Primerica, Inc. quarterly report, Q3 FY2019

Primerica, Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2019. Primerica provides term life insurance and distributes investment and savings products in the United States and Canada through independent sales representatives. Financial statements are unaudited.

Financial performance

Metric	Q3 2019	Q3 2018	Nine months 2019	Nine months 2018
Total revenue	$520.7 million	$484.8 million	$1,520.5 million	$1,412.5 million
Income before tax	$125.1 million	$111.4 million	$355.0 million	$308.2 million
Net income	$96.2 million	$85.1 million	$272.8 million	$237.6 million
Diluted EPS	$2.28	$1.94	$6.38	$5.34
Operating cash flow	Not separately reported for the quarter	Not separately reported for the quarter	$321.3 million	$285.3 million

Q3 revenue grew 7%, net income 13%, and diluted EPS 18% year over year. For the first nine months, revenue grew 8%, net income 15%, and diluted EPS 19%. Calculated net margin was approximately 18.5% for Q3 2019 versus 17.6% a year earlier, and 17.9% year to date versus 16.8%.

Net premiums rose 9% in both comparison periods, to $303.3 million for Q3 and $877.4 million year to date. Commissions and fees increased 5% for Q3 and 4% year to date.
Net investment income increased 10% for Q3 and 20% year to date, partly reflecting returns on the deposit asset supporting a coinsurance arrangement and growth in invested assets; lower portfolio yields partly offset the increase.
Total benefits and expenses increased 6% in both periods. Benefits and claims and deferred acquisition cost amortization rose with premium growth.
The effective tax rate was 23.1% for both Q3 and the nine-month period, broadly consistent with 2018.

Segments and operating trends

Term Life Insurance: Pretax income increased 13% to $83.8 million in Q3 and 13% to $238.1 million year to date. Net premiums rose 9% in both periods, reflecting growth in policies not subject to legacy IPO coinsurance and runoff of ceded business. Management said claims experience was in line with historical trends and Q3 persistency was slightly better year over year.
Investment and Savings Products: Pretax income increased 8% to $48.8 million in Q3 and 8% to $138.8 million year to date. Total product sales rose 5% in both periods; client asset values reached $66.2 billion at quarter-end, up from $64.2 billion a year earlier. Fee-generating positions declined 3% in Q3 and 4% year to date, largely following the transition from Freedom Portfolios to a platform that does not generate the same recordkeeping and custodial fees.
Corporate and Other Distributed Products: Pretax loss was $7.4 million in Q3 versus $8.0 million a year earlier, and $22.0 million year to date versus $29.9 million. Q3 included a $0.7 million reserve for ceded claims that may not be recovered from a reinsurer placed into receivership.
Life-licensed representatives totaled 130,871 at September 30, up from 129,550 at June 30. New recruits were lower year over year, while Q3 additions of newly licensed representatives increased. New term policies issued fell 2% year to date; production per representative was 0.18 policies monthly, compared with 0.20 a year earlier.

Cash, balance sheet, debt and capital

At September 30, total assets were $13.45 billion, total liabilities $11.84 billion, and stockholders’ equity $1.61 billion. Cash and cash equivalents were $237.7 million; investments totaled $3.52 billion.
Nine-month operating cash flow was $321.3 million; investing activities used $114.8 million and financing activities used $231.8 million. Cash declined $24.4 million to $237.7 million.
Notes payable were $373.9 million, representing $375 million of senior unsecured notes bearing 4.75% and maturing in July 2022. The Vidalia Re surplus note was $1.14 billion, bears 4.50%, and matures in 2030; its principal is expected to rise to $1.5 billion as supported reserves develop. The company describes this financing as non-recourse to the Parent Company and Primerica Life, while noting Parent support for Vidalia Re’s credit-enhancement fee.
No borrowings were outstanding under the $200 million revolving credit facility, which matures in December 2022. The company reported compliance with applicable debt and facility covenants.
The company repurchased $181.1 million of shares during the first nine months under a $275 million authorization; $93.9 million remained available at September 30. Dividends paid were $43.5 million, and dividends declared were $1.02 per share year to date, versus $0.75 in 2018.
Insurance subsidiaries were reported to have statutory capital and surplus substantially above applicable U.S. requirements; the Canadian insurer was in compliance with minimum capital requirements. The filing gives no specific capital ratio figures.

Outlook, risks and notable items

Management expects operating cash flows to provide sufficient operating liquidity over the next 12 months and believes cash flows and potential funding sources will support longer-term liquidity needs. No specific earnings or revenue guidance is provided.
Management attributes growth to the expanding term-life book, investment product sales and market appreciation. It noted slower recruiting momentum compared with the prior sustained growth period and higher technology and business-support costs.
Reg BI and Form CRS compliance is due June 30, 2020. Primerica anticipates changes to sales processes and controls but does not expect significant business disruption. State and Canadian conduct and compensation reforms could require further changes; their financial impact is not yet quantifiable.
Thirty jurisdictions were conducting multi-state unclaimed-property audits focused on life-insurance claims practices. The company could not estimate potential costs or liabilities. It also cited ordinary-course legal and regulatory matters without estimating possible losses.
Q3 2019 included $1.1 million of investment impairment losses recognized in earnings; year-to-date impairment losses were $1.2 million. The filing also reports a $0.7 million reserve for potentially uncollectible ceded claims.
Reinsurance is substantial: 87% of direct life insurance in force was ceded, and reinsurance recoverables were $4.17 billion. The largest reported recoverable was $2.72 billion from Pecan Re, a wholly owned Swiss Re subsidiary; the filing notes certain counterparties are not rated.
New long-duration insurance accounting guidance is expected to have a pervasive impact, but its magnitude was not yet determinable; the effective date was deferred to January 1, 2022. The company was also evaluating the expected-credit-loss standard effective in 2020, with impact not yet determined.
Operating lease accounting adoption added $52.7 million to assets and liabilities on January 1, 2019, with no reported effect on results or liquidity. At September 30, operating lease assets were $48.4 million and liabilities $54.7 million.

Important facts for investors to verify

Whether recruiting, licensing and term-policy issuance stabilize or weaken further, and how these trends affect future premium growth.
Reinsurance counterparties’ ability to meet obligations, the concentration of recoverables, and the outcome of the claim reserve related to a reinsurer in receivership.
Effects of Reg BI, Canadian and state conduct reforms, and potential changes to product-company compensation arrangements.
Whether favorable market valuations and investment returns persist, given portfolio credit, interest-rate and reinvestment risks.
Results and potential liabilities from the multi-jurisdiction unclaimed-property audits.
Capital needs and the consequences of continued share repurchases and dividend growth alongside reserve-financing obligations.