Primerica, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Although the request metadata says “2018 Q4,” this is an annual filing; fourth-quarter results are noted separately below. Primerica serves middle-income households in the U.S. and Canada through independent representatives, underwriting term life insurance and distributing investment and other financial products.
Financial performance and position
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $1,899.8 million | $1,689.1 million | +12% |
| Net premiums | $1,085.9 million | $961.3 million | +13% |
| Commissions and fees | $677.6 million | $591.3 million | +15% |
| Income before tax | $416.1 million | $379.5 million | +10% |
| Net income | $324.1 million | $350.3 million | -7% |
| Diluted EPS | $7.33 | $7.61 | -4% |
| Operating cash flow | $478.1 million | $391.5 million | +22% |
- Pre-tax margin was approximately 21.9% of revenue; net margin was approximately 17.1%.
- Net income fell despite higher revenue and pre-tax income because FY 2017 included a large one-time tax benefit from U.S. tax reform. Effective tax rates were 22.1% in 2018 and 7.7% in 2017.
- Cash and cash equivalents were $262.1 million at year-end, versus $280.0 million a year earlier. Investing activities used $232.8 million and financing activities used $261.0 million; financing outflows included $210.1 million of share repurchases and $44.1 million of dividends.
- Total assets were $12.60 billion, liabilities $11.13 billion and stockholders’ equity $1.46 billion. Investments totaled $3.13 billion, including a $970.4 million held-to-maturity note associated with reserve financing; separate-account assets and liabilities were each $2.20 billion.
- Parent-company senior notes had $375 million principal outstanding, bear 4.75% interest and mature July 2022. A $200 million revolving facility was undrawn at year-end. The separate $970.4 million surplus note is part of a reserve-financing structure and is contractually matched by the LLC note while held.
Business trends and changes versus prior year
- The life-licensed sales force grew 4% to 130,736 at year-end. New recruits declined to 290,886 from 303,867, partly because 2017 included about 19,000 hurricane-area recruits whose application fees were waived.
- Term policies issued fell to 301,589 from 312,799, and monthly policy productivity per licensed representative eased to 0.19 from 0.21. Face amount in force nevertheless increased 2% to $781.0 billion.
- Investment product sales rose 14% to $7.04 billion, led by managed investments, whose sales increased 76%, and annuities and other products, up 26%. Average client assets rose 9% to $61.8 billion, but year-end client asset values declined to $57.7 billion from $61.2 billion, reflecting weak late-year markets and currency translation. Net flows remained positive at $1.10 billion.
- Term Life Insurance pre-tax income increased 15% to $281.9 million; Investment and Savings Products pre-tax income rose 7% to $173.9 million. Corporate and Other Distributed Products reported a $39.7 million pre-tax loss, versus a $29.0 million loss.
- Net premiums benefited from growth in the in-force book and the run-off of older business subject to IPO coinsurance, which reduced ceded premiums. Reinsurance recoverables declined 2% to $4.14 billion; approximately 87% of direct life insurance in force was ceded.
Fourth-quarter results
For Q4 2018, revenue was $487.3 million, pre-tax income $107.9 million, net income $86.5 million and diluted EPS $1.99. Q4 2017 revenue was $442.9 million, net income $168.4 million and diluted EPS $3.72. The prior-year quarter benefited from a substantial tax benefit; therefore, the net-income comparison is not indicative of the underlying revenue trend.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management expected operating cash flows to be sufficient for operating liquidity over the next 12 months and believed cash flows and potential funding sources would support longer-term needs.
- Management cited recruitment and licensing, representative retention and productivity, mortality and policy persistency, reinsurance counterparty performance, equity-market exposure, interest rates and credit quality, cybersecurity, litigation, and regulatory change as important risks.
- Potential conduct and compensation changes include the proposed SEC best-interest framework and Canadian proposals affecting embedded and upfront mutual-fund commissions. Primerica said the financial effect and required business changes could not yet be quantified.
- Primerica Life adopted principle-based statutory reserves in 2018, which management said should reduce the need for future redundant-reserve financing on eligible new business. Adoption of U.S. long-duration insurance accounting changes is expected in 2021 and is anticipated to have a pervasive financial-reporting impact; the magnitude was not yet known.
- Thirty jurisdictions were conducting unclaimed-property audits focused on life-claim practices. The company could not reasonably estimate potential costs or liabilities. No pending legal proceeding was identified as requiring disclosure in the filing.
- FY 2018 included adoption of ASC 606, increasing opening retained earnings by $24.7 million; the standard added $1.6 million of 2018 revenue compared with prior guidance. Adoption of investment-accounting changes also put $2.5 million of equity-security fair-value losses through income.
- The company repurchased $210.1 million of shares during 2018. A new authorization of up to $275 million was approved in February 2019. The quarterly dividend declared in Q1 2019 was $0.34 per share.
Most important facts for investors to verify
- Separate recurring operating growth from the unusually low 2017 effective tax rate and its large tax-reform benefit when comparing earnings.
- Track sales-force productivity and term policy issuance, not just representative counts, given lower 2018 policy issuance and productivity.
- Monitor client assets, market performance, net flows and the shift toward managed advisory products, including its impact on fee mix and account-based revenue.
- Review reinsurance recoverables and counterparty concentration, as well as the collateral, guarantees and recapture terms supporting reserve-financing arrangements.
- Assess the potential effects of Canadian and U.S. conduct, licensing and compensation rule changes, and the unresolved multi-state unclaimed-property audits.
- Confirm the effect of future insurance-accounting changes on reported earnings, reserves, capital and dividend capacity; the filing does not provide a clear quantified estimate.