Primerica, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Primerica distributes term life insurance and investment and savings products to middle-income households in the United States and Canada. Comparisons below are year over year unless stated otherwise; amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Total revenue | $467.8 | $413.7 | $927.7 | $818.9 |
| Net premiums | $263.7 | $231.4 | $525.6 | $459.3 |
| Commissions and fees | $167.9 | $148.3 | $334.8 | $292.6 |
| Benefits and expenses | $354.1 | $317.3 | $731.0 | $647.6 |
| Income before tax | $113.8 | $96.4 | $196.7 | $171.2 |
| Net income | $86.7 | $63.1 | $152.4 | $115.2 |
| Diluted EPS | $1.95 | $1.36 | $3.40 | $2.47 |
- Q2 revenue rose 13% and net income rose 37%; first-half revenue rose 13% and net income rose 32%. Lower effective tax rates following U.S. tax reform contributed to earnings growth: 23.8% versus 34.5% in Q2 and 22.5% versus 32.7% for the first half.
- Q2 pretax income increased 18%; first-half pretax income increased 15%. Operating expenses rose 12% in Q2 and 13% in the first half, including higher policy costs, servicing costs, business-support spending and digital investment.
- Term Life Insurance segment pretax income was $75.8 million in Q2, up 23%, and $135.4 million for the first half, up 22%. Investment and Savings Products pretax income was $43.2 million in Q2, up 9%, and $83.2 million for the first half, up 8%. Corporate and Other Distributed Products reported pretax losses of $5.3 million in Q2 and $21.9 million for the first half.
- Net income rose while comprehensive income fell: total comprehensive income was $68.3 million in Q2 versus $72.1 million, and $99.8 million for the first half versus $130.0 million. The 2018 periods included substantial investment and foreign-currency translation losses in other comprehensive income.
Financial position, cash flow and capital
- At June 30, total assets were $12.50 billion and stockholders’ equity was $1.40 billion. Cash and cash equivalents were $159.3 million, down from $280.0 million at year-end 2017. Separate-account assets of $2.39 billion were matched by separate-account liabilities.
- For the first half, operating cash flow was $164.0 million, compared with $119.9 million. Investing activities used $122.1 million; financing activities used $161.4 million, mainly reflecting $133.8 million of share repurchases and $22.4 million of dividends paid. Ending cash was $159.3 million.
- Balance-sheet notes payable were $373.5 million; the company reported $375 million principal of 4.75% senior notes due July 2022. A $200 million revolving credit facility was undrawn. The Vidalia Re surplus note had $843.8 million principal, bears 4.50% interest, and matures in 2030; the related financing is described as non-recourse to the parent and Primerica Life, subject to the parent’s support of Vidalia Re’s credit-enhancement fee.
- The company repurchased 1.36 million shares for $133.7 million through June 30 under a $275 million authorization running through June 30, 2019; $141.3 million remained. The declared dividend was $0.25 per share in Q2, compared with $0.19 a year earlier.
- Management said cash flows and potential funding sources were expected to support liquidity needs, and anticipated sufficient operating liquidity for the next 12 months. Parent-company cash and invested assets were $86.0 million at June 30. U.S. insurance subsidiaries had statutory capital substantially above applicable requirements; the Canadian insurer was compliant with minimum capital requirements.
Changes, outlook and risks
- Growth in term life premiums reflected a larger in-force book and business no longer subject to earlier IPO coinsurance arrangements. Term life face amount in force increased 4% year over year to $773.6 billion. New policies issued were broadly level year over year; Q2 life-licensed sales-force productivity was 0.22 policies per representative per month.
- Investment and savings product sales rose 12% to $1.76 billion in Q2 and to $3.54 billion for the first half. Managed-investment sales grew strongly, while segregated-fund sales declined. Average client asset values increased 10% in Q2 to $61.3 billion; first-half net inflows were $473 million. Fee-generating positions declined 6% in Q2, partly due to clients’ transition to the Lifetime Investments Platform.
- Management attributed higher investment and savings revenue partly to market appreciation, positive net inflows, higher sales, and revised transfer-agent contracts. The revised contracts increased account-based revenue but also brought higher servicing costs. Favorable claims experience benefited Q2 results by about $4 million; first-half claims experience was described as modestly favorable.
- No formal earnings guidance was provided. The company expected to finalize remaining Tax Reform Act accounting estimates during the second half of 2018. It planned approximately $10 million of additional spending over 2017 levels on community, employee and business initiatives using tax savings; Q2 and first-half expenses included $4.3 million and $4.8 million, respectively, for these initiatives.
- Primerica adopted revenue-recognition guidance and financial-instrument accounting changes in 2018. Adoption of the revenue standard increased opening retained earnings by $24.7 million. Equity-security fair-value changes now flow through earnings; the company recorded a $0.5 million gain in Q2 and a $1.4 million loss for the first half under this treatment.
- Market and credit risks include interest-rate sensitivity, credit spreads, investment values, and Canadian-dollar translation. Available-for-sale fixed-maturity securities with cost above fair value totaled $1.19 billion at June 30, versus $529.2 million at year-end; management attributed most unrealized losses to rates and credit spreads and said it had the intent and ability to hold affected securities.
- Reinsurance recoverables were $4.20 billion, and 87% of direct life insurance in force was ceded. Reinsurance does not remove the company’s primary obligation to policyholders; counterparty performance remains a risk. The largest listed recoverable was $2.74 billion from Pecan Re, which was not rated in the filing’s table.
- Thirty jurisdictions were conducting unclaimed-property audits focused on life-insurance claims practices; potential outcomes and costs could not be reasonably estimated. The company also identified proposed U.S. broker-dealer conduct rules, New York’s amended suitability regulation, and possible Canadian compensation reforms as regulatory risks that could require business or compensation changes.
- Primerica Life adopted principle-based reserves in Q1 2018. Management said the change should reduce reserve requirements for new business and the need for future redundant-reserve financing on that business. Moody’s upgraded the senior-note rating to Baa1 and Primerica Life’s financial-strength rating to A1 on July 30, 2018, after quarter-end.
Most important facts for investors to verify
- Whether revenue and earnings growth persist after separating the effect of the lower tax rate, favorable claims experience, market movements, and revised servicing contracts.
- The sustainability and profitability of managed-investment growth, client asset inflows, and the declining number of fee-generating positions.
- Investment portfolio credit quality and the potential effects of interest-rate or credit-spread changes on unrealized losses, earnings, and capital.
- Reinsurer and reserve-financing counterparty exposure, including the large Pecan Re recoverable and the terms and expected growth of the Vidalia Re surplus note.
- Potential financial, operational, and compliance effects of unclaimed-property audits and pending or adopted U.S. and Canadian conduct and suitability rules.
- The pace of share repurchases, dividends, and cash use relative to parent-company liquidity and insurance-subsidiary capital needs.