Primerica, Inc. annual report, FY2017

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Primerica, Inc. — 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017. The filing also provides unaudited fourth-quarter results. Primerica distributes term life insurance and third-party investment and savings products mainly to middle-income households in the U.S. and Canada, using an independent sales force. It reported 126,121 licensed representatives and approximately five million insured lives at year-end.

Financial performance and position

  • Revenue: $1.689 billion, up 11% from $1.519 billion in 2016. Net premiums were $961.3 million (+14%); commissions and fees were $591.3 million (+9%); net investment income was $79.0 million, essentially unchanged.
  • Profit: Pretax income was $379.5 million (+12%); net income was $350.3 million (+60%). Diluted EPS was $7.61 versus $4.59. The reported increase in net income was substantially amplified by a one-time tax benefit; reported pretax margin was approximately 22.5%.
  • Cash flow: Operating cash flow was $388.5 million, versus $294.4 million in 2016. Investing activities used $128.3 million and financing activities used $193.5 million. Cash and cash equivalents ended the year at $280.0 million.
  • Balance sheet and debt: Total assets were $12.461 billion, liabilities $11.042 billion and stockholders’ equity $1.419 billion. The company had $375 million principal amount of 4.75% senior notes due July 2022. A new $200 million five-year revolving facility was undrawn at year-end.
  • Liquidity and capital: Management expected business cash flows to meet operating liquidity needs over the next 12 months. The Parent Company reported $112.1 million of cash and invested assets and relies on subsidiary distributions; insurance-subsidiary dividends are subject to regulatory limits. U.S. insurance subsidiaries had capital and RBC substantially above applicable requirements; Canadian operations met minimum capital requirements. Specific RBC ratios are not stated in the supplied filing text.
  • Insurance and investment scale: Term life face amount in force rose 5% to $763.8 billion; 312,799 policies were issued. Client investment-account asset values ended at $61.2 billion, up from $52.3 billion, with net inflows of $1.045 billion. Total investment product sales were $6.192 billion, up 11%.

Material changes versus 2016

  • Term Life segment pretax income increased 15% to $245.7 million, with growth in net premiums as the in-force book expanded and older policies began running off the 2009 IPO coinsurance arrangements. Higher claims, DAC amortization and expenses partly offset premium growth.
  • Investment and Savings Products segment pretax income increased 13% to $162.8 million. Asset-based revenue rose with market appreciation and net inflows; managed-investment sales doubled to $428 million following launch of the Lifetime Investments Platform. Annuity sales declined.
  • Corporate and Other Distributed Products reported a $29.0 million pretax loss, compared with a $20.1 million loss in 2016. Lower realized investment gains and investment income, and higher expenses, contributed.
  • The sales force grew: year-end life-licensed representatives increased to 126,121 from 116,827; recruits rose to 303,867 from 262,732. Approximately 19,000 hurricane-area recruits received waived application fees, with no significant effect on year-end licensed-representative growth.
  • Cash dividends totaled $35.8 million; share repurchases totaled $150.0 million. The company authorized a new repurchase program of up to $275 million in February 2018, including $50 million remaining under the prior authorization.

Outlook, commentary, risks and unusual items

  • Outlook: No numerical earnings or revenue guidance is provided. Management expects operating cash flows to provide sufficient liquidity for the next 12 months. It expects 2018 U.S. federal tax-rate reductions to be substantially offset in after-tax cash flows by tax provisions affecting deductions for acquisition costs and policy reserves.
  • Tax item: The 2017 effective tax rate was 7.7%, versus 35.0% in 2016. Enactment of the Tax Reform Act generated an approximately $98.5 million tax benefit from remeasuring deferred tax balances for the federal rate reduction; the company also recorded approximately $3.0 million of expense for deemed repatriation of Canadian earnings. Tax accounting remained provisional in certain areas.
  • Reserve financing: Primerica Life redomesticated from Massachusetts to Tennessee in December 2017, reducing certain premium taxes and licensing fees. It planned to adopt principle-based reserves in 2018, which management expects to reduce the need for future redundant-reserve financing on newly issued business.
  • Key risks: Recruiting, retention and licensing of independent representatives; legal or regulatory challenges to the distribution model or contractor classification; sales-practice compliance; changing fiduciary and licensing rules; cybersecurity and data privacy; mortality and persistency experience; investment, interest-rate and equity-market exposure; Canadian-dollar movements; and reliance on reinsurers and a concentrated group of investment-product providers.
  • Contingencies: Multi-state unclaimed-property audits by 30 jurisdictions focused on life-insurance claims practices were ongoing. The company said it could not reasonably estimate the likelihood or impact of additional costs. It also identified ordinary-course litigation and regulatory inquiries; it did not believe any pending proceeding required separate disclosure as of the report date.
  • Other: A 10% parallel rise in interest rates was estimated to reduce fixed-maturity portfolio fair value by about $67 million. A 10% weakening of the Canadian dollar was estimated to reduce 2017 pretax income by about $8 million. The financial-statement and internal-control audit opinions were unqualified; management and KPMG concluded internal control over financial reporting was effective.

Important facts for investors to verify

  1. How much of 2017’s 60% net-income growth is attributable to the nonrecurring tax benefit, and what earnings level is more representative going forward?
  2. Whether growth in net premiums and policies in force can continue while claims, early-duration persistency and DAC amortization remain favorable.
  3. Whether growth in client assets and advisory-platform sales persists through different market conditions, and how product mix affects recurring fees and commissions.
  4. The status and potential financial impact of the 30-jurisdiction unclaimed-property audits, and any subsequent developments in fiduciary-rule or distribution-model regulation.
  5. Reinsurer and reserve-financing counterparty credit quality, statutory capital and dividend capacity, and the effect of principle-based reserving and tax changes on capital and cash flows.