Primerica, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Primerica distributes term life insurance and third-party investment and savings products, primarily to middle-income households in the U.S. and Canada. Figures below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $459.9 million | $405.2 million; up 14% |
| Income before tax | $83.0 million | $74.8 million; up 11% |
| Net income | $65.7 million | $52.1 million; up 26% |
| Diluted EPS | $1.46 | $1.11; basic EPS was $1.46 versus $1.12 |
| Effective tax rate | 20.8% | 30.4% |
| Operating cash flow | $46.4 million | $52.5 million |
| Cash and cash equivalents | $190.6 million at March 31 | $280.0 million at December 31, 2017 |
| Total assets / stockholders’ equity | $12.49 billion / $1.43 billion | At March 31, 2018 |
- Net premiums rose 15% to $261.8 million; commissions and fees increased 16% to $166.8 million. Benefits and expenses rose 14% to $377.0 million.
- Term Life Insurance revenue increased 15% to $270.3 million and pretax income rose 22% to $59.6 million. Investment and Savings Products revenue increased 15% to $162.0 million, while pretax income rose 8% to $40.0 million. Corporate and Other Distributed Products reported a $16.6 million pretax loss, compared with an $11.3 million loss.
- Net cash declined $89.4 million during the quarter. Investing activities used $72.1 million and financing activities used $62.8 million, including $46.3 million of share repurchases and $11.3 million of dividends.
- Balance-sheet notes payable were $373.4 million; the separate surplus note was $795.7 million. The company reported $375.0 million principal outstanding on its 4.75% senior notes, due July 2022. Its $200 million revolving facility was undrawn, and it reported compliance with debt covenants.
- Available-for-sale fixed-maturity securities had a fair value of $1.96 billion. The portfolio’s average rating was A, average duration 3.7 years, and average book yield 3.92%.
Material changes and drivers
- Revenue growth reflected higher term-life premiums, growth in investment-product commissions and fees, and expanding client assets. Investment and savings product sales increased 12% to $1.78 billion; average client asset values increased 15% to $61.7 billion. Term-life policies issued were nearly flat at 70,821, while the life-licensed sales force grew to 127,182.
- Term-life net premiums benefited from growth in direct premiums and lower ceded premiums as legacy IPO coinsurance business ran off. Benefits and claims and DAC amortization also increased with business growth.
- Net income benefited from the lower U.S. federal corporate tax rate under the Tax Reform Act; the effective tax rate fell from 30.4% to 20.8%. The company recorded $1.0 million of estimated tax expense for global intangible low-taxed income and a $1.8 million tax benefit from refining its provisional Canadian earnings repatriation estimate.
- Accounting changes affected comparability: adoption of revenue-recognition guidance increased opening retained earnings by about $24.7 million; adoption of financial-instrument guidance moved equity-security fair-value changes into earnings and contributed $1.9 million of Q1 pretax losses. These changes did not materially alter Q1 revenue recognition overall.
- Other comprehensive income was a $34.1 million loss, compared with $5.8 million of income in Q1 2017, mainly reflecting lower unrealized investment values and foreign-currency translation.
Outlook, risks and contingencies
- Management said operating cash flows are expected to provide sufficient liquidity for the next 12 months and that cash flows and potential funding sources are expected to support long-term needs. The filing provides no specific earnings or revenue guidance.
- Primerica Life adopted principle-based reserves in Q1 2018. Management expects the change to reduce statutory reserve requirements for eligible new business and reduce the need for future redundant-reserve financing for business issued after the effective date.
- The company ceded 87% of direct life insurance in force. Reinsurance recoverables were $4.26 billion; reinsurance does not release the company from its obligations to policyholders, and reinsurer creditworthiness remains a risk.
- Unclaimed-property audits by 30 jurisdictions are examining life-insurance claims practices. The company said it could not reasonably estimate the likelihood or impact of additional costs or liabilities.
- The 5th Circuit vacated the DOL Fiduciary Rule and related exemptions; its mandate became final May 7, 2018, subject to possible Supreme Court appeal. SEC and state proposals on standards of conduct and disclosures could require business changes; the impact was not quantified.
- Investment values are exposed to interest-rate, credit-spread, market, liquidity and currency risks. The company reported no material change in market-risk exposures since year-end. It also noted that Tax Reform Act accounting estimates remained provisional in certain areas, with finalization expected in the second half of 2018.
Important facts for investors to verify
- Whether growth in term-life premiums and investment-product fees continues, and how claims, policy persistency and sales-force productivity develop.
- Cash generation and liquidity trends, including the use of cash for investment purchases, dividends and the remaining $228.7 million authorized for share repurchases.
- Reinsurance recoverable concentration and counterparty strength, particularly the largest balances, and the performance of redundant-reserve financing arrangements.
- Developments in the multi-state unclaimed-property audits and in federal or state financial-services conduct rules.
- Final tax-accounting estimates and the ongoing effects of investment-market movements, interest rates and Canadian-dollar changes on earnings and comprehensive income.