Business context and reporting period
Primerica, Inc. filed this Form 10-K for the fiscal year ended December 31, 2019. It serves middle-income households in the U.S. and Canada through independent representatives, underwriting term life insurance and distributing investment, savings, and other third-party products. At year-end, it had 130,522 life-licensed representatives, insured more than 5 million lives, and served approximately 2.5 million investment accounts.
Financial and operating metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $2.053 billion | $1.900 billion |
| Net income | $366.4 million | $324.1 million |
| Diluted EPS | $8.62 | $7.33 |
| Operating cash flow | $485.5 million | $478.1 million |
| Cash and cash equivalents, year-end | $256.9 million | $262.1 million |
| Total assets, year-end | $13.689 billion | $12.595 billion |
| Stockholders’ equity, year-end | $1.652 billion | $1.462 billion |
Revenue increased 8% and net income 13%; net margin was approximately 17.9%, compared with 17.1% in 2018. Net premiums rose 9% to $1.184 billion and commissions and fees rose 5% to $713.8 million. Income before taxes was $477.1 million, up 15%; the effective tax rate increased to 23.2% from 22.1%.
Operating cash flow exceeded net income. Investing activities used $201.9 million and financing activities used $290.1 million, including $225.0 million for share repurchases and $57.6 million in dividends. The annual dividend declared was $1.36 per share. In Q4 2019, revenue was $532.0 million, net income $93.6 million, and diluted EPS $2.24; Q4 2018 diluted EPS was $1.99.
Year-end notes payable were $374.0 million, principally $375 million of 4.75% senior notes due July 2022. The company had an undrawn $200 million revolving credit facility and reported covenant compliance. A separate $1.184 billion captive-insurance surplus note is matched by a held-to-maturity LLC note of equal principal; both mature in 2030 and bear 4.50% interest. Total liabilities were $12.036 billion. The parent company depends primarily on subsidiary distributions to meet obligations and return capital to shareholders.
Term Life Insurance segment pretax income increased 14% to $320.1 million; Investment and Savings Products pretax income rose 10% to $191.8 million. Corporate and Other Distributed Products reported a $34.8 million pretax loss. Investment and savings product sales increased 7% to $7.533 billion; client account values ended the year at $70.537 billion, up from $57.704 billion, largely reflecting market appreciation. Life insurance face amount in force grew 3% to $808.3 billion.
Material changes, outlook, risks, and unusual items
- Growth in premiums reflected expansion of the in-force term-life book and run-off of older business subject to IPO coinsurance, which reduced ceded premiums. Investment-product revenue benefited from stronger equity markets and higher sales, while asset-based fees benefited from higher client asset values.
- Recruiting momentum weakened: new recruits declined to 282,207 from 290,886, and newly life-licensed representatives fell to 44,739 from 48,041. The year-end licensed sales force was nearly flat year over year. New term policies issued declined 5% to 287,809.
- Management said business cash flows should provide sufficient operating liquidity over the next 12 months and support long-term needs, including potential funding sources. The filing provides no specific earnings or revenue guidance.
- Scottish Re entered rehabilitation in March 2019. Primerica recognized an allowance on its recoverables, resulting in an immaterial loss in 2019; separately, it recorded $2.3 million of losses on claims ceded on a closed block to a reinsurer in receivership. Reinsurance recoverables totaled $4.170 billion, and 87% of life insurance in force was ceded. Reinsurer performance is a key counterparty risk.
- Regulatory changes include the SEC’s Regulation Best Interest and Form CRS, with a June 30, 2020 compliance date. Canadian deferred-sales-charge restrictions announced in February 2020 are scheduled to take effect in 2022; management had not quantified their potential impact. The filing also identifies risks from sales-force recruitment and licensing, independent-contractor classification, mortality and persistency assumptions, market declines, cybersecurity, litigation, and regulatory capital or ratings changes.
- Investment portfolio fair value rose with markets; the fixed-maturity portfolio’s average book yield fell to 3.54% from 3.89%. A 100-basis-point parallel rate increase was estimated to reduce fixed-maturity fair value by $81.6 million. Adoption of the long-duration insurance accounting standard was deferred to 2022 and is expected to have a pervasive but not yet quantified effect. The audit opinion was unqualified; KPMG identified valuation assumptions for term-life policy benefits as a critical audit matter.
Important facts for investors to verify
- Whether weaker recruiting and lower policy issuance affect future sales-force size, productivity, and premium growth.
- The quality, collateral, and concentration of reinsurance recoverables, including exposure to reinsurers in distress.
- How the Canadian deferred-sales-charge ban and U.S. best-interest rules change distribution economics, commissions, and compliance costs.
- Whether market-driven increases in client assets and investment-product revenue persist, and the sensitivity of earnings to market and interest-rate movements.
- Subsidiary dividend capacity and capital adequacy relative to parent-company debt, dividends, and repurchases; also monitor implementation effects of new insurance accounting standards.