Primerica, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Primerica distributes term life insurance and third-party investment and savings products in the United States and Canada. Amounts below are in millions unless noted.
Financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Total revenue | $379.2 | $350.5 | $742.2 | $695.4 |
| Income before tax | $91.9 | $76.8 | $162.1 | $143.6 |
| Net income | $59.3 | $49.2 | $104.5 | $92.6 |
| Diluted EPS | $1.23 | $0.94 | $2.15 | $1.76 |
| Operating cash flow | — | $103.9 | $83.9 |
- Q2 revenue rose 8%, pretax income 20%, and net income 21%; first-half increases were 7%, 13%, and 13%, respectively. Approximate net margin was 15.6% for Q2 versus 14.0% and 14.1% for the first half versus 13.3%.
- Term Life Insurance was the main earnings growth driver: Q2 pretax income increased 30% to $58.0 million; first-half pretax income increased 29% to $104.1 million. Net premiums rose 14% in both periods, reflecting policy growth and runoff of older coinsured business.
- Investment and Savings Products pretax income declined 4% to $36.1 million in Q2 and 7% to $67.8 million in the first half. Total product sales fell 6% in Q2 and 8% year to date; sales-based revenue fell 6% in each period. Management cited market uncertainty and industry weakness in variable annuities.
- Corporate and Other Distributed Products reported pretax losses of $2.2 million in Q2 and $9.8 million in the first half. Q2 improved year over year, aided by higher realized investment gains.
- Cash and cash equivalents were $213.1 million at June 30, up from $152.3 million at year-end. First-half operating cash flow was $103.9 million; investing activities provided $65.0 million and financing activities used $109.3 million. Cash generation benefited partly from timing of ceded-claim recoveries from reinsurers.
- Total assets were $11.20 billion and stockholders’ equity $1.21 billion. Notes payable were $372.7 million; the surplus note was $430.2 million carrying value, with $431.0 million principal outstanding. Senior notes have a 4.75% coupon and mature in 2022; the surplus note matures in 2029. The company reported compliance with debt covenants and no short-term borrowings.
- Available-for-sale fixed-maturity securities had a 4.1-year average duration, 4.40% average book yield, and A- average rating. Approximately 5% of the fixed-maturity portfolio was below investment grade. Unrealized investment gains, net of tax and excluding OTTI, were $68.5 million versus $32.1 million at year-end.
Material changes and management commentary
- Life-licensed representatives increased to 112,365 at June 30 from 106,710 at December 31, 2015. Q2 new recruits rose to 65,273 from 60,246, and new life-licensed representatives to 12,171 from 10,439.
- Q2 term policies issued increased to 77,384 from 68,097; the average monthly issue rate per licensed representative was 0.23 in both periods. Term life face amount in force increased 4% year over year to $714.8 billion.
- Investment and savings client asset values ended Q2 at $49.4 billion. First-half net inflows were $470 million, while sales declined and average client asset values were lower year over year.
- Q2 term-life claims experience was below historical levels, contributing an estimated $2 million benefit; the prior-year comparison included approximately $1 million of claims above historical experience. Favorable claims experience and higher realized investment gains contributed to reported earnings growth.
- The company repurchased approximately $90.6 million of shares during the first half and paid $16.4 million in dividends. About $59.5 million remained under the $200 million repurchase authorization through December 31, 2016. Weighted-average diluted shares fell to 47.7 million in Q2 from 51.8 million.
- No earnings guidance was provided. Management said business cash flows were expected to provide sufficient operating liquidity over the next 12 months and to support long-term liquidity needs alongside potential funding sources.
Risks, contingencies, and unusual items
- The DOL Fiduciary Rule, published April 8, 2016, was expected to require changes to the qualified-plan business. Management had not finalized those changes or quantified the financial impact. Qualified retirement plans represented an estimated 59% of 2015 average client assets and 55% of 2015 investment and savings product sales. Applicability begins April 10, 2017, with certain requirements delayed until January 1, 2018.
- Primerica and its subsidiaries are subject to multi-state unclaimed-property audits by 30 jurisdictions concerning life-insurance claims practices. West Virginia’s State Treasurer has sued Primerica Life and other insurers; the company could not estimate the likelihood or impact of additional costs or liabilities.
- Reinsurance is significant: 88% of direct life insurance in force was ceded. Due from reinsurers totaled $4.15 billion, including $2.71 billion from Pecan Re, which was not rated in the filing’s table. Reinsurance does not remove Primerica’s primary obligation to policyholders.
- A $434.5 million letter of credit supports part of the Peach Re redundant-reserve financing arrangement. Management reported compliance with its facility covenants. U.S. life subsidiaries had statutory capital substantially above applicable requirements; the Canadian subsidiary was compliant with its minimum capital requirement.
- First-half OTTI losses recognized in earnings were $2.8 million, versus $0.9 million in 2015. Management attributed most other unrealized portfolio losses to interest rates and credit spreads and said it had the ability and intent to hold affected securities.
- The filing identifies risks from recruitment and representative licensing, insurance regulation, mortality and persistency assumptions, reinsurer performance, interest rates and credit, investment-product demand, Canadian-dollar exchange rates, and litigation. The company reported effective disclosure controls and no material second-quarter changes in internal control over financial reporting.
Important facts for investors to verify
- Whether term-life sales growth and claims experience remain favorable, and how persistency, mortality, and DAC amortization develop.
- Whether investment-product sales stabilize and what operational or compensation changes the DOL Fiduciary Rule requires, including their cost and revenue effects.
- The credit quality and collectability of the $4.15 billion reinsurance receivable, particularly exposures to unrated counterparties and the Pecan Re transition.
- The outcome and potential financial exposure of unclaimed-property audits and the West Virginia litigation.
- How share repurchases, dividends, reserve financing, and subsidiary dividend capacity affect parent-company liquidity and capital over time.