Primerica, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results are for Primerica and its subsidiaries, which distribute term life insurance and third-party investment and savings products in the United States and Canada. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $427.3 | $383.6 | $1,246.2 | $1,125.2 |
| Income before tax | $100.2 | $88.4 | $271.4 | $250.5 |
| Net income | $66.6 | $58.0 | $181.8 | $162.5 |
| Diluted EPS | $1.46 | $1.22 | $3.93 | $3.37 |
| Net income margin | 15.6% | 15.1% | 14.6% | 14.4% |
At September 30, 2017, total assets were $12.21 billion, total liabilities $10.93 billion, and stockholders’ equity $1.28 billion. Cash and cash equivalents were $177.4 million, down from $212.0 million at year-end 2016. Investments totaled $2.67 billion; due from reinsurers was $4.24 billion and deferred policy acquisition costs were $1.90 billion.
Cash flow, nine months: Operating activities provided $209.8 million, versus $166.6 million in 2016. Investing activities used $79.2 million, compared with providing $35.7 million in 2016, mainly reflecting increased fixed-maturity purchases and fewer maturities and sales. Financing activities used $166.3 million, including $132.8 million of common-stock repurchases and $26.8 million of dividends paid.
Debt and liquidity: Notes payable had a carrying value of $373.2 million; the company reported $375 million principal of senior unsecured notes bearing 4.75%, due July 2022. The Vidalia Re surplus note was $688.1 million at carrying value ($688.8 million principal), with an equal-principal LLC Note asset. Management said cash flows and potential funding sources should meet long-term liquidity needs and expected business cash flows to provide sufficient operating liquidity over the next 12 months. U.S. insurance subsidiaries had statutory capital and RBC substantially above requirements; Primerica Life Canada was compliant with its minimum capital requirement.
Investment indicators: The fixed-maturity portfolio, excluding the held-to-maturity security, had an average A- rating, 3.8-year duration, and 4.04% book yield, versus 3.9 years and 4.21% at December 31, 2016. Below-investment-grade holdings were 3% of amortized cost, down from 5%.
Material changes versus prior periods
- Q3 revenue rose 11% and net income rose 15%; for the nine months, revenue rose 11% and net income rose 12%. Lower weighted-average share counts contributed to per-share growth.
- Term Life Insurance revenue increased 15% in Q3 and 14% year to date, with segment pretax income up 14% and 9%, respectively. Growth reflected a larger in-force book and the run-off of policies under earlier coinsurance transactions, which increased net premiums relative to direct premiums.
- Investment and Savings Products revenue increased 8% in Q3 and 9% year to date; segment pretax income rose 9% and 12%. Total product sales increased 7% in Q3 and 10% year to date; client account asset values ended the quarter at $58.7 billion, up from $51.3 billion a year earlier.
- Corporate and Other Distributed Products reported a $5.4 million Q3 pretax loss, broadly similar to the prior-year quarter; its nine-month loss widened to $21.8 million from $15.2 million.
- Benefits and claims and DAC amortization rose 14% and 18% in Q3, respectively. For the nine months, claims experience adversely affected benefits and claims by about $5 million, while weaker persistency increased DAC amortization. Negotiated YRT rate reductions partly offset claims-cost growth.
- The company repurchased 1.71 million shares for approximately $132.8 million during the first nine months; about $67.2 million remained under the $200 million authorization at September 30. The quarterly dividend declared was $0.20 per share, versus $0.18 a year earlier.
Outlook, commentary, risks, and unusual items
- Outlook: No numerical earnings or revenue guidance is provided. Management said it expected operating cash flows to be sufficient for the next 12 months. The company intends to continue ceding approximately 90% of mortality risk on new U.S. and Canadian business, subject to availability and economics of reinsurance.
- Distribution: Q3 recruits increased to 90,210 from 73,706, including approximately 17,000 recruits from hurricane-affected areas whose application fees were waived. Management cautioned that these recruits’ licensing rate may be lower than historical rates. Life-licensed representatives totaled 124,436 at quarter-end.
- Regulatory uncertainty: The DOL Fiduciary Rule and related exemptions were under review; the company could not quantify the effects of potential changes. U.S. qualified retirement-plan assets represented an estimated 59% of average client account assets in 2016, and related sales 56% of investment and savings product sales.
- Reinsurance and reserve financing: Reinsurance is extensive and does not remove the company’s primary obligation to policyholders. Reinsurance receivables totaled $4.24 billion; Pecan Re accounted for $2.76 billion and was listed as not rated. Vidalia Re’s surplus-note financing is non-recourse to the parent and Primerica Life, but the parent supports payment of the credit-enhancement fee. A $367.2 million letter of credit supports Peach Re reserve financing.
- Contingencies: Thirty jurisdictions were conducting multi-state unclaimed-property audits focused on life-claim practices. The company could not reasonably estimate the likelihood or impact of additional costs or liabilities. It stated that no pending legal proceeding required disclosure under the filing’s legal-proceedings item.
- Other notable items: Adoption of share-based compensation accounting guidance reduced income tax expense by approximately $0.9 million in Q3 and $5.2 million year to date. The nine-month effective tax rate was 33.0%, versus 35.1% in 2016. Q3 term-life claims experience was favorable by about $2 million; first-half 2017 experience was adverse by about $5 million. Available-for-sale securities recorded $1.2 million of OTTI losses in earnings year to date, versus $3.3 million in 2016.
- Key risks: Sales-force recruiting, licensing and retention; mortality and persistency deviations; reinsurer or financing-counterparty performance; investment credit, interest-rate and valuation risks; regulatory or conduct-standard changes; litigation and audits; market performance and Canadian-dollar movements. Management reported no material change in market-risk exposures since year-end 2016 and said disclosure controls were effective.
Important facts for investors to verify
- Whether recruiting growth, especially the hurricane-related fee-waiver cohort, converts into licensed and productive representatives.
- Whether term-life persistency and claims experience improve or continue to raise DAC amortization and benefit costs.
- The credit quality, recoverability, and concentration of the $4.24 billion reinsurance receivable, including the large Pecan Re balance.
- Any changes to the DOL fiduciary requirements and their effect on qualified-account sales, compensation, compliance costs, and distribution.
- The terms, counterparty protections, and capital implications of Vidalia Re and Peach Re reserve-financing arrangements, including the LOC and parent fee support.
- Cash generation after investment purchases, repurchases, dividends, and the evolving investment portfolio’s yield and credit profile.