Primerica, Inc. quarterly report, Q2 FY2017

Primerica, Inc. — Q2 2017 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2017. Unaudited results are compared with the corresponding 2016 periods. Primerica distributes financial products to middle-income households in the U.S. and Canada, including term life insurance it underwrites and investment products primarily distributed for third parties.

Financial performance

Metric	Q2 2017	Q2 2016	Six months 2017	Six months 2016
Total revenue	$413.7 million	$379.0 million	$818.9 million	$741.6 million
Income before taxes	$96.4 million	$91.9 million	$171.2 million	$162.1 million
Net income	$63.1 million	$59.3 million	$115.2 million	$104.5 million
Diluted EPS	$1.36	$1.23	$2.47	$2.15
Operating cash flow	Not stated for quarter	Not stated for quarter	$119.9 million	$105.3 million

Q2 revenue rose 9%, pretax income 5%, net income 6%, and diluted EPS 11% year over year. Six-month revenue increased 10%, net income 10%, and diluted EPS 15%. Approximate Q2 net margin was 15.3%, versus 15.7% a year earlier; six-month net margin was approximately 14.1% in both periods. Net premiums increased 13% in both comparisons, while commissions and fees rose 8% in Q2 and 10% year to date.

By segment, Q2 pretax income was $61.9 million in Term Life Insurance (+7%), $39.7 million in Investment and Savings Products (+10%), and a $5.1 million loss in Corporate and Other Distributed Products, compared with a $2.2 million loss a year earlier. Six-month segment pretax results were $110.9 million, $76.8 million, and a $16.5 million loss, respectively.

Cash, investments, debt and liquidity

At June 30, cash and cash equivalents were $154.5 million, down from $212.0 million at year-end 2016. Six-month cash flow was $119.9 million from operations, $(78.7) million from investing, and $(99.2) million from financing; the resulting cash decrease was $57.5 million.
Total assets were $11.95 billion and stockholders’ equity was $1.27 billion. Total investments were $2.62 billion. Separate-account assets and matching liabilities were each $2.42 billion.
Notes payable had a $373.1 million carrying value; the company reported $375.0 million principal of senior unsecured notes bearing 4.75%, due July 2022. The surplus note was $635.0 million carrying value, with $635.7 million principal outstanding. The filing reports no short-term borrowings and compliance with debt covenants.
The company reported a $380.1 million letter of credit supporting Peach Re reserve financing. Parent-company cash and invested assets were approximately $67.0 million. Management said business cash flows were expected to provide sufficient operating liquidity for the next 12 months and believed cash flows and potential funding sources would support long-term needs.
U.S. insurance subsidiaries had statutory capital and risk-based capital substantially above applicable requirements; Primerica Life Canada was in compliance with Canadian minimum capital requirements.

Changes, operating trends and management commentary

Term-life growth reflected a larger sales force and in-force book: new policies issued rose to 84,033 in Q2 from 77,384; face amount in force was $746.4 billion at quarter-end, up 4% year over year. Life-licensed representatives numbered 121,471 at June 30.
Investment and savings product sales rose 7% in Q2 and 11% year to date. Retail mutual fund sales increased, while annuity and other sales declined. Client account assets ended the quarter at $56.6 billion, up from $49.4 billion a year earlier, supported by market appreciation and net inflows.
Costs grew faster than revenue in Q2: total benefits and expenses rose 11%. Management cited higher claims and acquisition costs, weaker persistency that added approximately $2 million to Q2 DAC amortization, and about $3.5 million of additional technology costs. Actual claims were approximately $2 million above historical trends in Q2 and $5 million above trends for the first half.
The effective tax rate fell to 34.5% for Q2 and 32.7% for the first half, partly reflecting adoption of ASU 2016-09 and recognition of excess share-based compensation tax benefits of approximately $0.9 million and $4.2 million, respectively.
In May, the Vidalia Re coinsurance and surplus-note arrangements were expanded to include eligible 2015–2016 term policies, with an option for 2017 policies. The two notes are expected to reach approximately $1.3 billion principal each based on estimated reserves for policies issued from 2011–2016. The financing is non-recourse to the Parent and Primerica Life, although the Parent supports Vidalia Re’s credit-enhancement fee obligation.
The company repurchased approximately $75.0 million of shares in the first half under a $200 million authorization through June 30, 2018; approximately $125.0 million remained. It declared dividends of $0.19 per share in Q2, versus $0.17 a year earlier.

Outlook, risks and contingencies

No specific earnings or revenue guidance is provided. Management’s stated liquidity outlook is that operating cash flows should be sufficient for the next 12 months.
The DOL Fiduciary Rule became applicable June 9, 2017, with final exemptions then scheduled for January 1, 2018, subject to possible delay or revision. Management could not quantify effects; qualified retirement accounts represented an estimated 59% of average client assets and 56% of investment and savings product sales in 2016. Potential impacts include compliance costs, changes to products or compensation, and reduced business.
Primerica relies extensively on reinsurance: 87% of direct life insurance in force was ceded at June 30. The $4.19 billion due-from-reinsurers balance creates counterparty exposure; the largest listed receivable was $2.73 billion from Pecan Re, which was shown as not rated. Reinsurance does not relieve the company of its obligation to policyholders.
Thirty jurisdictions were conducting multi-state unclaimed-property audits focused on life-insurance claims practices; other jurisdictions could pursue similar audits. The company said potential costs or liabilities could not then be reasonably estimated. It also reported routine legal, regulatory and arbitration matters and said no pending proceeding required disclosure under the filing’s legal-proceedings item.
Investment risks include interest-rate, credit, liquidity and reinvestment exposure. The fixed-maturity portfolio’s average rating was A-, average duration 3.8 years, and average book yield 4.11%; 5% of its amortized cost was below investment grade. Management reported no material change in market-risk exposure since year-end.
Other principal risks identified include mortality and persistency deviations, recruiting and licensing trends, regulatory changes, cybersecurity and operational disruptions, market performance, Canadian-dollar movements, and failure of reinsurers or reserve-financing counterparties.

Important facts for investors to verify

Whether persistency and claims experience improve, and whether DAC amortization and benefit costs remain elevated.
How the DOL Fiduciary Rule and subsequent regulatory decisions affect qualified-account sales, compensation, compliance costs and representative retention.
The credit quality and collectability of reinsurance receivables, particularly the concentrated Pecan Re balance, and the terms and capacity of the expanded Vidalia Re financing.
Whether investment-market performance and net client inflows sustain asset-based revenue growth, and how sales mix affects margins.
Cash available at the Parent versus subsidiaries, capital-return pace, and continued compliance with insurance capital requirements and debt covenants.
Developments in the 30-jurisdiction unclaimed-property audits and any resulting settlements or other liabilities.