Primerica, Inc. quarterly report, Q2 FY2020

Primerica, Inc. — Q2 2020 Form 10-Q

Reporting period: Three and six months ended June 30, 2020. Unaudited results; comparisons are with the corresponding 2019 periods unless stated otherwise. Primerica distributes term life insurance and third-party investment and savings products through independent representatives in the U.S. and Canada. Dollar amounts below are in millions unless noted.

Financial performance and position

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Total revenue	$525.8	$504.9	$1,050.8	$999.9
Income before tax	$134.1	$127.5	$228.6	$229.8
Net income	$101.5	$97.4	$174.0	$176.6
Diluted EPS	$2.51	$2.28	$4.25	$4.11

Q2 revenue rose 4% and net income rose 4%; six-month revenue rose 5%, while net income declined 1%. Approximate net margin was 19.3% for Q2 2020 versus 19.3% a year earlier, and 16.6% for the first half versus 17.7%.
Q2 Term Life Insurance segment pretax income increased 13% to $94.9; Investment and Savings Products pretax income was nearly flat at $46.9. Corporate and Other Distributed Products reported a $7.7 pretax loss, versus a $3.9 loss.
Benefits and claims increased 21% in Q2 and 16% for the half, primarily reflecting higher mortality, including COVID-19 effects. Management reported approximately $10 million of COVID-19-related claims in Q2.
Net investment income fell 9% in Q2 and 22% for the half. First-half realized investment losses were $8.3, versus gains of $3.9 a year earlier, including a $5.2 negative mark-to-market on equity securities and $4.2 of credit losses on available-for-sale securities.
Operating cash flow was $316.4 for the first half, up from $185.1; investing activities provided $2.7, versus using $56.8; financing activities used $214.9, mainly for share repurchases and dividends. Cash and cash equivalents were $360.4 at June 30, up from $256.9 at year-end.
Total assets were $14.0 billion and stockholders’ equity was $1.64 billion at June 30. Consolidated reinsurance recoverables were $4.22 billion. The company reports that 87% of life insurance in force was reinsured.
Debt included $374.2 carrying value of senior notes (stated principal $375 million, 4.75%, due July 2022) and a $1.278 billion carrying value surplus note (4.50%, due December 2030). The $200 million revolver was undrawn; the company reported compliance with covenants. Parent-company cash and invested assets were $255.8 million.

Material changes and drivers

Term life premiums and net premiums grew 4% and 10%, respectively, in Q2, supported by recent policy sales and improved persistency. New policies issued increased 20% year over year in Q2; face amount in force rose 2% year over year.
Q2 investment and savings product sales fell 13% to $1.69 billion amid COVID-related market volatility, although first-half sales increased 6% to $3.93 billion. Client account assets recovered to $68.2 billion at June 30 from $59.0 billion at March 31; first-half net flows were positive $1.16 billion, but market changes left assets down $2.31 billion from year-end.
Recruiting rose sharply: Q2 new recruits were 133,123 versus 86,173 in 2019. Licensing disruptions remained a constraint; June headcount included 3,400 temporary COVID-19 licenses and 4,400 extended licenses.
Share repurchases were $176.6 million in the first half, versus $110.7 million a year earlier. The new authorization permits up to $300 million through June 30, 2021; $123.5 million remained available at quarter-end. First-half dividends paid were $32.6 million.

Outlook, risks and unusual items

No specific earnings or revenue guidance was provided. Management said business cash flows were expected to provide sufficient operating liquidity over the next 12 months, while warning that future COVID-19 effects could impair cash flows and remain impossible to estimate.
COVID-19 has affected mortality, markets, household income, consumer demand, recruiting and licensing. Management noted that persistency had improved to date, but prolonged unemployment, lower income and expiry of government stimulus could weaken policy retention. Investment product demand and asset-based revenues remain sensitive to market levels.
Management cited market swings in the AFS portfolio: its net unrealized position moved from an $82.2 million gain at year-end 2019 to a $1.3 million loss at March 31, then to a $119.7 million gain at June 30. These valuation changes affected comprehensive income and equity, rather than being equivalent to realized operating earnings.
Reinsurance counterparty performance is a material exposure: reinsurance recoverables were $4.22 billion, with $2.69 billion attributable to Pecan Re. A $1.6 million allowance was recorded for ceded claims on a closed block potentially unrecoverable from a reinsurer placed into receivership.
The company adopted the expected-credit-loss standard on January 1, 2020, reducing opening retained earnings by $1.2 million net of tax. The impact of the long-duration insurance accounting standard, then expected to take effect in 2022 (with a proposed extension to 2023), had not been quantified.
Other risks include proposed or adopted investment-advice and sales-compensation rules, Canada’s deferred-sales-charge restrictions effective in 2022, investment-market and interest-rate risks, and legal or regulatory matters. The company said it could not estimate losses for legal matters unless otherwise indicated and reported no pending proceeding it believed required disclosure in this filing.

Important facts for investors to verify

Whether COVID-19 mortality, policy persistency and household affordability trends materially change in subsequent quarters.
Whether temporary and extended sales licenses convert to permanent licenses, and whether recruiting translates into sustained licensed-force growth and policy sales.
Reinsurer credit quality and collateral supporting the large recoverables, especially Pecan Re, and the status of the reinsurer in receivership.
How market movements, credit losses and interest rates affect investment income, AFS valuations and client assets under management.
Capital returns and liquidity: repurchase pace, remaining authorization, subsidiary dividend capacity, and the company’s ability to meet obligations while maintaining insurance regulatory capital.
The eventual financial and operational effects of long-duration insurance accounting changes and regulatory changes affecting advice standards and Canadian sales compensation.