Primerica, Inc. quarterly report, Q2 FY2019

Primerica, Inc. — Q2 2019 Form 10-Q

Business context and reporting period. Primerica provides term life insurance and distributes investment and savings products to middle-income households in the U.S. and Canada through independent sales representatives. This unaudited quarterly report covers the three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless noted. Amounts below are in U.S. dollars.

Financial performance

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Total revenue	$504.9 million	$467.8 million	$999.9 million	$927.7 million
Income before taxes	$127.5 million	$113.8 million	$229.8 million	$196.7 million
Net income	$97.4 million	$86.7 million	$176.6 million	$152.4 million
Diluted EPS	$2.28	$1.95	$4.11	$3.40
Operating cash flow	Not presented as a quarterly figure	Not presented as a quarterly figure	$185.1 million	$160.2 million

Q2 revenue rose 8%, pretax income 12%, and net income 12%. Six-month revenue rose 8%, pretax income 17%, and net income 16%.
Calculated net margin was approximately 19.3% in Q2 2019 versus 18.5% in Q2 2018, and 17.7% for the first half of 2019 versus 16.4% in the first half of 2018.
Q2 net premiums increased 9% to $286.7 million. Net investment income increased 24% to $24.9 million, including favorable returns on the deposit asset associated with a 10% coinsurance agreement.
At June 30, total assets were $13.32 billion and stockholders’ equity was $1.59 billion. Cash and cash equivalents were $245.0 million, down from $262.1 million at December 31, 2018.
Debt and financing: notes payable were $373.8 million, including $375.0 million principal of 4.75% senior notes due July 2022. A $1.087 billion surplus note is associated with reserve financing and is non-recourse to the Parent Company and Primerica Life. The $200 million revolving credit facility was undrawn; the company reported covenant compliance.
Six-month cash flows: operating activities provided $185.1 million; investing activities used $56.8 million; financing activities used $146.7 million, including $110.7 million of share repurchases and $29.1 million of dividends paid.

Material changes and operating trends

Term life: Segment revenue increased 9% in Q2 to $296.9 million and pretax income increased 11% to $84.0 million. Net premiums grew as the in-force book expanded and older business subject to IPO coinsurance ran off. The face amount of term life insurance in force was $796.4 billion at June 30, up 3% year over year. New policies issued declined to 78,664 in Q2 from 83,754; productivity was 0.20 policies per licensed representative monthly, versus 0.22.
Sales force: Q2 recruits increased to 86,173 from 76,520, attributed to the June convention and recruiting incentives. First-half recruits fell to 149,396 from 152,750, and new life-licensed representatives declined to 20,984 from 25,274. The licensed sales force was 129,550 at June 30, broadly stable sequentially.
Investment and savings: Segment pretax income rose 10% in Q2 to $47.3 million. Total product sales rose 10% to $1.94 billion in Q2; first-half sales increased 4% to $3.69 billion. Annuity sales supported growth, while first-half retail mutual fund sales declined 3%. Client account values ended June at $65.9 billion, up 7% from year-end, with positive net flows and market appreciation. Fee-generating positions declined 4% year over year, principally following the transition from Freedom Portfolios to a platform that does not generate the same recordkeeping and custodial fees.
Corporate and other: The segment’s pretax loss narrowed to $3.9 million in Q2 from $5.3 million; for the first half it narrowed to $14.5 million from $21.9 million. Higher investment income and gains contributed, partly offset by increased expenses.
Stockholders’ equity increased to $1.59 billion from $1.46 billion at year-end, reflecting earnings and improved unrealized investment gains, partly offset by buybacks and dividends. The company repurchased 937,054 shares for $110.7 million in the first half. Its $275 million repurchase authorization runs through June 30, 2020, with approximately $164.3 million remaining at quarter-end. Dividends declared were $0.34 per share in Q2 versus $0.25 a year earlier.

Management commentary, outlook, and risks

Management expects business cash flows to provide sufficient operating liquidity over the next 12 months and believes cash flows and potential funding sources will support longer-term needs. The filing provides no specific earnings or revenue guidance.
Management attributed growth to term premiums, higher investment and savings sales in Q2, and investment income. Claims experience was described as in line with historical trends; persistency was generally in line with the prior-year period.
Investment portfolio average rating was A, average duration 3.6 years, and average book yield 3.74% at June 30. BBB securities represented 42% of fixed-maturity amortized cost; below-investment-grade securities represented 3%. Management said unrealized losses were largely related to interest rates and credit spreads and did not consider them other-than-temporary impairments, citing its ability and intent to hold the securities.
Reinsurance is substantial: 87% of direct life insurance in force was reinsured. Reinsurance does not eliminate the company’s primary obligation to policyholders; counterparty performance and recoverability remain risks. Pecan Re accounted for $2.73 billion of reinsurance recoverables and was listed as not rated by A.M. Best.
Regulatory developments include SEC Regulation Best Interest and Form CRS, with a June 30, 2020 compliance date. Primerica expects process and policy changes and acknowledged increased regulatory and litigation risk, but did not expect significant business disruption. Potential Canadian reforms to mutual-fund commissions could require changes to compensation arrangements; impact and timing were unclear.
The company is subject to multi-state unclaimed-property audits by 30 jurisdictions focused on life-insurance claims practices. It could not reasonably estimate the likelihood or impact of additional costs or liabilities. Other legal disputes and regulatory matters arise in the ordinary course; management did not identify a proceeding requiring disclosure in this report.
The adoption of lease accounting on January 1, 2019 added $52.7 million to assets and liabilities at adoption, with no effect on earnings or liquidity. The expected effect of the forthcoming long-duration insurance accounting standard is described as pervasive, but its magnitude was not yet determinable.
Other principal risks include sales-force recruiting and licensing, mortality and persistency experience, interest rates and investment credit quality, reinsurer performance, regulatory changes, market conditions, cybersecurity and technology, and Canadian currency movements. Management reported no material change in market-risk exposures since year-end.

Investor verification priorities

Track recruiting, licensing, policy issuance, and productivity to assess whether the recent sales-force slowdown affects term-life growth.
Review reinsurance recoverables, counterparty strength, and the terms and expected scale of the Vidalia Re surplus-note financing.
Assess how much investment income growth depends on favorable marks and returns on the 10% coinsurance deposit asset, versus recurring portfolio yield.
Monitor the unclaimed-property audits and implementation costs or business effects of U.S. and Canadian conduct and compensation rules.
Check the remaining repurchase authorization against liquidity, subsidiary dividend capacity, and capital needs; confirm the status and eventual impact of pending insurance accounting changes.