potential funding sources should support long-term liquidity needs.
- Management said COVID-19 continued to elevate mortality claims; excess claims were approximately $44 million for the first nine months, nearly all attributed to COVID-19, versus approximately $19 million in the comparable 2020 period. Management expects mortality experience eventually to normalize but noted uncertainty from variants and vaccination patterns. Reinsurance mitigates much, but not all, mortality exposure.
- Management reported that term-life policy sales were trending back toward pre-pandemic levels, while persistency remained elevated. Future normalization in sales and persistency could affect premiums, claims, and DAC amortization.
- Senior Health has material execution and estimation risks: policyholder retention determines estimated lifetime commissions, acquisition costs are incurred before related commission cash is received, and the business is seasonally concentrated in the Medicare Annual Election Period. Its third-quarter LTV-to-cost ratio was below 1.0; the filing cautions that the estimate depends on retention and other assumptions.
- The e-TeleQuote purchase price allocation was preliminary. The agreement provides for possible earnout payments of up to $50 million in 2022 and 2023; no earnout liability was recognized because estimated acquisition-date fair value was zero. Primerica expects to acquire the remaining 20% interest over up to four years through call and put rights.
- Other stated risks include Medicare/CMS and carrier compliance, lead availability, key carrier relationships and commission rates, cybersecurity and protection of health information, independent-contractor classification, financial-services standards of care, Canadian compensation-rule changes effective June 2022, reinsurer performance, and interest-rate, credit, and foreign-exchange exposure.
- Senior notes and the seller note mature in July 2022. The company reported compliance with debt covenants and no defaults. Management reported insurance subsidiaries’ capital substantially above applicable U.S. requirements and Canadian operations in compliance with minimum capital requirements.
- Acquisition-related expenses, COVID-19 claims, investment valuation changes, and substantial judgment in renewal-commission estimates are notable items when interpreting period comparisons. The filing states that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether Senior Health’s policy retention, LTV estimates, acquisition costs, and integration performance support improved unit economics, particularly during the Medicare enrollment season.
- Whether COVID-19 mortality claims and unusually high term-life persistency normalize as management expects, and how that affects earnings and reserves.
- How Primerica will refinance or repay the $375 million senior notes and $15 million seller note due in July 2022, and the resulting impact on liquidity and interest expense.
- Whether the preliminary e-TeleQuote purchase accounting, remaining-stake purchase rights, and potential earnout terms change materially as estimates are finalized.
- How Canadian deferred-sales-charge rule changes, standards-of-care regulation, and Medicare/CMS requirements affect distribution, commissions, and compliance costs.
- The quality and concentration of reinsurance recoverables and the portfolio’s sensitivity to credit spreads, interest rates, and unrealized investment losses.