Primerica, Inc. annual report, FY2015

Business context and reporting period

Primerica, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015. It distributes term life insurance, which it underwrites, and investment, savings and other financial products, largely for third parties, to middle-income households in the United States and Canada. At year-end it had 106,710 life-licensed representatives, insured about five million people and served more than two million client investment accounts.

Financial performance and position

Metric	2015	2014	Change
Total revenue	$1.405 billion	$1.339 billion	+5%
Net income	$189.9 million	$181.4 million	+5%
Diluted EPS	$3.70	$3.29	+12%
Operating cash flow	$259.1 million	$237.3 million	+$21.8 million
Net cash change	$(39.7) million	$43.0 million	Cash declined

• Revenue growth reflected higher net premiums and commissions and fees; lower net investment income and realized investment losses partly offset the increase. Net premiums rose 10% to $750.2 million; commissions and fees rose 2% to $537.1 million. Net investment income fell 12% to $76.5 million.
• Pre-tax income was $291.0 million, up 6%; income from continuing operations was $189.9 million. The effective tax rate was 34.7%, versus 34.8%.
• Term Life Insurance segment pre-tax income increased 14% to $173.2 million. Investment and Savings Products segment pre-tax income was essentially flat at $146.1 million. Corporate and Other Distributed Products recorded a pre-tax loss of $28.3 million, versus a $22.4 million loss.
• Consolidated assets were $10.612 billion, liabilities $9.466 billion and stockholders’ equity $1.146 billion at year-end. Cash and cash equivalents were $152.3 million; investments were $2.179 billion, including separate-account assets matched by separate-account liabilities.
• Senior Notes principal was $375 million, at 4.75%, due July 2022. The company reported covenant compliance and no short-term borrowings. A $365.2 million subsidiary surplus note is matched by a held-to-maturity LLC Note; the filing describes this financing as non-recourse to the Parent Company, subject to its obligation to support the credit-enhancement fee.
• Parent Company cash and invested assets were approximately $86.5 million. The Parent is a holding company dependent on subsidiary distributions; insurance subsidiary dividends are subject to regulatory limits.

Material changes versus the prior comparable period

• Recruiting increased to 228,115 from 190,439, and life-licensed representatives rose to 106,710 from 98,358. New life policies issued increased 18% to 260,059; face amount issued rose to $79.1 billion.
• Investment and savings product sales rose 3% to $5.857 billion. Average client asset values rose 3% to $48.477 billion, but year-end client assets fell to $47.354 billion from $48.656 billion, reflecting market declines and Canadian-dollar translation, partly offset by net inflows.
• The Canadian dollar weakened materially: average exchange rates used to translate Canadian revenues and expenses declined 14% year over year. Management estimated a $36.2 million adverse revenue translation effect in 2015.
• Net investment income declined amid lower portfolio yields and less income from called securities. Realized investment losses were $1.7 million, compared with losses of $0.3 million in 2014; impairment charges recognized in earnings were $6.9 million, up from $4.0 million.
• Cash returned to shareholders increased: the company repurchased $200.0 million of stock and paid $32.8 million in dividends during 2015. Shares outstanding declined to 48.297 million from 52.169 million.
• Fourth-quarter revenue was $354.1 million, net income $47.9 million and diluted EPS $0.97, compared with $345.1 million, $45.5 million and $0.84, respectively, in fourth-quarter 2014.

Outlook, management commentary, risks and unusual items

• Management stated that operating cash flows were expected to provide sufficient liquidity over the next 12 months and that cash flows and potential funding sources were expected to support long-term needs. The filing provides no quantified earnings or revenue guidance.
• The proposed Department of Labor fiduciary rule was under OMB review as of the filing date. Management warned that, if finalized in a burdensome form, it could require changes to qualified-plan compensation and operations, raising costs and affecting retirement-account business and representative licensing.
• Key exposures include representative recruitment, retention and licensing; extensive insurance and securities regulation; mortality, persistency and reinsurance counterparty risk; equity-market and interest-rate movements; cybersecurity and privacy; and Canadian-dollar translation. Approximately 88% of life insurance in force was ceded, and due from reinsurers totaled $4.111 billion.
• Unclaimed-property audits by 30 jurisdictions and market-conduct examinations were ongoing; West Virginia’s Treasurer had sued Primerica Life and other insurers over alleged unclaimed-property violations. The company said it could not reasonably estimate potential additional costs or liabilities. The Canadian licensing-exam litigation was dismissed after regulators agreed to changes to the new exam program.
• A 100-basis-point parallel increase in interest rates was estimated to reduce fixed-maturity portfolio market value by about $64 million. A 10% Canadian-dollar decline was estimated to reduce annual pre-tax income by about $6.5 million.
• Unusual/comparability items include the 2014 sale of the short-term disability business, which contributed $1.6 million of after-tax discontinued-operations income in 2014 and none in 2015, and 2013 legal costs and settlement-related expense of approximately $27.1 million in the Investment and Savings Products segment.
• KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management reported disclosure controls and internal controls effective at year-end.

Most important facts for investors to verify

• Whether the final DOL fiduciary rule alters qualified-account economics, compensation, compliance costs or the securities-licensed sales force.
• Reinsurer credit quality and recoverability of the $4.111 billion due-from-reinsurers balance, including exposure to significant counterparties and legacy IPO coinsurance arrangements.
• Developments and potential financial exposure from the multi-state unclaimed-property audits, examinations and West Virginia litigation.
• Whether growth in premiums and product distribution offsets lower investment yields, market volatility and Canadian-dollar weakness.
• Insurance subsidiaries’ statutory capital, dividend capacity and the Parent Company’s liquidity to fund debt service, dividends and repurchases.