Primerica, Inc. quarterly report, Q3 FY2016

Primerica, Inc. — Q3 2016 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Primerica distributes term life insurance and third-party investment and savings products to middle-income households in the U.S. and Canada. Financial statements are unaudited.

Financial performance and condition

Metric	Q3 2016	Q3 2015	Nine months 2016	Nine months 2015
Total revenue	$383.6 million	$355.7 million	$1,125.2 million	$1,050.8 million
Income before taxes	$88.4 million	$75.0 million	$250.5 million	$218.6 million
Net income	$58.0 million	$49.4 million	$162.5 million	$141.9 million
Diluted EPS	$1.22	$0.98	$3.37	$2.73

Q3 revenue rose 8%, pretax income 18%, and net income 18% year over year. For the nine months, revenue rose 7%, pretax income 15%, and net income 15%.
Q3 net premiums were $216.9 million, up 12%; commissions and fees were $134.3 million, up 1%. Nine-month net premiums rose 12% to $624.2 million, while commissions and fees declined 1% to $400.0 million.
Q3 benefits and expenses increased 5% to $295.2 million; nine-month expenses increased 5% to $874.7 million. Effective tax rates were 34.4% for Q3 and 35.1% year to date.
Segments: Q3 Term Life revenue was $222.6 million and pretax income $58.1 million; Investment and Savings Products revenue was $130.1 million and pretax income $35.8 million; Corporate and Other had a $5.5 million pretax loss. Nine-month pretax income was $162.2 million, $103.5 million, and a $15.2 million loss, respectively.
Cash flow, nine months: Operating cash flow was $164.9 million, investing cash flow $35.7 million, and financing cash outflow $158.6 million, mainly reflecting $131.6 million of common-stock repurchases and $25.0 million of dividends paid. Cash and equivalents increased $43.0 million to $195.3 million.
Balance sheet at September 30: Total assets were $11.37 billion and stockholders’ equity $1.22 billion. Cash and equivalents were $195.3 million; total investments were $2.31 billion. Due from reinsurers was $4.16 billion, and deferred policy acquisition costs were $1.67 billion.
Debt and capital: Notes payable were $372.8 million carrying value; the company had $375 million principal of 4.75% senior notes due July 2022. A $453.2 million carrying-value surplus note supported a corresponding LLC investment; both instruments bear 4.50% and mature in 2029. The senior-note covenants were met, and no short-term borrowings were outstanding.
The parent company reported $72.5 million of cash and invested assets. Management said business cash flows were expected to provide sufficient operating liquidity for the next 12 months and support long-term needs. Insurance subsidiaries were reported as meeting applicable capital requirements; no RBC ratio was provided.

Material changes and management commentary

Term-life growth was supported by a larger sales force and higher policy issuance: Q3 new policies increased to 75,374 from 66,658. Life-licensed representatives numbered 115,345 at quarter-end, versus 112,365 at June 30. Term-life face amount in force increased 5% year over year to $722.2 billion.
Term-life segment pretax income rose 25% in Q3 and 27% year to date. Management cited growth in net premiums and Q3 incurred claims approximately $3 million below historical levels; slightly lower persistency also increased DAC amortization.
Investment and savings product sales declined 2% in Q3 and 6% year to date. Variable-annuity weakness was partly offset by retail mutual fund and fixed-indexed annuity sales. Client account values reached $51.3 billion at quarter-end, up from $45.8 billion a year earlier, primarily reflecting market gains and positive net inflows.
Investment portfolio average rating was A- and average duration 4.0 years, unchanged from year-end 2015; average book yield decreased to 4.29% from 4.40%. Available-for-sale net unrealized investment gains, net of tax, rose to $71.8 million from $32.1 million at year-end.
Q3 costs included approximately $1.7 million of DOL Fiduciary Rule implementation costs, $2.7 million of technology spending, and $2.3 million of higher employee costs. Management also cited growth-related and technology costs year to date.
During the nine months, the company repurchased 2.87 million shares. The board’s $200 million repurchase authorization ran through December 31, 2016; the filing reported approximately $18.5 million remaining as of September 30.

Outlook, risks, and contingencies

No specific earnings or revenue guidance was provided. Management noted that interim results are not necessarily indicative of full-year or future results.
The DOL Fiduciary Rule was scheduled to become applicable April 10, 2017, with certain requirements delayed until January 1, 2018. Management expected changes to qualified-plan business practices but had not finalized their scope or quantified their financial impact. Qualified retirement accounts represented an estimated 59% of average client assets and 55% of investment and savings product sales in 2015.
Primerica ceded 88% of direct life insurance in force. Reinsurance does not relieve the company of its obligations to policyholders; the large reinsurance receivable and reinsurer performance are material exposures. A reinsurance novation transferred the principal 80% coinsurance agreement from Prime Re to Pecan Re effective January 1, 2016; the filing says material terms were unchanged.
Thirty jurisdictions were conducting multi-state unclaimed-property audits focused on life-insurance claims practices. Potential costs or liabilities could not be reasonably estimated. The company also disclosed ordinary-course legal disputes and regulatory inquiries, but no proceeding it believed required separate disclosure.
Other risks highlighted include mortality and persistency deviations, interest-rate and credit-spread changes, investment valuation, market performance, Canadian-dollar movements, recruiting and licensing, regulatory changes, and the ability of subsidiaries to pay dividends to the parent. The company reported no material change in market-risk exposures since December 31, 2015.

Important facts for investors to verify

Whether term-life sales growth and favorable recent claims experience persist, and how persistency affects DAC amortization and profitability.
The eventual operational, compensation, product, and revenue effects of the DOL Fiduciary Rule.
Reinsurer credit quality and recoverability of the $4.16 billion reinsurance receivable, including the effects of the 2016 novation.
Results of the 30-jurisdiction unclaimed-property audits and any resulting settlements, claims payments, or escheatment obligations.
Investment portfolio credit quality, unrealized losses, interest-rate sensitivity, and the economics and reserve-linked growth of the surplus-note financing.
Repurchase authorization use, dividend capacity at regulated subsidiaries, and parent-level liquidity.