Primerica, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Primerica distributes term life insurance and third-party investment and savings products to middle-income households in the United States and Canada. Unaudited financial statements are prepared under U.S. GAAP.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $405.2 million | $362.6 million | +12% |
| Net premiums | $227.9 million | $201.8 million | +13% |
| Commissions and fees | $144.3 million | $128.8 million | +12% |
| Income before tax | $74.8 million | $70.2 million | +7% |
| Net income | $52.1 million | $45.2 million | +15% |
| Diluted EPS | $1.11 | $0.92 | +21% |
| Operating cash flow | $52.5 million | $35.3 million | +$17.2 million |
Calculated net margin was approximately 12.8%, versus 12.5% a year earlier; pretax margin was approximately 18.5%, versus 19.4%. The effective tax rate fell to 30.4% from 35.7%, including a $3.3 million benefit from adopting new share-based compensation tax accounting and approximately $0.7 million of tax benefits from expired statutes of limitation.
Business performance and material changes
- Term life: Segment revenue rose 14% to $234.1 million and pretax income rose 6% to $49.0 million. New policies issued increased 6% to 70,642, while the monthly issue rate per licensed representative was 0.20 versus 0.21. Management attributed premium growth to recent sales and policies not subject to earlier IPO coinsurance arrangements. Claims were approximately $3 million higher than expected, partly offset by lower-than-expected reserve increases associated with weaker persistency. DAC amortization rose 22%, including costs associated with lower persistency and Louisiana policies that lapsed after a flood-related lapse restriction ended.
- Investment and savings products: Segment revenue increased 12% to $140.4 million and pretax income increased 17% to $37.1 million. Product sales rose 15% to $1.585 billion; average client assets increased 15% to $53.8 billion. Management cited market appreciation, net inflows, higher mutual fund sales, and account-fee changes. Annuity sales were slightly lower.
- Corporate and other: Segment revenue declined 3% to $30.7 million, and its pretax loss widened to $11.3 million from $7.6 million, largely reflecting higher operating expenses and lower allocated net investment income.
- Recruiting and licensing strengthened: new recruits increased to 70,983 from 63,427, new life-licensed representatives to 10,903 from 9,666, and the licensed sales force reached 117,907 at quarter-end.
Financial position, cash flow, and capital
- At March 31, 2017, total assets were $11.67 billion, liabilities $10.42 billion, and stockholders’ equity $1.25 billion. Cash and cash equivalents were $185.8 million, down from $212.0 million at year-end 2016.
- Operating cash flow was $52.5 million; investing activities used $33.7 million and financing activities used $45.2 million. The quarter included $29.9 million of common stock repurchases and $8.9 million of dividends paid.
- Debt included $375 million principal of 4.75% senior unsecured notes due July 2022 (carrying value $373.0 million) and a $535.2 million surplus note bearing 4.50%, due December 2029. The surplus note principal is expected to increase with supported reserves; interest income from the corresponding held-to-maturity LLC Note offsets its interest expense. Senior-note covenants were met; no short-term borrowings were outstanding.
- The company reported statutory capital substantially above applicable requirements for its U.S. life insurers and compliance with Canadian minimum capital requirements. Management expected business cash flows to provide sufficient operating liquidity for the next 12 months and to support long-term needs.
Outlook, risks, and unusual items
- No formal earnings or revenue guidance is provided in the supplied filing text. Management says recruiting, consumer and market conditions, investment returns, interest rates, and Canadian-dollar movements can affect results.
- The DOL Fiduciary Rule was scheduled to begin applying June 9, 2017, subject to review and possible revision or delay; final exemptions were scheduled for January 1, 2018. Qualified retirement accounts represented an estimated 59% of average client account assets and 56% of investment and savings product sales in 2016. The company planned sales-process modifications but said it could not quantify the business impact.
- Primerica ceded 88% of direct life insurance in force at quarter-end. Due from reinsurers totaled $4.22 billion, with substantial balances associated with Pecan Re and other counterparties. Reinsurance does not remove Primerica’s primary obligation to policyholders; counterparty performance is a material risk.
- Thirty jurisdictions were conducting unclaimed-property audits focused on life-insurance claims practices. The company could not reasonably estimate the likelihood or impact of potential additional costs or liabilities. It also reported ordinary-course legal and regulatory matters without estimating losses where possible outcomes were uncertain.
- On May 4, 2017, after quarter-end, Primerica expanded the Vidalia Re coinsurance arrangement to include eligible 2015–2016 policies, with an option for 2017 policies. The related notes’ maximum principal amounts are expected to reach approximately $1.3 billion each; the arrangement remains non-recourse to Primerica, Inc. and Primerica Life.
- Other notable factors included $211,000 of investment impairment losses, compared with $2.0 million a year earlier, and a $394.5 million letter of credit supporting part of Peach Re’s Regulation XXX reserves. Management reported no material change in market-risk exposures since year-end and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether sales-force growth and investment product inflows continue, and whether licensed-agent productivity remains stable.
- Persistency, mortality and claims experience, including the effect on DAC amortization and future policy reserves.
- The ultimate requirements and economic impact of the DOL Fiduciary Rule and any related compensation, product, or compliance changes.
- Reinsurer credit quality and concentration, the performance and terms of reserve-financing arrangements, and the expanded Vidalia Re transaction.
- Potential outcomes of the multi-state unclaimed-property audits and any other legal or regulatory matters.
- Capital returns, liquidity, and debt obligations, including repurchases under the remaining $170.1 million authorization and the $394.5 million letter of credit.