Primerica, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Primerica provides term life insurance and distributes investment, savings, Medicare-related and other financial products, primarily through independent sales representatives in the U.S. and Canada. Results are unaudited. Unless stated otherwise, figures below are in U.S. dollars.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $690.0 million | $691.2 million | Down 0.2% |
| Income before taxes | $163.1 million | $145.9 million | Up 11.8% |
| Net income attributable to Primerica | $125.1 million | $115.0 million | Up 8.8% |
| Diluted EPS | $3.38 | $2.91 | Up 16.2% |
| Operating cash flow | $175.9 million | $214.3 million | Down $38.4 million |
Approximate pretax margin was 23.6% versus 21.1%; net margin attributable to Primerica was 18.1% versus 16.6%. Net premiums rose 3.4% to $412.5 million, while commissions and fees fell 8.0% to $231.5 million. Net investment income increased 64.3% to $31.1 million, reflecting higher investment income and yields. Investment gains turned to a $4.6 million loss from a $0.8 million gain.
Operating cash flow was $175.9 million; investing activities used $31.2 million and financing activities used $119.0 million. Cash and equivalents were $515.1 million at quarter-end, up from $489.2 million at year-end 2022. Total assets were $14.80 billion; total liabilities were $12.87 billion and stockholders’ equity was $1.92 billion, down from $2.01 billion, largely reflecting other comprehensive loss and capital returns.
Debt included $593.1 million carrying value of senior notes (a $600 million principal balance, 2.80% coupon, due 2031) and a $1.46 billion surplus note due 2030 at 4.50%. No borrowings were outstanding under the $200 million revolving credit facility. The surplus-note financing is non-recourse to Primerica, Inc. and Primerica Life, subject to the disclosed support for Vidalia Re’s credit-enhancement fee. Management reported covenant compliance.
Material changes and segment trends
- Term Life: Revenue rose 3% to $421.1 million and pretax income rose 7% to $126.7 million. Direct premiums increased with growth in the in-force book. Life-licensed representatives increased to 136,430 from 130,206; new recruits rose to 93,540 from 84,707. Policies issued rose versus reported 2022, but the filing provides an adjusted 2022 comparison because of a product redesign.
- Investment and Savings Products: Revenue fell 13% to $210.2 million and pretax income fell 16% to $56.1 million. Total product sales declined 25% to $2.30 billion; average client assets fell 8% to $86.6 billion. Net flows remained positive and quarter-end client asset values were $87.6 billion.
- Senior Health: Revenue was $18.7 million and the pretax loss narrowed to $3.8 million from $23.1 million. Submitted policies decreased to 19,826 from 26,231 as the company prioritized more efficient lead procurement and conversion. Lower acquisition costs and no negative tail revenue adjustment in Q1 2023 aided the comparison; Q1 2022 included a $19.1 million negative adjustment.
- Corporate and Other Distributed Products: Revenue increased 7% to $40.1 million, primarily on higher net investment income; the pretax loss narrowed to $15.9 million.
The company repurchased 530,723 shares on the open market for $85.3 million under its 2023 $375 million authorization; $289.8 million remained available at March 31. Dividends paid were $23.9 million, and the declared dividend was $0.65 per share, versus $0.55 a year earlier.
Outlook, accounting, risks and contingencies
- Management expects business cash flows to provide sufficient operating liquidity over the next 12 months and believes cash flows and potential funding sources support long-term needs. No quantitative earnings or revenue guidance was provided.
- Primerica adopted long-duration contract accounting (LDTI) on January 1, 2023 and restated prior-period information. Q1 2022 net income attributable to Primerica increased by $33.6 million under the restatement, to $115.0 million. LDTI also produced substantial changes in balance-sheet presentation and OCI; Q1 2023 comprehensive income was $15.8 million versus $631.6 million in Q1 2022, chiefly reflecting changes in insurance-liability discount-rate effects. Consider this accounting change when comparing periods.
- Management cited continued market volatility, elevated inflation, interest-rate and credit-spread exposure, and currency movements as factors affecting results. Higher interest rates increased investment income but contributed to substantial unrealized AFS bond losses: fair value was $2.56 billion against $2.82 billion amortized cost at March 31. The company said these losses primarily reflected rates and spreads, reported no present intent to sell the affected holdings, and stated it could hold them until maturity or market recovery. The held-to-maturity LLC Note had an estimated $71.6 million unrealized loss; no credit losses were recognized on that note.
- Reinsurance remains material: 86% of direct life insurance in-force was ceded. Reinsurance recoverables were $3.18 billion, including $2.43 billion from Swiss Re Life and Health America. Reinsurance does not remove Primerica’s primary obligation to policyholders; counterparty performance and concentration merit monitoring.
- Canadian regulatory changes may require changes to mutual-fund compensation arrangements. The company expects lower segregated-fund sales beginning June 2023 following planned restrictions on deferred sales charges for new contracts; the financial impact is not quantified. Changes to independent-contractor classification rules could also affect the distribution model.
- Legal disputes, regulatory inquiries and arbitrations arise in the ordinary course; the company said it could not estimate possible losses unless otherwise indicated and reported no proceeding it believed required disclosure. The filing also disclosed an $80.4 million letter of credit supporting certain Regulation XXX reserves; the company was compliant with its covenants.
- Management said disclosure controls were effective. A new general ledger and financial reporting application was implemented during the quarter; management reported no material change to internal control over financial reporting from the implementation.
Key facts for investors to verify
- How LDTI restatement affects comparisons of earnings, reserves, and OCI, including the large year-over-year comprehensive-income difference.
- Whether investment-product sales, client assets, and fee income recover, and whether positive client net flows continue.
- Term-life persistency, claims, policy issuance and recruiting/licensing trends, including comparisons adjusted for the product redesign.
- Senior Health unit economics, lead-conversion efficiency, renewal assumptions and the sustainability of lower acquisition costs.
- Reinsurer credit quality and concentration, unrealized investment losses, and the expected effects of Canadian compensation rules.
- Capital allocation pace, liquidity, and remaining capacity under the share-repurchase authorization.