PRIMERICA, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to inform the reader about matters affecting the
financial condition and results of operations of Primerica, Inc. (the "Parent
Company") and its subsidiaries (collectively, "we", "us" or the "Company") for
the period from December 31, 2019 to March 31, 2020 . As a result, the following
discussion should be read in conjunction with MD&A and the consolidated
financial statements and notes thereto that are included in our Annual Report on
Form 10-K for the year ended December 31, 2019 ("2019 Annual Report"). This
discussion contains forward-looking statements that constitute our plans,
estimates and beliefs. These forward-looking statements involve numerous risks
and uncertainties, including, but not limited to, those discussed under the
heading "Risk Factors" in the 2019 Annual Report and in Item 1A of this Report.
Actual results may differ materially from those contained in any forward-looking
statements.
This MD&A is divided into the following sections:
• Business Overview • Business Trends and Conditions • Factors Affecting Our Results • Critical Accounting Estimates • Results of Operations • Financial Condition • Liquidity and Capital Resources
Business Overview
We are a leading provider of financial products to middle-income households inthe United States and Canada through a network of independent contractor sales representatives ("sales representatives" or "sales force"). We assist our clients in meeting their needs for term life insurance, which we underwrite, and mutual funds, annuities, managed investments and other financial products, which we distribute primarily on behalf of third parties. We have two primary operating segments,Term Life Insurance and Investment and Savings Products; and a third segment, Corporate and Other Distributed Products.Term Life Insurance . We distribute the term life insurance products that we underwrite through our three issuing life insurance company subsidiaries:Primerica Life Insurance Company ("Primerica Life"),National Benefit Life Insurance Company ("NBLIC"), andPrimerica Life Insurance Company of Canada ("Primerica Life Canada"). Policies remain in force until the expiration of the coverage period or until the policyholder ceases to make premium payments. Our in-force term life insurance policies have level premiums for the stated term period. As such, the policyholder pays the same amount each year. Initial policy term periods are between 10 and 35 years. While premiums typically remain level during the initial term period, our claim obligations generally increase as our policyholders age. In addition, we incur significant upfront costs in acquiring new insurance business. Our deferral and amortization of policy acquisition costs and reserving methodology are designed to match the recognition of premium revenues with the timing of policy lapses and the payment of expected claims obligations. Investment and Savings Products. Inthe United States , we distribute mutual funds, managed investments, variable annuity, and fixed annuity products of several third-party companies. We provide investment advisory and administrative services for client assets invested in our managed investments program. We also perform distinct transfer agent recordkeeping services and non-bank custodial services for investors purchasing certain mutual funds we distribute. In Canada, we offer our own Primerica-branded mutual funds, as well as mutual funds of other companies, and segregated funds, which are underwritten byPrimerica Life Canada . Corporate and Other Distributed Products. Our Corporate and Other Distributed Products segment consists primarily of revenues and expenses related to other distributed products, including closed blocks of various insurance products underwritten by NBLIC, prepaid legal services, and other financial products. These products, except for closed blocks of various insurance products underwritten by NBLIC, are distributed pursuant to distribution arrangements with third-party companies through the independent sales force. Net investment income earned on our invested asset portfolio is recorded in our Corporate and Other Distributed Products segment, with the exception of the assumed net interest accreted to ourTerm Life Insurance segment's future policy benefit reserve liability less deferred acquisition costs. Interest expense incurred by the Company is attributed solely to the Corporate and Other Distributed Products segment.
Business Trends and Conditions
The relative strength and stability of financial markets and economies inthe United States and Canada affect our growth and profitability. Our business is, and we expect will continue to be, influenced by a number of industry-wide and product-specific trends and conditions. Economic conditions, including unemployment levels and consumer confidence, influence investment and spending decisions by middle-income consumers, who are generally our primary clients. These conditions and factors also impact prospective recruits' perceptions of the business opportunity that becoming a sales representative offers, which can drive or dampen recruiting. Consumer spending and borrowing levels affect how consumers evaluate their savings and debt management plans. In addition, interest rates and equity market returns impact consumer demand for the savings and investment products we distribute. Our 25 --------------------------------------------------------------------------------
customers' perception of the strength of the capital markets may influence their decisions to invest in the investment and savings products we distribute.
The financial and distribution results of our operations inCanada , as reported inU.S. dollars, are affected by changes in the currency exchange rate. As a result, changes in the Canadian dollar exchange rate may significantly affect the result of our business for all amounts translated and reported inU.S. dollars. During the first quarter of 2020, market conditions have changed rapidly due to the impact of the novel Coronavirus ("COVID-19") pandemic. Measures taken to combat the spread of COVID-19 have led to an economic downturn inthe United States and Canada that is likely to continue for the foreseeable future and will have repercussions on our business. To date this economic downturn has resulted in extraordinary unemployment rates, lower household income, and lower consumer spending. The resulting significant decline in North American equity markets during the first quarter has decreased the value of clients' investment accounts and will likely cause asset-based revenues in our investment and savings products to decrease. In addition, major declines in bond prices have adversely affected the fair value of our invested asset portfolio and resulted in an increase in unrealized losses as ofMarch 31, 2020 . Such unrealized losses could lead to further recognition of credit losses in subsequent periods if credit conditions of the underlying security issuers worsen. The impact of economic conditions caused by the spread of COVID-19 on our operating results in the first quarter of 2020 is discussed in more detail later in this section, the Results of Operations section, and the Financial Condition section. Due to the evolving and highly uncertain nature of this event, it currently is not possible to estimate the impact the COVID-19 pandemic will have on our business in future periods. However, we believe the effect of COVID-19 could create uncertainty in the following business trends and conditions: • Social distancing measures could challenge the effectiveness of our ability to attract new recruits and retain and motivate sales representatives as remote communication tools may not effectively replace face-to-face interactions. • The ability for new recruits to obtain the requisite licenses to sell
our products will likely be limited by the availability of licensing
jurisdictions to administer exams and maintain licensing operations.
• Our medical underwriting vendors have limited capacity in this
environment to handle the paramedic testing requirements needed to issue
certain types of term life insurance policies, thereby possibly limiting
new policy sales.
• We may experience an increase in mortality expense due to premature
deaths of our insureds caused by the COVID-19 disease. Any increase in
mortality expense would be mitigated by reinsurance as we have ceded a
significant majority of our mortality risk to reinsurers we believe to
be creditworthy.
• The prolonged impact of high unemployment and lower household income may
adversely impact the persistency of existing term life insurance
policies. Refer to the Factors Affecting Our Results section for more
information about how lower persistency impacts our financial results.
• Instability of equity markets hampers demand for the investments and
savings products we distribute. This dynamic leads to decreased cash
flows earned in the form of upfront sales-based revenue and lower
earnings of asset-based trail commissions earned from client assets
under management.
The effects of business trends and conditions on our quarterly results are discussed below, in the Results of Operations section, and in the Financial Condition section.
Size of the Independent Sales Force.
Our ability to increase the size of the independent sales force is largely based on the success of the sales force's recruiting efforts as well as training and motivating recruits to get licensed to sell life insurance. We believe that recruitment and licensing levels are important to sales force trends, and growth in recruiting and licensing is usually indicative of future growth in the overall size of the sales force. Changes in the number of new recruits do not always result in commensurate changes in the size of the licensed sales force because new recruits may obtain the requisite licenses at rates above or below historical levels.
The size of the life-licensed independent sales force was as follows:
March 31, 2020 December 31 ,
2019
Life-licensed sales representatives 130,095
130,522
Details on new recruits and life-licensed sales representative activity were as
follows:
Three months ended March 31,
2020 2019
New recruits 84,762 63,223
New life-licensed sales representatives 10,599 10,065
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-------------------------------------------------------------------------------- New recruits increased during the three months endedMarch 31, 2020 compared to the same period in 2019 due to positive recruiting momentum generated in recent periods combined with the effect of offering discounted business application fees in early January and again at the end of March to sustain our recruiting momentum as COVID-19 concerns began to emerge. New life-licensed representatives increased during the three months endedMarch 31, 2020 compared to the same period in 2019 due to strength in recruiting despite licensing headwinds related to the COVID-19 pandemic that included the suspension of live licensing preparation classes and the closing of licensing exam centers. In order to address challenges in life licensing presented by the COVID-19 pandemic, we have enhanced current incentive programs that encourage recruits to get through the licensing process, expanded the reach of online offerings for licensing exam preparation, and worked with states to offer alternatives to the traditional licensing process including remote testing and the issuance of temporary licenses until the full licensing process can be completed.
Term Life Insurance Product Sales and Face Amount In Force.
The average number of life-licensed sales representatives and the number of term
life insurance policies issued, as well as the average monthly rate of new
policies issued per life-licensed sales representative (historically between
0.18 and 0.22), were as follows:
Three months ended
2020 2019
Average number of life-licensed sales representatives 130,106
130,117
Number of new policies issued 71,318
64,242
Average monthly rate of new policies issued per life-licensed sales representative 0.18 0.16 New policies issued during the three months endedMarch 31, 2020 increased compared to the same period in 2019 as a result of a stronger productivity, which is measured by the average monthly rate of new policies issued per life-licensed sales representative. Productivity increased in the current period as a result of positive distribution momentum. We utilized existing tools to minimize the adverse impact that COVID-19-related conditions could have on new policy sales such as mobile and web-based applications that allow life-licensed sales representatives to communicate with clients remotely and submit applications electronically. Furthermore, we have leveraged the use of TermNow, our rapidly underwritten term life product that uses database underwriting instead of traditional medical exam information for policies with face amounts of$300,000 or less. For new policies sales exceeding these limits, we have identified alternative solutions to traditional methods of collecting medical exam information such as the use of available clinical testing instead of in-home testing. Given the time it takes to issue a policy underwritten with medical exam information, policies issued in the first quarter of 2020 generally are attributable to applications submitted prior to the onset of COVID-19 stay-at-home orders. The changes in the face amount of our in-force book of term life insurance policies were as follows: Three months ended March 31, % of beginning % of beginning 2020 balance 2019 balance (Dollars in millions) Face amount in force, beginning of period$ 808,262 $
781,041
Net change in face amount: Issued face amount 23,221 3 % 20,925 3 % Terminations (18,294 ) (2 )% (18,383 ) (2 )% Foreign currency (8,676 ) (1 )% 1,969 * Net change in face amount (3,749 ) * 4,511 1 % Face amount in force, end of period$ 804,513 $ 785,552 * Less than 1%. The face amount of term life policies in force increased 3% as ofMarch 31, 2020 compared toMarch 31, 2019 as the level of face amount issued continued to exceed the face amount terminated. As a percentage of the beginning face amount in force, issued face amount as well as terminated face amount during the three months endedMarch 31, 2020 remained consistent with the comparable 2019 period. During the three months endedMarch 31, 2020 , the effect of a strongerU.S. dollar in relation to the Canadian dollar reduced the translated face amount of existing policies in force and reduced the overall issued face amount. Conversely, during the three months endedMarch 31, 2019 , the strengthening of the Canadian dollar in relation to theU.S. dollar added to the increase in face amount.
Investment and Savings Products Sales, Asset Values and Accounts/Positions.
Investment and savings products sales and average client asset values were as follows:
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Three months ended March 31, Change
2020 2019 $ %
(Dollars in millions)
Product sales:
Retail mutual funds $ 1,202 $ 954 $ 248 26 %
Annuities and other 673 547 126 23 %
Total sales-based revenue
generating product sales 1,875 1,501 374 25 %
Managed investments 246 162 85 52 %
Segregated funds and other 125 94 30 32 %
Total product sales $ 2,246 $ 1,757 $ 490 28 %
Average client asset values:
Retail mutual funds $ 40,643 $ 37,657 $ 2,986 8 %
Annuities and other 19,681 18,240 1,442 8 %
Managed investments 3,905 3,241 664 20 %
Segregated funds 2,366 2,314 52 2 %
Total average client asset values
$ 5,143 8 % * Less than 1%.
The rollforward of asset values in client accounts was as follows:
Three
months ended
% of beginning
2020 balance 2019 % of beginning balance
(Dollars in millions)
Asset values, beginning of period $ 70,537 $ 57,704
Net change in asset values:
Inflows 2,246 3 % 1,757 3 %
Redemptions (1,704 ) (2 )% (1,530 ) (3 )%
Net flows 542 * 227 *
Change in fair value, net (11,065 ) (19 )% 5,470 9 %
Foreign currency, net (978 ) * 201 *
Net change in asset values (11,501 ) (20 )% 5,898 10 %
Asset values, end of period $ 59,036 $ 63,602
* Less than 1%.
Average number of fee-generating positions was as follows:
Three months ended March 31, Change
2020 2019 Positions %
(Positions in thousands)Average number of fee-generating
positions (1): Recordkeeping and custodial 2,031 1,998 33 2 % Recordkeeping only 658 641 18 3 % Total average number of fee- generating positions 2,689 2,639
50 2 %
(1) We receive recordkeeping fees by mutual fund positions. An individual client
account may include multiple mutual fund positions. We may also receive
fees, which are earned on a per account basis, for custodial services that
we provide to clients with retirement plan accounts that hold positions in
these mutual funds.
Changes in Investment and Savings Products Sales, Asset Values and
Accounts/Positions during the Three Months Ended
Product sales. Investment and savings products sales increased during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 due to a combination of strong demand for variable annuity products and mutual funds and, to a lesser degree, higher sales of managed accounts, that followed a prolonged period of strong equity market performance leading into early 2020. In contrast, the period endedMarch 31, 2019 was preceded by a market correction inDecember 2018 that weakened demand for investment and saving products. We did not experience an adverse impact to demand for the investments and savings products we distribute as a result of the economic downturn associated with the COVID-19 pandemic as these events occurred late in the quarter. Average client asset values. Average client asset values increased during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily due to market appreciation between the periods and continued positive net flows, partially offset by poor market performance at the end of the quarter as a result of the market reaction and economic uncertainty associated with the COVID-19 pandemic. Rollforward of client asset values. The decrease in client asset values for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 was primarily due to the significant decline in the value of client assets stemming from 28
-------------------------------------------------------------------------------- market reaction and economic uncertainty associated with the COVID-19 pandemic. Partially offsetting the decline in client asset values was positive net flows driven by strong product sales during the quarter. Redemptions for the quarter grew in-line with client asset values. Average number of fee-generating positions. The average number of fee-generating positions increased during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily due to the cumulative effect of retail mutual fund sales in recent periods that led to an increase in the number of retail mutual fund positions serviced on our transfer agent record keeping platform.
Other business trends and conditions.
Standards of care. OnJune 5, 2019 , theSEC adopted rules and interpretations addressing the standards of conduct applicable to broker-dealers and investment advisers and their associated persons (collectively, the "SEC Rulemaking"). Specifically, the SEC Rulemaking (i) creates a new "best interest" standard of conduct for broker-dealers ("Reg BI"), (ii) imposes new disclosure requirements through summary forms intended to clarify relationships among brokers, advisers, and their retail customers ("Form CRS"), (iii) provides interpretative guidance regarding the standard of conduct that applies to investment advisers under the Investment Advisers Act of 1940 ("Advisers Act'), and (iv) provides interpretative guidance on the scope of the broker-dealer "solely incidental" exclusion from the definition of "investment adviser" in the Advisers Act. The SEC Rulemaking became effective onJuly 12, 2019 , with a compliance date ofJune 30, 2020 for Reg BI and Form CRS. We anticipate making certain changes to our sales processes, policies, and procedures in order to comply with the SEC Rulemaking. While we acknowledge that its higher standards of care and enhanced obligations increase regulatory and litigation risk, we do not anticipate that the SEC Rulemaking will cause significant disruption to our business. Certain states have proposed or passed laws or proposed or issued regulations requiring investment advisers, broker-dealers, and/or insurance agents to meet fiduciary standards or standards of care that their advice be in the customer's best interest, and to mitigate and disclose conflicts of interest to consumers of investment and insurance products. The severity of the impact that such state laws or regulations could have on our business vary from state to state depending on the content of the legislation or regulation and how it would be applied by state regulators and interpreted by the courts, but any such laws or regulations could disrupt our brokerage business in the relevant state. We cannot quantify the financial impact, if any, of any changes to our business that may be necessary in order to comply with such laws or regulations at this time. Restriction on compensation models inCanada . The organization of provincial and territorial securities regulators (collectively referred to as the "Canadian Securities Administrators" or "CSA") published final rule amendments, applicable in all provinces exceptOntario , to prohibit upfront sales commissions by fund companies for the sale of mutual funds offered under a prospectus inCanada effectiveJune 1, 2022 ("DSC Ban"). The CSA indicated that the participating provinces' prohibition of upfront sales commissions by fund companies will require firms to discontinue the use of the mutual fund deferred sales charge compensation model, which is the primary model for the mutual funds we distribute inCanada . These rules will result in changes in compensation arrangements with both the fund companies that offer the mutual fund products we distribute and sales representatives in the participating provinces. The deferred sales charge compensation model is permitted to be used until the effective date. WhileOntario has disagreed with the prohibition of upfront sales commissions by fund companies and is not at this time participating in adoption of the DSC Ban, theOntario Securities Commission has proposed several restrictions effectiveJune 1, 2022 on the use of the deferred compensation model, including a$50,000 maximum account size and a limitation on the maximum term of the deferred sales charge schedule to three years compared to current industry practice where the maximum term can be up to seven years. We have not finished the process of determining the types of changes we will make in response to the DSC Ban and the restrictions inOntario , therefore, we are unable to quantify the potential impact on our financial condition or results of operations. Factors Affecting Our Results
Refer to the Business Trends and Conditions section for discussion of the potential impact on our business from the COVID-19 pandemic.
Term Life Insurance Segment. Our
Sales and policies in force. Sales of term policies and the size and
characteristics of our in-force book of policies are vital to our results over
the long term. Premium revenue is recognized as it is earned over the term of
the policy, and eligible acquisition expenses are deferred and amortized ratably
with the level premiums of the underlying policies. However, because we incur
significant cash outflows at or about the time policies are issued, including
the payment of sales commissions and underwriting costs, changes in life
insurance sales volume in a period will have a more immediate impact on our cash
flows than on revenue and expense recognition in that period.
Historically, we have found that while sales volume of term life insurance
products between fiscal periods may vary based on a variety of factors, the
productivity of sales representatives generally remains within a range (i.e., an
average monthly rate of new policies issued per life-licensed sales
representative between 0.18 and 0.22). The volume of our term life insurance
products sales will fluctuate in the short-term, but over the longer term, our
sales volume generally correlates to the size of the independent sales force.
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-------------------------------------------------------------------------------- Pricing assumptions. Our pricing methodology is intended to provide us with appropriate profit margins for the risks we assume. We determine pricing classifications based on the coverage sought, such as the size and term of the policy, and certain policyholder attributes, such as age and health. In addition, we generally utilize unisex rates for our term life insurance policies. The pricing assumptions that underlie our rates are based upon our best estimates of mortality, persistency, disability, and interest rates at the time of issuance, sales force commission rates, issue and underwriting expenses, operating expenses and the characteristics of the insureds, including the distribution of sex, age, underwriting class, product and amount of coverage. Our results will be affected to the extent there is a variance between our pricing assumptions and actual experience.
• Persistency. Persistency is a measure of how long our insurance policies
stay in force. As a general matter, persistency that is lower than our
pricing assumptions adversely affects our results over the long termbecause we lose the recurring revenue stream associated with the policies
that lapse. Determining the near-term effects of changes in persistency is
more complicated. When actual persistency is lower than our pricing
assumptions, we must accelerate the amortization of deferred policy
acquisition costs ("DAC"). The resultant increase in amortization expense
is offset by a corresponding release of reserves associated with lapsed
policies, which causes a reduction in benefits and claims expense. The
future policy benefit reserves associated with any given policy willchange over the term of such policy. As a general matter, future policy
benefit reserves are lowest at the inception of a policy term and rise
steadily to a peak before declining to zero at the expiration of thepolicy term. Accordingly, depending on when the lapse occurs in relation
to the overall policy term, the reduction in benefits and claims expense
may be greater or less than the increase in amortization expense, and,
consequently, the effects on earnings for a given period could be positive
or negative. Persistency levels will impact results to the extent actual
experience deviates from the persistency assumptions that are locked-in at
time of issue.
• Mortality. Our profitability will fluctuate to the extent actual mortality
rates differ from the assumptions that are locked-in at time of issue. We
mitigate a significant portion of our mortality exposure through
reinsurance.
• Disability. Our profitability will fluctuate to the extent actualdisability rates, including recovery rates for individuals currently
disabled, differ from the assumptions that are locked-in at the time of
issue or time of disability.
• Interest Rates. We use an assumption for future interest rates that
initially reflects the current low interest rate environment gradually
increasing to a level consistent with historical experience. Both DAC and
the future policy benefit reserve liability increase with the assumed
interest rate. Since DAC is higher than the future policy benefit reserve
liability in the early years of a policy, a lower assumed interest rate
generally will result in lower profits. In the later years, when the
future policy benefit reserve liability is higher than DAC, a lower
assumed interest rate generally will result in higher profits. Theseassumed interest rates, which like other pricing assumptions are locked-in
at issue, impact the timing but not the aggregate amount of DAC and future
policy benefit reserve changes. We allocate net investment income
generated by the investment portfolio to the
in an amount equal to the assumed net interest accreted to the segment's
future policy benefit reserve liability less DAC. All remaining net
investment income, and therefore the impact of actual interest rates, is
attributed to the Corporate and Other Distributed Products segment.
Reinsurance. We use reinsurance extensively, which has a significant effect on
our results of operations. We have generally reinsured between 80% and 90% of
the mortality risk on our term life insurance (excluding coverage under certain
riders) on a quota share yearly renewable term ("YRT") basis. To the extent
actual mortality experience is more or less favorable than the contractual rate,
the reinsurer will earn incremental profits or bear the incremental cost, as
applicable. In contrast to coinsurance, which is intended to eliminate all risks
(other than counterparty risk of the reinsurer) and rewards associated with a
specified percentage of the block of policies subject to the reinsurance
arrangement, the YRT reinsurance arrangements we enter into are intended only to
reduce volatility associated with variances between estimated and actual
mortality rates.
In 2010, as part of our corporate reorganization and the initial public offering
of our common stock, we entered into significant coinsurance transactions (the
"IPO coinsurance transactions") with entities then affiliated with Citigroup,
Inc. (collectively, the "IPO coinsurers") and ceded between 80% and 90% of the
risks and rewards of our term life insurance policies that were in force at
year-end 2009. We administer all such policies subject to these coinsurance
agreements. Policies reaching the end of their initial level term period are no
longer ceded under the IPO coinsurance transactions.
The effect of our reinsurance arrangements on ceded premiums and benefits and expenses on our statement of income follows:
• Ceded premiums. Ceded premiums are the premiums we pay to reinsurers.
These amounts are deducted from the direct premiums we earn to calculate
our net premium revenues. Similar to direct premium revenues, ceded
coinsurance premiums remain level over the initial term of the insurance
policy. Ceded YRT premiums increase over the period that the policy has
been in force. Accordingly, ceded YRT premiums generally constitute an
increasing percentage of direct premiums over the policy term.
• Benefits and claims. Benefits and claims include incurred claim amounts
and changes in future policy benefit reserves. Reinsurance reduces
incurred claims in direct proportion to the percentage ceded. Coinsurance
also reduces the change in future policy benefit reserves in direct
proportion to the percentage ceded, while YRT reinsurance does not
significantly impact the change in these reserves.
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• Amortization of DAC. DAC, and therefore amortization of DAC, is reduced on
a pro-rata basis for the coinsured business, including the business
reinsured with the IPO coinsurers. There is no impact on amortization of
DAC associated with our YRT contracts.
• Insurance expenses. Insurance expenses are reduced by the allowances
received from coinsurance. There is no impact on insurance expenses
associated with our YRT contracts.
We may alter our reinsurance practices at any time due to the unavailability of YRT reinsurance at attractive rates or the availability of alternatives to reduce our risk exposure. We presently intend to continue ceding approximately 90% of ourU.S. and Canadian mortality risk on new business.
Expenses. Results are also affected by variances in client acquisition, maintenance and administration expense levels.
Investment and Savings Products Segment. Our Investment and Savings Products segment results are primarily driven by sales, the value of assets in client accounts for which we earn ongoing management, marketing and support, and distribution fees, and the number of transfer agent recordkeeping positions and non-bank custodial fee-generating accounts we administer. Sales. We earn commissions and fees, such as dealer re-allowances and marketing and distribution fees, based on sales of mutual fund products and annuities. Sales of investment and savings products are influenced by the overall demand for investment products inthe United States and Canada, as well as by the size and productivity of the independent sales force. We generally experience seasonality in our Investment and Savings Products segment results due to our high concentration of sales of retirement account products. These accounts are typically funded in February through April, coincident with our clients' tax return preparation season. While we believe the size of the independent sales force is a factor in driving sales volume in this segment, there are a number of other variables, such as economic and market conditions, which may have a significantly greater effect on sales volume in any given fiscal period. Asset values in client accounts. We earn marketing and distribution fees (trail commissions or, with respect toU.S. mutual funds, 12b-1 fees) on mutual fund and annuity assets inthe United States and Canada. Inthe United States , we also earn investment advisory and administrative fees on assets in managed investments. In Canada, we earn management fees on certain mutual fund assets and on the segregated funds for which we serve as investment manager. Asset values are influenced by new product sales, ongoing contributions to existing accounts, redemptions and the change in market values in existing accounts. While we offer a wide variety of asset classes and investment styles, our clients' accounts are primarily invested in equity funds. Positions. We earn transfer agent recordkeeping fees for administrative functions we perform on behalf of several of our mutual fund providers. An individual client account may include multiple fund positions for which we earn transfer agent recordkeeping fees. We may also receive fees earned for non-bank custodial services that we provide to clients with retirement plan accounts.
Sales mix. While our investment and savings products all provide similar long-term economic returns to the Company, our results in a given fiscal period will be affected by changes in the overall mix of products within these categories. Examples of changes in the sales mix that influence our results include the following:
• sales of annuity products in
revenues in the period such sales occur than sales of other investment
products that either generate lower upfront revenues or, in the case of
managed investments and segregated funds, no upfront revenues;
• sales of a higher proportion of managed investments and segregated funds
products will spread the revenues generated over time because we earn
higher revenues based on assets under management for these accounts eachperiod as opposed to earning upfront revenues based on product sales; and
• sales of a higher proportion of mutual fund products sold will impact the
timing and amount of revenue we earn given the distinct transfer agent
recordkeeping and non-bank custodial services we provide for certain
mutual fund products we distribute.
Corporate and Other Distributed Products Segment. We earn revenues and pay commissions and referral fees within our Corporate and Other Distributed Products segment for various other insurance products, prepaid legal services and other financial products, all of which are originated by third parties. Our Corporate and Other Distributed Products segment also includes in-force policies from several discontinued lines of insurance underwritten by NBLIC. Corporate and Other Distributed Products segment net investment income reflects actual net investment income recognized by the Company less the amount allocated to ourTerm Life Insurance segment based on the assumed net interest accreted to the segment'sU.S. GAAP-measured future policy benefit reserve liability less DAC. Actual net investment income reflected in the Corporate and Other Distributed Products segment is impacted by the size and performance of our invested asset portfolio, which can be influenced by interest rates, credit spreads, and the mix of invested assets. The Corporate and Other Distributed Products segment also includes corporate income and expenses not allocated to our other segments, general and administrative expenses (other than expenses that are allocated to ourTerm Life Insurance or Investment and Savings Products segments), interest expense on notes payable, redundant reserve financing transactions and our revolving credit facility, as well as realized gains and losses on our invested asset portfolio. 31
-------------------------------------------------------------------------------- Capital Structure. Our financial results are affected by our capital structure, which includes our senior unsecured notes (the "Senior Notes"), redundant reserve financing transactions, our revolving credit facility, and our common stock. See Note 7 (Stockholders' Equity), Note 10 (Commitments and Contingent Liabilities), and Note 12 (Debt) to our unaudited condensed consolidated financial statements included elsewhere in this report for more information on changes in our capital structure. Foreign Currency. The Canadian dollar is the functional currency for our Canadian subsidiaries and our consolidated financial results, reported inU.S. dollars, are affected by changes in the currency exchange rate. As such, the translated amount of revenues, expenses, assets and liabilities attributable to our Canadian subsidiaries will be higher or lower in periods where the Canadian dollar appreciates or weakens relative to theU.S. dollar, respectively. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Canadian Currency Risk included in our 2019 Annual Report and Note 2 (Segment and Geographical Information) to our unaudited condensed consolidated financial statements included elsewhere in this report for more information on our Canadian subsidiaries and the impact of foreign currency on our financial results.
Critical Accounting Estimates
We prepare our financial statements in accordance withU.S. GAAP. These principles are established primarily by theFinancial Accounting Standards Board . The preparation of financial statements in conformity withU.S. GAAP requires us to make estimates and assumptions based on currently available information when recording transactions resulting from business operations. Our significant accounting policies are described in Note 1 (Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies) to our consolidated financial statements included in our 2019 Annual Report. The most significant items on our condensed consolidated balance sheets are based on fair value determinations, accounting estimates and actuarial determinations, which are susceptible to changes in future periods and could affect our results of operations and financial position. The estimates that we deem to be most critical to an understanding of our results of operations and financial position are those related to DAC, future policy benefit reserves and corresponding amounts recoverable from reinsurers, income taxes, and the valuation of investments. The preparation and evaluation of these critical accounting estimates involve the use of various assumptions developed from management's analyses and judgments. Subsequent experience or use of other assumptions could produce significantly different results. Accounting Policy Changes. OnJanuary 1, 2020 , the Company adopted Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments ("ASC 326"). ASC 326 maintains the fundamental incurred probable loss approach for measuring losses in the condensed consolidated statement of income and replaces the other-than-temporary impairment model with a subtly different credit loss model. For available-for-sale securities in an unrealized loss position that we intend to sell or would more-likely-than-not be required to sell before the expected recovery of the amortized cost basis, we still recognize the impairment in our condensed consolidated statements of income by writing down the amortized cost basis to the fair value under ASC 326. For available-for-sale securities in an unrealized loss position that we do not intend to sell or it is not more-likely-than-not that we will be required to sell before the expected recovery of the amortized cost basis, ASC 326 requires that we recognize the portion of the impairment that is due to a credit loss in our condensed consolidated statements of income through an allowance. We are allowed to reverse credit losses previously recognized in the allowance in situations where the estimate of credit losses on those securities has declined. The amendments in ASC 326 also preclude us from considering the length of time an available-for-sale security has been in an unrealized loss position and removes the requirement to consider recoveries or declines in fair value after the balance sheet date when determining whether an impairment on a security is due to a credit loss. The adoption of ASC 326 has not resulted in any material changes to impairment losses recognized in our condensed consolidated statements of income for available-for-sale securities. During the three months endedMarch 31, 2020 , there have been no changes in the accounting methodology for items that we have identified as critical accounting estimates. For additional information regarding our critical accounting estimates, see the Critical Accounting Estimates section of MD&A included in our 2019 Annual Report. 32
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Results of OperationsPrimerica, Inc. and Subsidiaries Results. Our results of operations were as follows: Three months ended March 31, Change 2020 2019 $ % (Dollars in thousands) Revenues: Direct premiums$ 702,637 $ 677,286 $ 25,351 4 % Ceded premiums (386,825 ) (389,795 ) (2,970 ) (1 )% Net premiums 315,812 287,491 28,321 10 % Commissions and fees 190,069 167,315 22,754 14 % Investment income net of investment expenses 28,892 34,785 (5,893 ) (17 )% Interest expense on surplus note (13,472 ) (10,674 ) 2,798 26 % Net investment income 15,420 24,111 (8,691 ) (36 )% Realized investment gains (losses) (10,030 ) 2,847 (12,877 ) * Other, net 13,665 13,223 442 3 % Total revenues 524,936 494,987 29,949 6 % Benefits and expenses: Benefits and claims 134,813 122,284 12,529 10 % Amortization of DAC 70,311 64,628 5,683 9 % Sales commissions 96,607 83,799 12,808 15 % Insurance expenses 48,709 43,402 5,307 12 % Insurance commissions 6,844 5,619 1,225 22 % Interest expense 7,192 7,180 12 * Other operating expenses 65,914 65,707 207 * Total benefits and expenses 430,390 392,619 37,771 10 % Income before income taxes 94,546 102,368 (7,822 ) (8 )% Income taxes 22,077 23,203 (1,126 ) (5 )% Net income$ 72,469 $ 79,165 $ (6,696 ) (8 )%
* Less than 1% or not meaningful.
Results for the Three Months Ended
Total revenues. Total revenues increased during the three months endedMarch 31, 2020 compared to the same period in 2019 driven by incremental premiums on term life insurance policies that are not subject to the IPO coinsurance transactions. The run-off of business subject to these same transactions is reflected in the decline in ceded premiums. Commissions and fees from our Investment and Savings Products segment increased largely due to growth in product sales and higher average client asset values in 2020 as compared to 2019. Net investment income decreased during the three months endedMarch 31, 2020 compared to the same period in 2019 largely due to the negative impact from a lower total return on the deposit asset backing the 10% coinsurance agreement that is subject to deposit method accounting. The lower total return of$8.5 million on this deposit asset was primarily due to a negative mark-to-market adjustment as fixed income security prices fell during the current year period as a result of economic uncertainty associated with the COVID-19 pandemic. Also contributing to a decrease in net investment income was lower yield on our invested portfolio of approximately$2.1 million , partially offset by larger invested asset portfolio which resulted in an increase in net investment income of approximately$1.8 million compared to the prior period. Investment income net of investment expenses includes interest earned on our held-to-maturity invested asset, which is completely offset by interest expense on surplus note, thereby eliminating any impact on net investment income. Amounts recognized for each line item will remain offsetting and will fluctuate from period to period along with the principal amounts of the held-to-maturity asset and the surplus note based on the balance of reserves being contractually supported under a redundant reserve financing transaction used byVidalia Re, Inc. ("Vidalia Re Financing Transaction"). For more information on the Vidalia Re Financing Transaction, see Note 3 (Investments) and Note 12 (Debt) to our unaudited condensed consolidated financial statements included elsewhere in this report. Realized investment gains (losses) during the three months endedMarch 31, 2020 was a loss compared to a gain in the same period in 2019 primarily due to$6.7 million negative mark-to-market adjustment on equity securities held within our investment portfolio as a result of market reaction to the economic disruption caused by the COVID-19 pandemic. Also contributing to the realized investment loss in the current period is the recognition of$3.7 million of credit losses for specific issuers that operate in distressed industry sectors that were particularly affected by deteriorating credit conditions during the three months endedMarch 31, 2020 . Total benefits and expenses. Total benefits and expenses increased during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 led by growth in premium-related costs, which include benefits and claims and amortization of DAC. Sales commissions expense also increased in the three months endedMarch 31, 2020 versus the three months endedMarch 31 , 33 --------------------------------------------------------------------------------
2019 due to increased commissions and fees revenue. Insurance expenses were higher due to increases in expenses to support growth in the business and to enhance technology-related capabilities.
Income taxes. Our effective income tax rate for the three months endedMarch 31, 2020 was 23.4%, compared to 22.7% for the three months endedMarch 31, 2019 due to lower tax benefits recognized in the current period on equity award vesting compared to the same period in 2019. Tax benefits recognized on equity awards include increases in the share price of equity awards from the grant date to the vest date and such increases were lower in 2020 as compared with 2019.
For additional information, see the Segment Results discussions below.
Segment Results
Term Life Insurance Segment Results. Our results for theTerm Life Insurance segment were as follows: Three months ended March 31, Change 2020 2019 $ % (Dollars in thousands) Revenues: Direct premiums$ 696,564 $ 670,755 $ 25,809 4 % Ceded premiums (385,232 ) (388,100 ) (2,868 ) (1 )% Net premiums 311,332 282,655 28,677 10 % Allocated investment income 6,246 4,444 1,802 41 % Other, net 10,168 9,744 424 4 % Total revenues 327,746 296,843 30,903 10 % Benefits and expenses: Benefits and claims 128,563 118,443 10,120 9 % Amortization of DAC 65,840 64,066 1,774 3 % Insurance expenses 47,165 41,832 5,333 13 % Insurance commissions 3,286 2,163 1,123 52 % Total benefits and expenses 244,854 226,504
18,350 8 %
Income before income taxes
Results for the Three Months Ended
Net premiums. Direct premiums increased during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 largely due to sales of new policies in recent periods that have contributed to growth in the in-force book of business. The decline in ceded premiums includes$13.3 million in lower coinsurance ceded premiums due to the run-off of business subject to the IPO coinsurance transactions, partially offset by$10.4 million in higher non-level YRT reinsurance ceded premiums as business not subject to the IPO coinsurance transactions ages. The continued impact from the increase of direct premiums combined with the reduction in ceded premiums caused net premiums to grow at a higher rate than direct premiums. Allocated investment income. Allocated investment income increased during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 due to an increase in the assumed net interest accreted to ourTerm Life Insurance segment's future policy benefit reserve liability less deferred acquisition costs as ourTerm Life Insurance segment's in-force business continues to grow. Benefits and claims. Benefits and claims increased during the three months endedMarch 31, 2020 compared to the same period in 2019 primarily due to the growth in net premiums. Claims experience was in line with historical trends. Amortization of DAC. The amortization of DAC increased during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 largely due to growth in net premiums during the first quarter of 2020 compared to the same period in 2019. The rate of growth in DAC is lower than the premium growth due to the impact of favorable trends in persistency in recent periods. Insurance expenses. Insurance expenses increased during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily due to increases in expenses to support growth in the business and to enhance technology-related capabilities.
Insurance commissions. Insurance commissions increased during the three months
ended
Investment and Savings Products Segment Results. Investment and Savings Products segment results were as follows:
34
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Three months ended March 31, Change
2020 2019 $ %
(Dollars in thousands)
Revenues:
Commissions and fees:
Sales-based revenues $ 80,891 $ 66,997 $ 13,894 21 %
Asset-based revenues 81,395 73,639 7,756 11 %
Account-based revenues 20,204 19,613 591 3 %
Other, net 2,542 2,423 119 5 %
Total revenues 185,032 162,672 22,360 14 %
Expenses:
Amortization of DAC 4,305 477 3,828 803 %
Insurance commissions 3,201 3,025 176 6 %
Sales commissions:
Sales-based 56,561 47,831 8,730 18 %
Asset-based 36,323 32,343 3,980 12 %
Other operating expenses 36,942 36,312 630 2 %
Total expenses 137,332 119,988 17,344 14 %
Income before income taxes $ 47,700 $ 42,684 $ 5,016 12 %
Results for the Three Months Ended
Commissions and fees. Commissions and fees increased during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 driven by higher demand for mutual fund products and variable annuity products. Also contributing to the increase in commissions and fees was growth in asset-based revenues as average client asset values increased in 2020 versus 2019 due to market performance and continued positive net flows between the two periods. The impact of the significant decline in investment markets during the first quarter of 2020 on average client asset values was limited as the decline occurred during the final month of the three months endedMarch 31, 2020 . Amortization of DAC. Amortization of DAC increased during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 largely due to a negative market performance of the funds underlying our Canadian segregated funds product caused by market conditions and economic uncertainty associated with the COVID-19 pandemic in 2020 compared with positive market performance in 2019. Sales commissions. The increase in sales-based and asset-based commissions for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 were generally consistent with the increase in sales-based revenue and asset-based revenue, respectively. Other operating expenses. Other operating expenses increased during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 due to increased spending on technology-related expenses, partially offset by the phase-in of reduced fees paid to a service provider for the Company's transfer agent recordkeeping platform.
Corporate and Other Distributed Products Segment Results. Corporate and Other Distributed Products segment results were as follows:
35
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Three months ended March 31, Change
2020 2019 $ %
(Dollars in thousands)
Revenues:
Direct premiums $ 6,073 $ 6,531 $ (458 ) (7 )%
Ceded premiums (1,593 ) (1,695 ) (102 ) (6 )%
Net premiums 4,480 4,836 (356 ) (7 )%
Commissions and fees 7,579 7,066 513 7 %
Investment income net of investment
expenses 22,646 30,341 (7,695 ) (25 )%
Interest expense on surplus note (13,472 ) (10,674 ) 2,798 26 %
Net investment income 9,174 19,667 (10,493 ) (53 )%
Realized investment gains (losses) (10,030 ) 2,847 (12,877 ) *
Other, net 955 1,056 (101 ) (10 )%
Total revenues 12,158 35,472 (23,314 ) (66 )%
Benefits and expenses:
Benefits and claims 6,250 3,841 2,409 63 %
Amortization of DAC 166 85 81 95 %
Insurance expenses 1,544 1,570 (26 ) (2 )%
Insurance commissions 357 431 (74 ) (17 )%
Sales commissions 3,723 3,625 98 3 %
Interest expense 7,192 7,180 12 *
Other operating expenses 28,972 29,395 (423 ) (1 )%
Total benefits and expenses 48,204 46,127 2,077 5 %
Loss before income taxes $ (36,046 ) $ (10,655 ) $ 25,391 238 %
* Less than 1% or not meaningful.
Results for the Three Months Ended
Total revenues. Total revenues decreased during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 largely due to the decrease in net investment income and realized investment gains (losses) as discussed in thePrimerica, Inc. and Subsidiaries Results of Operations section above. Total benefits and expenses. Total benefits and expenses increased during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily due to higher benefits and claims experienced on non-term life insurance business underwritten by NBLIC and the recognition of a$1.6 million allowance for ceded claims on a closed block of business that may not be collected from a reinsurer that was ordered into receivership.
Financial Condition
Investments. Our insurance business is primarily focused on selling term life insurance, which does not include an investment component for the policyholder. The invested asset portfolio funded by premiums from our term life insurance business does not involve the substantial asset accumulations and spread requirements that exist with other non-term life insurance products. As a result, the profitability of our term life insurance business is not as sensitive to the impact that interest rates have on our invested asset portfolio and investment income as the profitability of other companies that distribute non-term life insurance products. We follow a conservative investment strategy designed to emphasize the preservation of our invested assets and provide adequate liquidity for the prompt payment of claims. To meet business needs and mitigate risks, our investment guidelines provide restrictions on our portfolio's composition, including limits on asset type, per issuer limits, credit quality limits, portfolio duration, limits on the amount of investments in approved countries and permissible security types. We also manage and monitor our allocation of investments to limit the accumulation of any disproportionate concentrations of risk among industry sectors or issuer countries outside of theU.S. and Canada. In addition, as ofMarch 31, 2020 , we did not hold any country of issuer concentrations outside of theU.S. or Canada that represented more than 5% of the fair value of our available-for-sale invested asset portfolio or any industry concentrations of corporate bonds that represented more than 10% of the fair value of our available-for-sale invested asset portfolio. We invest a portion of our portfolio in assets denominated in Canadian dollars to support our Canadian operations. Additionally, to ensure adequate liquidity for payment of claims, we take into account the maturity and duration of our invested asset portfolio and our general liability profile. We also hold within our invested asset portfolio a credit enhanced note ("LLC Note") issued by a limited liability company owned by a third-party service provider which is classified as a held-to-maturity security. The LLC Note, which is scheduled to mature onDecember 31, 2030 , was obtained in exchange for the Surplus Note of equal principal amount issued by Vidalia Re. For more information on the LLC Note, see Note 3 (Investments) to our unaudited condensed consolidated financial statements included elsewhere in this report. 36 -------------------------------------------------------------------------------- We have an investment committee composed of members of our senior management team that is responsible for establishing and maintaining our investment guidelines and supervising our investment activity. Our investment committee regularly monitors our overall investment results and our compliance with our investment objectives and guidelines. We use a third-party investment advisor to assist us in the management of our investing activities. Our investment advisor reports to our investment committee. Our invested asset portfolio is subject to a variety of risks, including risks related to general economic conditions, market volatility, interest rate fluctuations, liquidity risk and credit and default risk. Investment guideline restrictions have been established to minimize the effect of these risks but may not always be effective due to factors beyond our control. Interest rates and credit spreads are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. A significant increase in interest rates or credit spreads could result in significant losses, realized or unrealized, in the value of our invested asset portfolio. For example, fromDecember 31, 2019 toMarch 31, 2020 market volatility and economic uncertainty associated with the COVID-19 pandemic caused a sharp increase in credit spreads, which translated to a reduction in the net unrealized gain on available-for-sale securities portfolio from$82.2 million to a net unrealized loss of$1.3 million . Additionally, with respect to some of our investments, we are subject to prepayment and, therefore, reinvestment risk.
Details on asset mix (excluding our held-to-maturity security) were as follows:
March 31, 2020 December 31, 2019
Average rating of our fixed-maturity
portfolio A A
Average duration of our fixed-maturity
portfolio 3.6 years 3.6 years
Average book yield of our fixed-maturity
portfolio 3.55% 3.54%
The distribution of our investments in fixed-maturity securities (excluding our held-to-maturity security) by rating, including those classified as trading securities, were as follows:
March 31, 2020 December 31, 2019
Amortized cost (1) % Amortized cost (1) %
(Dollars in thousands)
AAA $ 524,942 23 % $ 555,640 24 %
AA 277,247 12 % 271,936 12 %
A 523,598 23 % 543,351 23 %
BBB 889,352 39 % 885,497 38 %
Below investment grade 70,045 3 % 59,190 3 %
Not rated 3,101 * 2,389 *
Total $ 2,288,285 100 % $ 2,318,003 100 %
(1) Includes trading securities at fair value and available-for-sale securities
at amortized cost.
* Less than 1%.
The ten largest holdings within our fixed-maturity invested asset portfolio (excluding our held-to-maturity security) were as follows:
March 31, 2020
Amortized Unrealized Credit
Issuer Fair value cost (1) gain (loss) rating
(Dollars in thousands)
Government of Canada $ 19,286 $ 18,625 $ 661 AAA
Province of Ontario Canada 13,191 12,552 639 A+
Province of Quebec Canada 12,913 11,787 1,126 AA-
Wells Fargo & Co 11,376 11,702 (326 ) A-
Enbridge Inc 10,681 10,876 (195 ) A+
Cigna Corp 10,414 10,192 222 A-
Bank of America Corp 10,095 9,822 273 A-
Province of British Columbia Canada 10,093 9,729 364 AAA
Province of Alberta Canada 9,984 9,538 446 A+
Province of New Brunswick Canada 9,180 8,790 390 A+
Total - ten largest holdings $ 117,213 $ 113,613 $ 3,600
Total - fixed-maturity securities $ 2,287,034 $ 2,288,285
Percent of total fixed-maturity securities 5 % 5 %
(1) Includes trading securities at fair value and available-for-sale securities
at amortized cost.
For additional information on our invested asset portfolio, see Note 3 (Investments) to our unaudited condensed consolidated financial statements included elsewhere in this report.
37
--------------------------------------------------------------------------------Liquidity and Capital Resources
Dividends and other payments to the Parent Company from its subsidiaries are our principal sources of cash. The amount of dividends paid by the subsidiaries is dependent on their capital needs to fund future growth and applicable regulatory restrictions. The primary uses of funds by the Parent Company include the payments of stockholder dividends, interest on notes payable, general operating expenses, and income taxes, as well as repurchases of common shares outstanding. As ofMarch 31, 2020 , the Parent Company had cash and invested assets of$271.8 million .The Parent Company's subsidiaries generate operating cash flows primarily from term life insurance premiums (net of premiums ceded to reinsurers), income from invested assets, commissions and fees collected from the distribution of investment and savings products as well as other financial products. The subsidiaries' principal operating cash outflows include the payment of insurance claims and benefits (net of ceded claims recovered from reinsurers), commissions to the sales force, insurance and other operating expenses, interest expense for future policy benefit reserves financing transactions, and income taxes. The distribution and underwriting of term life insurance requires upfront cash outlays at the time the policy is issued as we pay a substantial majority of the sales commission during the first year following the sale of a policy and incur costs for underwriting activities at the inception of a policy's term. During the early years of a policy's term, we generally receive level term premiums in excess of claims paid. We invest the excess cash generated during earlier policy years in fixed-maturity and equity securities held in support of future policy benefit reserves. In later policy years, cash received from the maturity or sale of invested assets is used to pay claims in excess of level term premiums received. Historically, cash flows generated by our businesses, primarily from our existing block of term life policies and our investment and savings products, have provided us with sufficient liquidity to meet our operating requirements. Although our cash flow could be adversely affected by the deteriorating economic conditions caused by the COVID-19 pandemic, we anticipate that cash flows from our businesses will continue to provide sufficient operating liquidity over the next 12 months. If necessary, we could seek to enhance our liquidity position or capital structure through sales of our available-for-sale investment portfolio, changes in the timing or amount of share repurchases, borrowings against our revolving credit facility, or some combination of these sources. Additionally, we believe that cash flows from our businesses and potential sources of funding will sufficiently support our long-term liquidity needs. Cash Flows. The components of the changes in cash and cash equivalents were as follows: Three months ended March 31, Change 2020 2019 $ (In thousands) Net cash provided by (used in) operating activities$ 131,522 $ 66,421 $ 65,101 Net cash provided by (used in) investing activities (744 ) 25,278 (26,022 ) Net cash provided by (used in) financing activities (112,274 ) (74,987 ) (37,287 ) Effect of foreign exchange rate changes on cash (2,295 ) 776 (3,071 ) Change in cash and cash equivalents$ 16,209 $
17,488
Operating Activities. Cash provided by operating activities increased during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 in large part due to the impact in the prior year of reduced cash flows caused by the timing of when cash payments to or from reinsurers were due for ceded premiums and ceded claims. In addition, cash flows from operations increased in 2020 due to higher cash receipts from the collection of premium revenues in excess of benefits and claims paid in ourTerm Life Insurance segment. The impact of direct premium growth and the additional layering of net premiums from term life insurance policies not subject to the IPO coinsurance transactions has continued to drive positive incremental cash flows from operating activities. Investing Activities. Cash flows related to investing activities was a slight use of cash during the three months endedMarch 31, 2020 compared to a source of cash in 2019 as a result of higher purchases of fixed maturity securities as our invested asset portfolio has increased with the continued growth of our term life business in force. This was partially offset due to cash receipts from the sale and maturity of fixed-maturity securities. Financing Activities. Cash used in financing activities increased during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 mainly due to the accelerated timing of share repurchases made in 2020 in response to market conditions that provided an opportunity to repurchase shares at attractive prices. In addition, the level of share repurchase activity increased as the size of the share repurchase program in 2020 increased over 2019.Risk-Based Capital ("RBC"). TheNational Association of Insurance Commissioners ("NAIC") has established RBC standards forU.S. life insurers, as well as a risk-based capital model act (the "RBC Model Act") that has been adopted by the insurance regulatory authorities. The RBC Model Act requires that life insurers annually submit a report to state regulators regarding their RBC based upon four categories of risk: asset risk; insurance risk; interest rate risk and business risk. The capital requirement for each is determined by applying factors that vary based upon the degree of risk to various asset, premiums and policy benefit reserve items. The formula is an early warning tool to identify possible weakly capitalized companies for purposes of initiating further regulatory action. 38 -------------------------------------------------------------------------------- As ofMarch 31, 2020 , ourU.S. life insurance subsidiaries maintained statutory capital and surplus substantially in excess of the applicable regulatory requirements and remain well positioned to support existing operations and fund future growth. In Canada, an insurer's minimum capital requirement is overseen by the Office of the Superintendentof Financial Institutions ("OSFI") and determined as the sum of the capital requirements for five categories of risk: asset default risk; mortality/morbidity/lapse risks; changes in interest rate environment risk; segregated funds risk; and foreign exchange risk. As ofMarch 31, 2020 ,Primerica Life Insurance Company of Canada was in compliance with Canada's minimum capital requirements as determined by OSFI. Redundant Reserve Financings. The Model Regulation entitled Valuation of Life Insurance Policies, commonly known as Regulation XXX, requires insurers to carry statutory policy benefit reserves for term life insurance policies with long-term premium guarantees which are often significantly in excess of the future policy benefit reserves that insurers deem necessary to satisfy claim obligations ("redundant policy benefit reserves"). Accordingly, many insurance companies have sought ways to reduce their capital needs by financing redundant policy benefit reserves through bank financing, reinsurance arrangements and other financing transactions. We have establishedPeach Re, Inc. ("Peach Re") and Vidalia Re as special purpose financial captive insurance companies and wholly owned subsidiaries of Primerica Life. Primerica Life has ceded certain term life policies issued prior to 2011 to Peach Re as part of a Regulation XXX redundant reserve financing transaction (the "Peach Re Redundant Reserve Financing Transaction") and has ceded certain term life policies issued in 2011 through 2017 to Vidalia Re as part of a Regulation XXX redundant reserve financing transaction (the "Vidalia Re Redundant Reserve Financing Transaction"). These redundant reserve financing transactions allow us to more efficiently manage and deploy our capital. The NAIC has adopted a model regulation for determining reserves using a principle-based approach ("principle-based reserves" or "PBR"), which is designed to reflect each insurer's own experience in calculating reserves and move away from a standardized reserving formula. Primerica Life adopted PBR as ofJanuary 1, 2018 . The adoption of PBR facilitated extending the premium guarantees for Primerica Life for the entire initial term period for new sales. The PBR regulation will significantly reduce the statutory policy benefit reserve requirements, but will apply for business issued after the effective date. As a result, we expect that the adoption of PBR will significantly reduce the need to engage in future redundant reserve financing transactions for business issued after the effective date. See Note 4 (Investments), Note 10 (Debt) and Note 16 (Commitments and Contingent Liabilities) to our consolidated financial statements within our 2019 Annual Report for more information on these redundant reserve financing transactions. Notes Payable. The Company has$375.0 million of publicly-traded, Senior Notes outstanding issued at a price of 99.843% with an annual interest rate of 4.75%, payable semi-annually in arrears onJanuary 15 andJuly 15 . The Senior Notes matureJuly 15, 2022 . We were in compliance with the covenants of the Senior Notes as ofMarch 31, 2020 . No events of default occurred during the three months endedMarch 31, 2020 .
Rating Agencies. There have been no changes to
Short-Term Borrowings. We had no short-term borrowings as of or during the three
months ended
Surplus Note. Vidalia Re issued the Surplus Note in exchange for the LLC Note as a part of the Vidalia Re Redundant Reserve Financing Transaction. The Surplus Note has a principal amount equal to the LLC Note and is scheduled to mature onDecember 31, 2030 . For more information on the Surplus Note, see Note 12 (Debt) to our unaudited condensed consolidated financial statements included elsewhere in this report. Off-Balance Sheet Arrangements. We have no transactions, agreements or other contractual arrangements to which an entity unconsolidated with the Company is a party, under which the Company maintains any off-balance sheet obligations or guarantees as ofMarch 31, 2020 . Credit Facility Agreement. We maintain an unsecured$200.0 million revolving credit facility ("Revolving Credit Facility") with a syndicate of commercial banks that has a scheduled termination date ofDecember 19, 2022 . Amounts outstanding under the Revolving Credit Facility bear interest at a periodic rate equal to LIBOR or the base rate, plus in either case an applicable margin. The Revolving Credit Facility contains language that allows for the Company and the lenders to agree on a comparable or successor reference rate in the event LIBOR is no longer available, as is expected to happen in 2022. The Revolving Credit Facility also permits the issuance of letters of credit. The applicable margins are based on our debt rating with such margins for LIBOR rate loans and letters of credit ranging from 1.125% to 1.625% per annum and for base rate loans ranging from 0.125% to 0.625% per annum. Under the Revolving Credit Facility, we incur a commitment fee that is payable quarterly in arrears and is determined by our debt rating. This commitment fee ranges from 0.125% to 0.225% per annum of the aggregate$200.0 million commitment of the lenders under the Revolving Credit Facility. As ofMarch 31, 2020 , no amounts have been drawn under the Revolving Credit Facility and we were in compliance with its covenants. Furthermore, no events of default have occurred under the Revolving Credit Facility in the three months endedMarch 31, 2020 .
Contractual Obligations Update. There have been no material changes in contractual obligations from those disclosed in the 2019 Annual Report.
39
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this report as well
as some statements in periodic press releases and some oral statements made by
our officials during our presentations are "forward-looking" statements.
Forward-looking statements include, without limitation, any statement that may
project, indicate or imply future results, events, performance or achievements,
and may contain the words "expect", "intend", "plan", "anticipate", "estimate",
"believe", "will be", "will continue", "will likely result", and similar
expressions, or future conditional verbs such as "may", "will", "should",
"would", and "could". In addition, any statement concerning future financial
performance (including future revenues, earnings or growth rates), ongoing
business strategies or prospects, and possible actions taken by us or our
subsidiaries are also forward-looking statements. These forward-looking
statements involve external risks and uncertainties, including, but not limited
to, those described under the section entitled "Risk Factors" included herein.
Forward-looking statements are based on current expectations and projections
about future events and are inherently subject to a variety of risks and
uncertainties, many of which are beyond the control of our management team. All
forward-looking statements in this report and subsequent written and oral
forward-looking statements attributable to us, or to persons acting on our
behalf, are expressly qualified in their entirety by these risks and
uncertainties. These risks and uncertainties include, among others:
• major public health pandemics, epidemics or outbreaks, specifically the
novel coronavirus COVID-19 pandemic, could materially adversely impact
our business, financial condition and results of operations;
• our failure to continue to attract new recruits, retain sales
representatives or license or maintain the licensing of sales
representatives would materially adversely affect our business,
financial condition and results of operations;
• there are a number of laws and regulations that could apply to our
distribution model, which could require us to modify our distribution
structure;
• there may be adverse tax, legal or financial consequences if the
independent contractor status of sales representatives is overturned;
the Company's or the independent sales representatives' violation of, or non-compliance with, laws and regulations and related claims and proceedings could expose us to material liabilities;
• any failure to protect the confidentiality of client information could
adversely affect our reputation and have a material adverse effect on our
business, financial condition and results of operations;
• we may face significant losses if our actual experience differs from our
expectations regarding mortality or persistency;
• the occurrence of a catastrophic event could materially adversely affect
our business, financial condition and results of operations;
• our insurance business is highly regulated, and statutory and regulatory
changes may materially adversely affect our business, financial condition
and results of operations;
• a decline in the regulatory capital ratios of our insurance subsidiaries
could result in increased scrutiny by insurance regulators and ratings
agencies and have a material adverse effect on our business, financial
condition and results of operations;
• a significant ratings downgrade by a ratings organization could materially
adversely affect our business, financial condition and results of
operations;
• the failure by any of our reinsurers or reserve financing counterparties to
perform its obligations to us could have a material adverse effect on our
business, financial condition and results of operations;
• our Investment and Savings Products segment is heavily dependent on mutual
fund and annuity products offered by a relatively small number of companies,
and, if these products fail to remain competitive with other investment
options or we lose our relationship with one or more of these companies, our
business, financial condition and results of operations may be materially
adversely affected;
• the Company's or the securities-licensed sales representatives' violations
of, or non-compliance with, laws and regulations could expose us to
material liabilities;
• if heightened standards of conduct or more stringent licensing requirements,
such as those adopted by the
proposed or adopted by state legislatures or regulators or Canadian
securities regulators, are imposed on us or the sales representatives, or
selling compensation is reduced as a result of new legislation or
regulations, it could have a material adverse effect on our business,
financial condition and results of operations;
• if our suitability policies and procedures, or our policies and
procedures for compliance with federal or state regulations governing
standards of care, were deemed inadequate, it could have a material
adverse effect on our business, financial condition and results of
operations;
• sales force support tools may fail to appropriately identify financial needs
or suitable investment products;
• non-compliance with applicable regulations could lead to revocation of our
subsidiary's status as a non-bank custodian;
• as our securities sales increase, we become more sensitive to performance of
the equity markets;
• if one of our significant information technology systems fails, if its
security is compromised, or if the Internet becomes disabled or unavailable,
our business, financial condition and results of operations may be
materially adversely affected;
• the current legislative and regulatory climate with regard to cybersecurity
may adversely affect our business, financial condition, and results of
operations;
• in the event of a disaster, our business continuity plan may not besufficient, which could have a material adverse effect on our business,
financial condition and results of operations;
• licensing requirements will impact the size of the mortgage loan sales
force;
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• our loan business is subject to various federal and state laws, changes in
which could affect the cost or our ability to distribute our products and
could materially adversely affect our business, financial condition and
results of operations;
• credit deterioration in, and the effects of interest rate fluctuations on,
our invested asset portfolio and other assets that are subject to changes in
credit quality and interest rates could materially adversely affect our
business, financial condition and results of operations;
valuation of our investments and the determination of when the fair value of our
available-for-sale invested assets is below amortized costs are both based on
estimates that may prove to be incorrect;
• changes in accounting standards can be difficult to predict and could
adversely impact how we record and report our financial condition and
results of operations;
• the effects of economic down cycles could materially adversely affect our
business, financial condition and results of operations;
• we are subject to various federal, state and provincial laws and regulations
in
require us to alter our business practices and could materially adversely
affect our business, financial condition and results of operations;
• litigation and regulatory investigations and actions may result in financial
losses and harm our reputation;
• the current legislative and regulatory climate with regard to financial
services may adversely affect our business, financial condition, and
results of operations;
• the inability of our subsidiaries to pay dividends or make distributions
or other payments to us in sufficient amounts would impede our ability to
meet our obligations and return capital to our stockholders;
• a significant change in the competitive environment in which we operate
could negatively affect our ability to maintain or increase our market
share and profitability;
• the loss of key employees and sales force leaders could negatively
affect our financial results and impair our ability to implement our
business strategy;
• we may be materially adversely affected by currency fluctuations in the
United States dollar versus the Canadian dollar; and • the market price of our common stock may fluctuate.
Developments in any of these areas could cause actual results to differ materially from those anticipated or projected or cause a significant reduction in the market price of our common stock.
The foregoing list of risks and uncertainties may not contain all of the risks and uncertainties that could affect us. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report may not in fact occur. Accordingly, undue reliance should not be placed on these statements. We undertake no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, except as otherwise required by law.
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