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PRIMERICA, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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, 2020 to September 30, 2021 . 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, 2020 ("2020 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 2020 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 primarily through a network of independent contractor sales representatives ("independent sales representatives" or "independent 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 historically have had two primary operating segments,Term Life Insurance and Investment and Savings Products, and a third segment, Corporate and Other Distributed Products. OnJuly 1, 2021 , we acquired 80% of e-TeleQuote Insurance, Inc. and subsidiaries (collectively, "e-TeleQuote") through our recently formed subsidiary,Primerica Health, Inc. ("Primerica Health "). e-TeleQuote markets Medicare-related insurance products underwritten by third-party health insurance carriers to eligible Medicare participants through its licensed health insurance agents. BeginningJuly 1, 2021 , the Company has reported the operations of e-TeleQuote as its own operating segment calledSenior Health . e-TeleQuote licensed health insurance agents are employees of e-TeleQuote.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 .Senior Health . Inthe United States , we distribute Medicare-related insurance products nationwide to eligible Medicare participants and enroll them in coverage utilizing e-TeleQuote's team of licensed health insurance agents. The health insurance products we distribute are underwritten and administered by third-party health insurance carriers and primarily consist of Medicare Advantage enrollments. Contract acquisition costs are incurred upfront when policy applications are approved and include costs associated with generating or acquiring leads as well as fees paid toPrimerica Senior Health certified independent sales representatives as well as compensation, licensing, and training costs incurred for e-TeleQuote's workforce of licensed health insurance agents. We receive compensation from the health insurance carriers in the form of initial commissions when eligible Medicare participants are enrolled and renewal commissions, upon the anniversary of the effective date, for as long as policies remain in-force. 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, mortgage originations, 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 29 --------------------------------------------------------------------------------
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 our
Insurance
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 an independent sales representative offers, which can drive or dampen recruiting. Similarly, these conditions also affect e-TeleQuote's ability to recruit and retain licensed health insurance agents. 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 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. The ongoing coronavirus COVID-19 ("COVID-19") pandemic has continued to impact our business in 2021, as discussed in more detail later in this section, the Results of Operations section, and the Financial Condition section. We expect COVID-19 will continue to create uncertainty in the following business trends and conditions:
• Businesses are repopulating their facilities and people are resuming
their pre-pandemic activities. The focus on licensing by new recruits is
challenging as the reopening expands. Meanwhile, most states are getting
back to normal testing capacity and candidates have more flexibility to
access pre-licensing classes with both in-person and remote options
becoming available. However, the threat of mutations of COVID-19,
including the Delta variant, continue to create uncertainty. As a
result, repopulation and other activities could experience additional
periods of slowdown. The timing and extent of the impact these dynamics
will have on licensing activity in future periods remains uncertain.
• We have experienced an increase in mortality expense due to premature
deaths of our insureds caused by COVID-19 infections. We expect that
vaccinations will eventually cause our elevated mortality experience to
normalize. However, with the emergence of variants and the reluctance of
a portion of the population to be vaccinated, it remains difficult to
predict the ultimate impact the COVID-19 pandemic will have on our
business in future periods. Any increase in mortality expense will be
mitigated by reinsurance as we have ceded a significant majority of our
mortality risk to reinsurers we believe to be creditworthy.
• To date, the impact of COVID-19 has led to high levels of persistency
throughout all policy durations and increased policy sales as a result
of strong public sentiment towards owning life insurance products. It is
unknown how long these trends will continue and to what level
persistency will normalize as the current fear associated with the
COVID-19 pandemic subsides. We have started to see policy sales trend
back to pre-COVID-19 pandemic levels. Refer to the Factors Affecting Our
Results section for more information about how persistency impacts our
financial results.
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 independent 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 independent sales force trends, and growth in recruiting and licensing is usually indicative of future growth in the overall size of the independent sales force. Changes in the number of new recruits do not always result in commensurate changes in the size of the licensed independent sales force because new recruits may obtain the requisite licenses at rates above or below historical levels.
Details on new recruits and life-licensed independent sales representative
activity were as follows:
Three months ended September 30 ,
Nine months ended
2021 2020 2021 2020
New recruits 91,884 101,861 275,802 319,746
New life-licensed independent sales
representatives 9,381 13,138 30,326 35,987
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The size of the life-licensed independent sales force was as follows:
September 30, 2021 September 30, 2020
Life-licensed independent sales representatives 130,023 136,306
The number of new recruits decreased during the three and nine months ended
September 30, 2021 compared to the same periods in 2020. The year-over-year
comparisons were impacted by various recruiting incentives in the prior year
introduced to help overcome the challenges posed by the COVID-19 pandemic. We
also noted that the impact of the lockdown in 2020 at the onset of the COVID-19
pandemic benefited recruiting results in the 2020 periods as the independent
sales force had a more captive focus on recruiting activities.
New life-licensed sales representatives decreased during the three and nine
months ended
additional flexibility provided by a remote workplace and web-conferencing
options allow us to reach a broader audience. However, remote learning options
have not been as effective as in-person learning in achieving licensing results.
The Company had 130,023 independent life-licensed representatives as ofSeptember 30, 2021 compared to 136,306 as ofSeptember 30, 2020 . The number of independent life-licensed representatives as ofSeptember 30, 2021 included approximately 800 individuals with COVID-19 temporary licenses or extended renewal dates, the majority of which are not expected to remain as part of our independent sales force by the end of the year. AtSeptember 30, 2020 , approximately 9,700 individuals with COVID-19 temporary licenses or extended renewal dates were included in the life-licensed independent sales representatives total of 136,306, some of which ultimately did not take the steps necessary to obtain a permanent license or did not renew their license.
Term Life Insurance Product Sales and Face Amount In-Force.
The average number of life-licensed independent 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 independent sales representative
(historically between 0.18 and 0.22), were as follows:
Three months ended September 30 ,
Nine months ended
2021 2020 2021 2020
Average number of life-licensed
independent sales representatives 130,753 135,083 131,834 132,275
Number of new policies issued 75,914 100,199 248,652 265,561
Average monthly rate of new
policies issued per life-licensed
independent sales representative 0.19 0.25 0.21 0.22
New policies issued during the three months ended September 30, 2021 normalized
toward pre-pandemic levels compared to historically elevated levels experienced
during the comparable period in 2020. The onset of the COVID-19 pandemic
highlighted the need for protection products; leading to a surge of new policies
issued in 2020, which was the most pronounced during the third quarter of 2020.
Issued policies during the nine months ending September 30, 2021 also reflect
strong demand for protection products but were lower when compared with the
elevated level of policies issued during the nine months ending September 30,
2020 , Productivity during the three and nine months ending September 30, 2021 ,
measured by the average monthly rate of new policies issued per life-licensed
independent sales representative, was in line with our historical range.
The changes in the face amount of our in-force book of term life insurance
policies were as follows:
Three months ended September 30, Nine months ended September 30,
% of beginning % of beginning % of beginning % of beginning
2021 balance 2020 balance 2021 balance 2020 balance
(Dollars in millions)
Face amount in force,
beginning of period $ 886,519 $ 821,998 $ 858,818 $ 808,262
Net change in face amount:
Issued face amount 26,219 3 % 30,104 4 % 82,843 10 % 81,079 10 %
Terminations (16,241 ) (2 )% (13,733 ) (2 )% (48,187 ) (6 )% (46,343 ) (6 )%
Foreign currency (2,479 ) * 1,858 * 544 * (2,771 ) *
Net change in face amount 7,499 1 % 18,229 2 % 35,200 4 % 31,965 4 %
Face amount in force, end of
period $ 894,018 $ 840,227 $ 894,018 $ 840,227
* Less than 1%.
The face amount of term life policies in-force increased 1% and 4%,
respectively, for the three and nine months ended September 30, 2021 as the
level of face amount issued continued to exceed the face amount terminated. The
net change in face amount during the three months ending September 30, 2021 was
more muted than the comparable period in 2020 primarily due to peak sales and
persistency experienced in 2020. As a percentage of the beginning face amount
in-force, issued face amount as well as terminated face amount during the nine
months ended September 30, 2021 remained consistent with the comparable 2020
period and illustrate the strong demand for both buying and maintaining
protection products during both nine-month periods.
Investment and Savings Products Sales, Asset Values and Accounts/Positions.
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Investment and savings products sales and average client asset values were as
follows:
Three months ended Nine months ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(Dollars in millions)
Product sales:
Retail mutual funds $ 1,563 $ 1,064 $ 499 47 % $ 4,942 $ 3,189 $ 1,753 55 %
Annuities and other 721 469 252 54 % 2,233 1,631 602 37 %
Total sales-based
revenue generating
product sales 2,284 1,533 751 49 % 7,175 4,820 2,355 49 %
Managed investments 387 223 164 74 % 1,099 669 430 64 %
Segregated funds and
other 120 85 35 42 % 410 284 126 44 %
Total product sales $ 2,791 $ 1,841 $ 950 52 % $ 8,684 $ 5,773 $ 2,911 50 %
Average client asset
values:
Retail mutual funds $ 57,780 $ 43,729 $ 14,051 32 % $ 54,954 $ 41,177 $ 13,777 33 %
Annuities and other 25,778 20,997 4,781 23 % 24,886 19,998 4,888 24 %
Managed investments 6,362 4,325 2,037 47 % 5,857 4,034 1,823 45 %
Segregated funds 2,732 2,461 271 11 % 2,688 2,373 315 13 %
Total average client
asset values $ 92,652 $ 71,512 $ 21,140 30 % $ 88,385 $ 67,582 $ 20,803 31 %
The rollforward of asset values in client accounts was as follows:
Three months ended September 30 , Nine
months ended
2021 % of beginning balance 2020 % of beginning balance 2021 % of beginning balance 2020 % of beginning balance
(Dollars in millions)
Asset values, beginning
of period $ 91,735 $ 68,224 $ 81,533 $ 70,537
Net change in asset
values:
Inflows 2,791 3 % 1,841 3 % 8,684 11 % 5,773 8 %
Redemptions (1,756 ) (2 )% (1,334 ) (2 )% (5,341 ) (7 )% (4,110 ) (6 )%
Net flows 1,035 1 % 507 1 % 3,343 4 % 1,663 2 %
Change in fair value, net (681 ) (1 )% 3,669 5 % 6,840 8 % 776 1 %
Foreign currency, net (323 ) * 206 * 50 * (370 ) (1 )%
Net change in asset
values 31 * 4,382 6 % 10,233 13 % 2,069 3 %
Asset values, end of
period $ 91,766 $ 72,606 $ 91,766 $ 72,606
* Less than 1%.
Average number of fee-generating positions was as follows:
Three months ended Nine months ended
September 30, Change September 30, Change
2021 2020 Positions % 2021 2020 Positions %
(Positions in thousands)
Average number of
fee-generating
positions (1):
Recordkeeping and
custodial 2,192 2,072 120 6 % 2,155 2,050 105 5 %
Recordkeeping only 762 685 77 11 % 739 672 67 10 %
Total average number
of fee-
generating positions 2,954 2,757 197 7 % 2,894 2,722 172 6 %
(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 endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 led by higher sales of variable annuities, retail mutual funds, and managed investments. This increase is mainly due to the continued strength in equity market conditions that have fueled investor confidence and emphasis on the importance of saving for the future. Average client asset values. Average client asset values increased for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 primarily due to continued market appreciation between the periods and continued positive net flows. Rollforward of client asset values. Ending client asset values increased for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 , due to continued inflows from product sales, which outpaced redemptions. Market 32
-------------------------------------------------------------------------------- performance was down slightly during the three months endedSeptember 30, 2021 compared to strong market performance in the comparable 2020 period due to a significant recovery from initial lows experienced at the onset of the COVID-19 pandemic. Average number of fee-generating positions. The average number of fee-generating positions increased during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 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 recordkeeping platform.
Changes in Investment and Savings Products Sales, Asset Values and
Accounts/Positions During the Nine Months Ended
Product sales. Investment and savings products sales increased during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 primarily due to the same factors discussed above in the three-month comparison. Average client asset values. Average client asset values increased for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 primarily due to the continued market appreciation between the periods and continued positive net flows. In addition, average client asset values in 2020 were negatively impacted by the initial market reaction to economic uncertainty associated with the onset of the COVID-19 pandemic. Rollforward of client asset values. Ending client asset values increased for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 primarily due to overall market appreciation experienced throughout 2021. Comparatively, the impact of market performance caused client asset values to remain relatively flat during the nine months endedSeptember 30, 2020 as the market recovered from the initial reaction to the COVID-19 pandemic. Elevated net flows also contributed to the increase in client asset values during the nine months endedSeptember 30, 2021 versus the prior year period. Average number of fee-generating positions. The average number of fee-generating positions increased during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 primarily due to the same factors discussed above in the three-month comparison.
Senior Health Key Performance Indicators.
Submitted Policies and Approved Policies
Submitted policies. Submitted policies represents the number of completed applications that, with respect to each such application, the applicant has authorized us to submit to the health insurance carrier. The applicant may need to take additional actions, including providing subsequent information, before the application is reviewed by the health insurance carrier. Approved policies. Approved policies represent an estimate of submitted policies approved by the health insurance carriers for the identified product during the indicated period. Not all approved policies will go in force. In general, the relationship between submitted policies and approved policies has been seasonally consistent over time. Therefore, factors impacting the number of submitted policies generally impact the number of approved policies. The number ofSenior Health submitted policies and approved policies were as follows: Three and nine months ended September 30, 2021 2020 Number of Senior Health submitted policies 20,867 N/A Number of Senior Health approved policies 18,276 N/A
The number of
unchanged for the three and nine months ended
comparable period metrics due to our acquisition of e-TeleQuote on
The acquisition of e-TeleQuote allows Primerica independent sales
representatives to generate leads in a cost-effective manner by referring
eligible Medicare participants for enrollment in policies distributed by
e-TeleQuote.
The number ofPrimerica Senior Health certified independent sales representatives equals the number of Primerica independent sales representatives who have completed the required certification and are eligible to refer participants for enrollment in policies distributed by e-TeleQuote. The number of submitted policies sourced by Primerica independent sales representatives measures the numberSenior Health submitted policies originated through Primerica independent sales force. September 30, 2021 September 30, 2020Primerica Senior Health certified independent sales representatives 17,588 N/A Submitted policies sourced by Primerica independent sales representatives 319 N/A 33
-------------------------------------------------------------------------------- The number ofPrimerica Senior Health certified independent sales representatives and submitted policies sourced by Primerica independent sales representatives are unchanged for the three and nine months endedSeptember 30, 2021 with no comparable period metrics due to our acquisition of e-TeleQuote onJuly 1, 2021 . The metrics above represent the initial launch of the referral program with certifications beginning midway through the quarter followed by policy submissions by e-TeleQuote's licensed health insurance agents commencing towards the end of the quarter. OurSenior Health segment experiences notable seasonality with the strongest demand occurring in the fourth quarter due to the Medicare Annual Election Period ("AEP") fromOctober 15th to December 7th . We also experience seasonally higher demand in the first quarter due to the Medicare Open Enrollment Period fromJanuary 1st to March 31st , which allows individuals to switch Medicare Advantage plans. Meanwhile, the second and third quarters experience seasonally lower demand as the focus for submitted policies is limited to participants that are dual eligible (Medicare and Medicaid), qualify for a special enrollment period, aged into Medicare or are enrolling off of an employer-sponsored plan.
Lifetime value of commissions and Contract acquisition costs
Lifetime value of commissions ("LTV"). LTV represents the cumulative total of
commissions estimated to be collected over the expected life of a policy for
policies approved during the period. For more information on LTV, refer to Note
13 (Revenue from Contracts with Customers) of our unaudited condensed
consolidated financial statements and the Factors Affecting our Results - Senior
Health Segment section of MD&A included elsewhere in this report.
Contract acquisition costs ("CAC"). CAC represents the total direct costs
incurred to acquire an approved policy during the period. CAC are primarily
comprised of the costs associated with generating or acquiring leads including
fees paid to Primerica certified senior health representatives as well as
compensation, licensing, and training costs associated with the workforce of
e-TeleQuote licensed health insurance agents. We incur the entire cost of
approved policies prior to enrollment, and prior to receiving our first
commission related payment.
Per unit metrics for the LTV and CAC per approved policy measure our ability to
profitably distribute
The LTV per approved policy, CAC per approved policy, and the ratio of LTV to
CAC per approved policy during the period were as follows:
Three and nine months
ended
2021
2020
LTV per policy approved during the period $ 1,180 N/A CAC per policy approved during the period $ 1,292 N/A LTV/CAC per approved policy 0.91 N/A The LTV per approved policy, CAC per approved policy, and ratio of LTV to CAC per approved policy are unchanged for the three and nine months endedSeptember 30, 2021 with no comparable period metrics due to our acquisition of e-TeleQuote onJuly 1, 2021 . Contract acquisition costs per policy are generally highest in the third quarter as we onboard new agents in anticipation of AEP and administer annual regulatory training for our agents.
Other business trends and conditions.
Standards of care.The Securities and Exchange Commission's ("SEC") regulation Best Interest ("Reg BI"), which establishes a "best interest" standard of conduct and imposes certain disclosure requirements, went into effect onJune 30, 2020 . Its higher standards of care and enhanced obligations increase regulatory and litigation risk. In addition, onDecember 15, 2020 , theDepartment of Labor ("DOL") published an interpretation of, and class exemption regarding, the rules governing fiduciary investment advice with respect to Individual Retirement Accounts ("IRAs") and other retirement accounts (the "DOL Rule"). The effective date of the DOL Rule wasFebruary 16, 2021 and the DOL extended its non-enforcement policy throughJanuary 31, 2022 with the enforcement of specific requirements extended throughJune 30, 2022 . The DOL Rule imposes a higher standard of care and enhanced obligations that require sales process changes and increase regulatory and litigation risk to our business. The interpretation and enforcement of Reg BI and the DOL Rule by theSEC and the DOL, respectively, remain uncertain and could have the potential to disrupt our investment and savings products business in theU.S. In addition to federal regulators, 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 varies 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 such laws or regulations could disrupt our brokerage or advisory businesses 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. 34 -------------------------------------------------------------------------------- Worker classification standards. There has been a trend toward administrative and legislative activity around worker classification. In 2019, for example,California enacted Assembly Bill 5 ("AB 5"), which imposes a stricter test for the classification of workers as independent contractors. Our business lines are exempted from AB 5. In 2020, theDepartment of Labor commenced a rulemaking to clarify the classification standard under the Fair Labor Standards Act. That process resulted in a final rule which since has been withdrawn by the new administration. Other federal and state legislative and regulatory proposals regarding worker classification also are under consideration. While none of these proposals have advanced into law, they demonstrate increased legislative and administrative activity around worker classification. It is difficult to predict what the ultimate outcome of this activity may be. Changes to worker classification laws could impact our business as our sales representatives are independent contractors. Restrictions on compensation models inCanada . The organization of provincial and territorial securities regulators (collectively referred to as the "Canadian Securities Administrators" or "CSA") have published final rule amendments to prohibit upfront sales commissions by fund companies for the sale of mutual funds offered under a prospectus inCanada ("DSC Ban"). The final amendments have an effective date ofJune 1, 2022 and the deferred sales charge compensation model is permitted to be used until then. The CSA indicated that the 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. We are finalizing the changes we will make in response to the DSC Ban and expect such changes to reduce near-term financial results, but allow us to realize long-term economics similar to the products we currently sell. For the nine months endedSeptember 30, 2021 , Canadian mutual funds represented approximately 13% of our total investment and savings product sales. 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
primarily driven by sales volumes, how closely actual experience matches our
pricing assumptions, terms and use of reinsurance, and expenses.
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. 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 term
because 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 will
change 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 the
policy 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.
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• Disability. Our profitability will fluctuate to the extent actual
disability 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 portfolio's current reinvestment rate gradually
increasing over seven years to a level consistent with our expectation of
future yield growth. 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. These assumed 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
interest accreted to the segment's
principles ("
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 statements 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.
• 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. 36 -------------------------------------------------------------------------------- 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 each
period 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.
Senior Health Segment. OurSenior Health segment results are primarily driven by approved policies, LTV per approved policy and tail revenue, CAC per approved policy, and other revenue. Approved policies. Approved policies represent submitted policies approved by health insurance carriers for the identified product during the indicated period. Not all approved policies will go in force. In general, the relationship between submitted policies and approved policies has been consistent over time. Therefore, factors impacting the number of submitted policies generally impact the number of approved policies. Revenue is primarily generated from approved policies and LTVs are recorded when the enrollment is approved by the applicable health insurance carrier partner. Medicare Advantage plans make up the substantial portion of the approved policies we distribute. Approved policies are influenced by the following:
• the size and growth of the population of senior citizens in the United
States;
• the appeal of government-funded Medicare Advantage plans that provide
privately administered healthcare coverage with enhanced benefits
relative to original Medicare;
• our ability to generate and obtain leads for our licensed workforce of
e-TeleQuote licensed health insurance agents;
• our ability to staff and train our e-TeleQuote licensed health insurance
agents to manage leads and help eligible Medicare participants through
the enrollment process; and
• our health insurance carrier relationships that allow us to offer plans
that most appropriately meet eligible Medicare participants' needs.
LTV per approved policy and tail revenue. When a policy is approved by the
health insurance carrier, commission revenue is recognized based on an estimated
LTV per approved policy. LTV per approved policy is the cumulative total of
commissions estimated to be collected over the expected life of a policy,
subject to constraints applied in accordance with our revenue recognition
policy. LTV per approved policy is equal to the sum of the initial commissions,
less an estimate of chargebacks for paid policies that are disenrolled in the
first policy year, plus forecasted renewal commissions. This estimate is driven
by a number of factors, including, but not limited to, contracted commission
rates from carriers, carrier mix, expected policy turnover, historical
chargeback activity and applied constraints. These factors may result in varying
values from period to period.
We recognize adjustments to revenue outside of LTV for approved policies from
prior periods when our cash collections are different from the estimated
constrained LTV's which we refer to as tail revenue. The recognition of tail
revenue is a result of a change in the estimate of expected cash collections
when actual cash collections have indicated a trend that is different from the
estimated constrained LTV for the revenue recognized at the time of approval.
Tail revenue can be positive or negative and we recognize positive adjustments
to revenue when we do not believe it is probable that a significant reversal of
cumulative revenue will occur.
CAC per approved policy. Results are also driven by the costs of acquisition,
which is defined as the total direct costs incurred per approved policy. Our
costs of acquisition are primarily comprised of the cost to generate and acquire
leads and the labor, benefits, bonus compensation and training costs associated
with our team of e-TeleQuote licensed health insurance agents. We incur our
entire cost of approved policies prior to enrollment and prior to receiving our
first commission related payment. Factors that impact our costs of acquisition
per approved policy include:
37
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• the market price of externally-generated leads; • our ability to efficiently procure internally-generated leads; and
• the productivity of our e-TeleQuote licensed health insurance agents in
converting procured leads into approved policies. Other revenue. Other revenue recognized in ourSenior Health segment includes marketing development revenue received for providing marketing services to certain health insurance carriers. Marketing development revenue provides additional compensation to deliver approved policies and are based on meeting agreed-upon objectives with certain health insurance carriers. Marketing development funds serve to offset contract acquisition costs associated with distribution of approved policies. Agreements for marketing development funds are generally short-term in nature and can vary from period to period. Corporate and Other Distributed Products Segment. We earn revenues and pay commissions and referral fees within our Corporate and Other Distributed Products segment for mortgage loan originations, prepaid legal services, auto and homeowners' insurance referrals, 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 byNational Benefit Life Insurance Company ("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. 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 2020 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 2020 Annual Report. The most significant items on our unaudited 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. With the acquisition of e-TeleQuote onJuly 1, 2021 , we added renewal commissions receivable and goodwill as critical accounting estimates as described in this section. 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. Renewal commissions receivable. e-TeleQuote earns commissions when we enroll insurance policies on behalf of our customers, third party health insurance carriers, and have no further obligations to our customers once an eligible Medicare participant is enrolled. We are entitled to commissions at the time the initial policy is approved by the health insurance carrier and are entitled to renewal commissions for as long as the policy renews. The estimate of renewal commissions is part of the variable consideration recognized and requires significant judgment including determining the number of periods in which a renewal will occur and the value of those renewal commissions to be received if renewed. We utilize the expected value approach to do this, incorporating a combination of 38
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historical lapse data and effective commission rates to estimate forecasted
renewal consideration. We apply a constraint on our estimate of renewal
commissions so that it is probable that a significant reversal in the amount of
cumulative revenue will not occur. Variable consideration in excess of the
amount constrained is recognized in subsequent reporting periods when the
uncertainty is resolved.
We utilize a practical expedient to estimate renewal commissions revenue by applying the use of a portfolio approach to policies grouped together by health insurance carrier, Medicare product type, and policy effective date (referred to as a "cohort"). This provides a practical approach to estimating the renewal commissions expected to be collected by evaluating various factors, including but not limited to, contracted commission rates, health insurance carrier mix, and persistency rates. We continuously evaluate the assumptions and inputs into our calculation of renewal commissions revenue and refine our estimates based on current information. There could be situations where new facts or circumstances, that were not available at the time of the initial estimate, may indicate that the renewal commissions receivable recognized is higher or lower than our revised estimate. In those situations, the renewal commissions receivable will be written down or up to its revised expected value by adjusting revenue.Goodwill . In applying the acquisition method of accounting for the e-TeleQuote business combination, amounts assigned to identifiable assets and liabilities acquired are based on estimated fair values as of the date of acquisition, subject to certain exceptions, with the remainder recorded as goodwill. Significant judgment is used to determine the value of the acquired assets and liabilities as well as the purchase consideration for non-controlling interests. Key assumptions used to develop these estimates include projected revenue, expenses, and cash flows, weighted average cost of capital, discount rates, estimates of customer turnover rates, estimates of terminal values, forward-looking estimates of peer company values, and assessment of the probabilities of the earnout metrics.Goodwill will be tested for impairment annually beginningJuly 1, 2022 and whenever indicators of impairment arise.Goodwill is tested at the reporting unit level, all of which is attributable to theSenior Health segment reporting unit. The determination of whether the carrying value of the reporting unit exceeds its fair value involves a high degree of estimation and can be affected by a number of industry and company-specific risk factors that are subject to change over time. During the three and nine months endedSeptember 30, 2021 , there were no changes in the accounting methodology for items that we have identified as critical accounting estimates other than as described above. For additional information regarding our critical accounting estimates, see the Critical Accounting Estimates section of MD&A included in our 2020 Annual Report. 39 --------------------------------------------------------------------------------
Results of OperationsPrimerica, Inc. and Subsidiaries Results. Our results of operations were as follows: Three months ended September 30, Change Nine months ended September 30, Change 2021(1) 2020 $ % 2021(1) 2020 $ % (Dollars in thousands) Revenues: Direct premiums$ 785,277 $ 736,606 $ 48,671 7 %$ 2,327,804 $ 2,156,331 $ 171,473 8 % Ceded premiums (401,295 ) (393,716 ) 7,579 2 % (1,211,117 ) (1,183,090 ) 28,027 2 % Net premiums 383,982 342,890 41,092 12 % 1,116,687 973,241 143,446 15 % Commissions and fees 269,796 185,302 84,494 46 % 754,529 547,159 207,370 38 % Investment income net of investment expenses 35,741 37,657 (1,916 ) (5 )% 106,970 103,333 3,637 4 % Interest expense on surplus note (15,741 ) (14,704 ) 1,037 7 % (46,382 ) (42,250 ) 4,132 10 % Net investment income 20,000 22,953 (2,953 ) (13 )% 60,588 61,083 (495 ) (1 )% Realized investment gains (losses) 1,410 642 768 * 3,876 (7,645 ) 11,521 * Other, net 18,051 16,674 1,377 8 % 49,958 45,375 4,583 10 % Total revenues 693,239 568,461 124,778 22 % 1,985,638 1,619,213 366,425 23 % Benefits and expenses: Benefits and claims 183,425 160,166 23,259 15 % 535,561 434,625 100,936 23 % Amortization of DAC 62,214 47,491 14,723 31 % 182,604 170,979 11,625 7 % Sales commissions 129,268 91,950 37,318 41 % 382,465 274,049 108,416 40 % Insurance expenses 51,901 46,109 5,792 13 % 149,246 138,572 10,674 8 % Insurance commissions 8,412 9,694 (1,282 ) (13 )% 25,990 22,871 3,119 14 % Contract acquisition costs 23,524 - 23,524 * 23,524 - 23,524 * Interest expense 7,529 7,221 308 4 % 21,814 21,614 200 1 % Other operating expenses 79,864 59,347 20,517 35 % 219,559 181,413 38,146 21 % Total benefits and expenses 546,137 421,978 124,159 29 % 1,540,763 1,244,123 296,640 24 % Income before income taxes 147,102 146,483 619 * 444,875 375,090 69,785 19 % Income taxes 35,663 34,382 1,281 4 % 107,403 89,010 18,393 21 % Net income 111,439 112,101 (662 ) (1 )% 337,472 286,080 51,392 18 % Net income attributable to noncontrolling interests (1,017 ) - (1,017 ) * (1,017 ) - (1,017 ) * Net income attributable to Primerica, Inc.$ 112,456 $ 112,101 $ 355 *$ 338,489 $ 286,080 $ 52,409 18 %
(1) Three and nine months ended
segment results of operations.
* Less than 1% or not meaningful.
Results for the Three Months Ended
Total revenues. Total revenues increased during the three months endedSeptember 30, 2021 compared to the same period in 2020 driven by higher commissions and fees earned in the Investment and Savings Products segment and growth in net premiums in the Term Life segment. Commissions and fees earned during the three months endedSeptember 30, 2021 compared to the same period in 2020 increased in part due to higher sales-based revenues driven by strong demand for variable annuity and mutual fund products. Also contributing to the increase in commissions and fees was growth in asset-based revenues, reflecting higher average client asset values driven by market appreciation and continued positive net flows since the prior year period. The increase in commissions and fees was also impacted by the acquisition of e-TeleQuote as ofJuly 1, 2021 . The increase in Term Life net premiums were driven by incremental premiums on term life insurance policies that are not subject to the IPO coinsurance transactions as well as the layering effect of strong sales of life insurance and significant positive persistency trends experienced across all policy durations as a result of favorable public sentiment for protection products since the onset of the COVID-19 pandemic. Net investment income decreased during the three months endedSeptember 30, 2021 compared to the same period in 2020 due to a$2.3 million negative impact from lower yields on the invested asset portfolio and a lower total return on the deposit asset backing the 10% coinsurance agreement that is subject to deposit method accounting. The lower year-over-year total return of$2.5 million on this deposit asset was due to a positive mark-to-market return in the prior year period as fixed income prices recovered from the low levels seen at the end of the first quarter of 2020. These decreases were partially offset by a$2.0 million positive impact from growth in the invested asset portfolio. Investment income net of investment expenses includes interest earned on our held-to-maturity 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 40
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Transaction, see Note 3 (Investments) and Note 12 (Debt) to our unaudited
condensed consolidated financial statements included elsewhere in this report.
Other, net revenues increased during the three months endedSeptember 30, 2021 compared to the same period in 2020 primarily due to marketing development revenue recognized in theSenior Health segment as a result of the acquisition of e-TeleQuote onJuly 1, 2021 . Total benefits and expenses. Total benefits and expenses increased during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 largely due to higher sales commissions in our Investment and Savings Products segment as a result of the increases in sales-based and asset-based revenues discussed above. Also contributing to the increase were the growth in benefits and claims and amortization of DAC due to growth in our in-force book of business, including persistency, which while favorable to pre-pandemic levels was lower than the peak experience in the prior year period. Benefits and claims also increased due to higher COVID-19 related claims in excess of historical trends during the three months endedSeptember 30, 2021 versus the same period in 2020. Contract acquisition costs also increased total benefits and expense as a result of the acquisition of e-TeleQuote onJuly 1, 2021 . Other operating expenses were higher in the three months endedSeptember 30, 2021 due to growth in the business, various initiatives to support business development, and transaction-related expenses incurred for the acquisition of e-TeleQuote. Income taxes. Our effective income tax rate for the three months endedSeptember 30, 2021 was 24.2% compared with 23.5% for the three months endedSeptember 30, 2020 . The increase in the effective tax rate in 2021 was primarily due to a higher portion of earnings coming from our Canadian operations which incur income taxes at a higher statutory rate than theU.S.
Results for the Nine Months Ended
Total revenues. Net premiums and Commissions and fees increased during the nine months endedSeptember 30, 2021 compared to the same period in 2020 primarily due to the same factors discussed above in the three-month comparison. Net investment income during the nine months endedSeptember 30, 2021 remained relatively consistent compared to the 2020 period as the impact of lower yields on our invested asset portfolio was generally offset by growth in the size of our invested assets portfolio. 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 and included elsewhere in this report. Realized investment gains (losses) increased to a gain during the nine months endedSeptember 30, 2021 compared to a loss in the same period in 2020 in part due to a$1.1 million positive mark-to-market adjustment on equity securities held within our investment portfolio during the nine months endedSeptember 30, 2021 compared to$4.6 million negative mark-to-market adjustment on equity securities held within our investment portfolio in the comparable 2020 period as a result of market reaction to the economic disruption caused by the onset of the COVID-19 pandemic. Also contributing to the realized investment loss during the nine months endedSeptember 30, 2020 was the recognition of$4.3 million of credit losses for specific issuers that operated in distressed industry sectors that were particularly affected by the economic disruption caused by the onset of the COVID-19 pandemic. By comparison, during the nine months endedSeptember 30, 2021 , only$0.7 million of credit losses were recognized. Other, net revenues increased during the nine months endedSeptember 30, 2021 compared to the same period in 2020 largely due to the increase in fees received for access to Primerica Online ("POL"), our primary sales force support tool, during the 2021 period. The increase in these fees is consistent with subscriber growth. Fees collected for POL subscriptions are allocated between ourTerm Life Insurance segment and our Investment and Savings Products segment based on the estimated number of sales representatives that are licensed to sell products in each segment. The increase in these fees was accompanied by higher spending reflected in insurance and other operating expenses to support and enhance POL. Also contributing to the increase were marketing development revenues recognized in theSenior Health segment as a result of the acquisition of e-TeleQuote onJuly 1, 2021 . Total benefits and expenses. Total benefits and expenses increased during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 primarily due to the factors discussed above in the three-months comparison. Income taxes. Our effective income tax rate for the nine months endedSeptember 30, 2021 was 24.1% compared with 23.7% for the nine months endedSeptember 30, 2020 . The increase in the effective tax rate in 2021 was primarily due to the same factor discussed above in the three-month comparison.
For additional information, see the Segment Results discussions below.
41 --------------------------------------------------------------------------------
Segment Results
Term Life Insurance Segment Results. Our results for the
segment were as follows:
Three months ended Nine months ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(Dollars in thousands)
Revenues:
Direct premiums $ 779,490 $ 730,273 $ 49,217 7 % $ 2,310,504 $ 2,138,024 $ 172,480 8 %
Ceded premiums (399,835 ) (392,004 ) 7,831 2 % (1,206,413 ) (1,178,155 ) 28,258 2 %
Net premiums 379,655 338,269 41,386 12 % 1,104,091 959,869 144,222 15 %
Allocated investment income 9,320 6,813 2,507 37 % 26,324 19,598 6,726 34 %
Other, net 12,476 12,717 (241 ) (2 )% 36,601 34,311 2,290 7 %
Total revenues 401,451 357,799 43,652 12 % 1,167,016 1,013,778 153,238 15 %
Benefits and expenses:
Benefits and claims 179,696 156,209 23,487 15 % 521,148 420,182 100,966 24 %
Amortization of DAC 59,287 45,529 13,758 30 % 174,106 164,099 10,007 6 %
Insurance expenses 50,534 44,800 5,734 13 % 145,160 134,272 10,888 8 %
Insurance commissions 4,345 5,946 (1,601 ) (27 )% 13,999 12,115 1,884 16 %
Total benefits and expenses 293,862 252,484 41,378 16 % 854,413 730,668 123,745 17 %
Income before income taxes
2 %
Results for the Three Months Ended
Net premiums. Direct premiums increased during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 largely due to strong sales of new policies in recent periods that contributed to growth in the in-force book of business. Also contributing to the increase in direct premiums are high levels of persistency experienced during recent periods as a result of favorable public sentiment for protection products since the onset of the COVID-19 pandemic. This is partially offset by an increase in ceded premiums, which includes$19.6 million in higher non-level YRT reinsurance ceded premiums as business not subject to the IPO coinsurance transactions ages, reduced by$11.8 million in lower coinsurance ceded premiums due to the run-off of business subject to the IPO coinsurance transactions. Allocated investment income. Allocated investment income increased during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 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 endedSeptember 30, 2021 compared to the same period in 2020 primarily due to higher claims and growth in net premiums. Total benefits and claims during the three months endedSeptember 30, 2021 includes approximately$16 million in death claims in excess of historical trends driven by$14 million of COVID-19 related claims and approximately$2 million of other claims not identified as COVID-19. Offsetting this increase was approximately$2 million of reduced benefit reserves for policy riders that provide for premiums to be waived due to disability. This compares with approximately$8 million of COVID-19 related claims and approximately$1 million of other claims not identified as COVID-19 in the third quarter 2020. Benefit reserve increases due to higher persistency were approximately$6 million for the three months endedSeptember 30, 2021 compared to approximately$8 million for the same period in 2020. Amortization of DAC. The amortization of DAC increased during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 due to growth in net premiums and lower persistency relative to the peak persistency experienced in the 2020 period. Although lower than the comparable period, persistency remained elevated in 2021 due to continued favorable public sentiment for maintaining protection products since the onset of the COVID-19 pandemic. The significant improvement in persistency has slowed down the amortization of DAC on our existing book of business in relation to pre-pandemic trends by approximately$11 million for the three months endedSeptember 30, 2021 compared to approximately$22 million for the same period in 2020. Insurance expenses. Insurance expenses increased during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 primarily due to an increase in expenses to support growth in the business and employee-related expenses. Insurance commissions. Insurance commissions decreased during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 as a result of higher non-deferrable sales force promotional activities offered in the 2020 period to incentivize the sales force during the pandemic.
Results for the Nine Months Ended
Net premiums. Direct premiums increased during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 due to the same factors discussed in the three-month comparison. This is partially offset by an increase in ceded 42
-------------------------------------------------------------------------------- premiums, which includes$59.3 million in higher non-level YRT reinsurance ceded premiums as business not subject to the IPO coinsurance transactions ages, reduced by$31.0 million in lower coinsurance ceded premiums due to the run-off of business subject to the IPO coinsurance transactions. Allocated investment income. Allocated investment income increased during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 due to the same factors discussed in the three-month comparison. Benefits and claims. Benefits and claims increased during the nine months endedSeptember 30, 2021 compared to the same period in 2020 primarily due to higher mortality experience as a result of the COVID-19 pandemic as well as larger reserve increases due to favorable persistency trends and growth in net premiums. Total benefits and claims experience increased during the nine months endedSeptember 30, 2021 by approximately$44 million of claims in excess of historical trends compared to approximately$19 million of excess claims in the same period in 2020. Nearly all of the increase in claims is due to COVID-19. Benefit reserve increases due to higher persistency were approximately$19 million for the nine months endedSeptember 30, 2021 compared to approximately$12 million for the same period in 2020. Amortization of DAC. The amortization of DAC increased during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 as a result of higher net premiums, while persistency during both nine month periods was well above historical levels. This high persistency reduced the amortization of DAC by approximately$37 million for the nine months endedSeptember 30, 2021 compared to approximately$33 million for the same period in 2020. Insurance expenses. Insurance expenses increased during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 primarily due to an increase in expenses of$11.6 million as a result of growth in the business and employee-related expenses. This increase was partially offset by a decrease in expenses of$4.4 million as a result of event cancellations and a reduction in sales force-related expenses in 2021 caused by the COVID-19 pandemic. Insurance commissions. Insurance commissions increased during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 primarily as a result of higher non-deferrable sales force incentives, specifically in the first half of 2021.
Investment and Savings Products Segment Results. Investment and Savings Products
segment results were as follows:
Three months ended Nine months ended September
September 30, Change 30, Change
2021 2020 $ % 2021 2020 $ %
(Dollars in thousands)
Revenues:
Commissions and fees:
Sales-based revenues $ 95,229 $ 65,600 $ 29,629 45 % $ 298,057 $ 209,304 $ 88,753 42 %
Asset-based revenues 113,558 86,695 26,863 31 % 323,288 246,235 77,053 31 %
Account-based revenues 21,456 21,008 448 2 % 64,424 61,690 2,734 4 %
Other, net 3,094 3,034 60 2 % 9,001 8,322 679 8 %
Total revenues 233,337 176,337 57,000 32 % 694,770 525,551 169,219 32 %
Expenses:
Amortization of DAC 2,580 1,667 913 55 % 7,641 6,072 1,569 26 %
Insurance commissions 3,747 3,377 370 11 % 11,065 9,684 1,381 14 %
Sales commissions:
Sales-based 67,745 46,821 20,924 45 % 209,969 148,217 61,752 42 %
Asset-based 53,233 39,349 13,884
35 % 150,587 111,345 39,242 35 %
Other operating expenses 36,664
33,751 2,913
9 % 111,623 104,302 7,321 7 %
Total expenses
163,969 124,965 39,004
31 % 490,885 379,620 111,265 29 %
Income before income taxes
Results for the Three Months Ended
Commissions and fees. Commissions and fees increased during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 in part due to higher sales-based revenues driven by robust demand for variable annuity and mutual fund investment products. Also contributing to the increase were growth in asset-based revenues reflecting higher average client asset values driven by market appreciation and continued positive net inflows. Amortization of DAC. Amortization of DAC increased during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 due to the difference in the market performance of the funds underlying our Canadian segregated funds product in the third quarter of 2021 compared to the third quarter of 2020. The performance of these funds was stronger in 2020 as markets rapidly recovered from lows associated with the onset of the COVID-19 pandemic. 43
-------------------------------------------------------------------------------- Sales commissions. The increase in sales-based commissions for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 was generally consistent with the increase in sales-based revenue. When considering that asset-based expenses for our Canadian segregated funds were reflected within insurance commissions and amortization of DAC, the increase in asset-based commissions for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 was consistent with the increase in asset-based revenues excluding the Canadian segregated funds. Other operating expenses. Other operating expenses increased during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 primarily due to growth in the business.
Results for the Nine Months Ended
Commissions and fees. Commissions and fees increased during the nine months
ended
due to the same factors as described in the three-month comparison above.
Amortization of DAC. Amortization of DAC increased during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 due to the same factors as described in the three-month comparison above. Sales commissions. The increase in sales-based and asset-based commissions for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 were in line with the increase in sales-based and asset-based commissions revenues. Other operating expenses. Other operating expenses increased during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 due to the same factors as described in the three-month comparison above. Senior Health Segment Results.Senior Health segment results were as follows: Three and nine months ended September 30, Change 2021 2020 $ % (Dollars in thousands) Revenues: Commissions and fees $ 21,558 N/A * * Other, net 1,378 N/A * * Total revenues 22,936 N/A * * Benefits and expenses: Contract acquisition costs 23,524 N/A * * Other operating expenses 7,902 N/A * * Total benefits and expenses 31,426 N/A * * Loss before income taxes $ (8,490 ) N/A * * * Not calculated.
Results for the Three and Nine Months Ended
As the Company acquired e-TeleQuote onJuly 1, 2021 , the results for three- and nine-month periods endedSeptember 30, 2021 for theSenior Health segment are the same.
Commissions and fees. Commissions and fees reflect lifetime revenues recognized
for the distribution of Medicare insurance products on behalf of health
insurance carriers during the period. No adjustments for tail revenue were
recognized in the third quarter.
Other, net. Marketing development revenue was received for providing marketing services on behalf of certain health insurance carriers for the three months endedSeptember 30, 2021 . Marketing development revenue provides additional compensation for delivering approved policies and are based on meeting agreed-upon objectives with certain health insurance carriers. Agreements for marketing development funds are generally short-term in nature and can vary from period to period. Contract acquisition costs. Contract acquisition costs are primarily comprised of costs associated with generating leads including fees paid toPrimerica Senior Health certified independent sales representatives as well as compensation, training and licensing costs associated with e-TeleQuote's licensed health insurance agents. Contract acquisition costs during the third quarter reflect the financial impact of heightened turnover throughout the year which led to a high level of hiring and agent-related onboarding costs during the quarter. Other operating expenses. Represents other operating expenses incurred during the period. These expenses are not directly tied to the distribution of Medicare insurance products and consist of intangible amortization, depreciation, technology and communications, and other administrative fees. Other operating expenses included$2.9 million of intangible amortization expense for intangible assets identified as part of the e-TeleQuote business combination. 44 --------------------------------------------------------------------------------
Corporate and Other Distributed Products Segment Results. Corporate and Other
Distributed Products segment results were as follows:
Three months ended Nine months ended September
September 30, Change 30, Change
2021 2020 $ % 2021 2020 $ %
(Dollars in thousands)
Revenues:
Direct premiums $ 5,787 $ 6,333 $ (546 )
(9 )%
Ceded premiums
(1,460 ) (1,712 ) (252 )
(15 )% (4,704 ) (4,935 ) (231 ) (5 )%
Net premiums
4,327 4,621 (294 ) (6 )% 12,596 13,372 (776 ) (6 )% Commissions and fees 17,995 11,999 5,996 50 % 47,202 29,930 17,272 58 % Investment income net of investment expenses 26,421 30,844 (4,423 ) (14 )% 80,646 83,735 (3,089 ) (4 )% Interest expense on surplus note (15,741 ) (14,704 ) 1,037 7 % (46,382 ) (42,250 ) 4,132 10 % Net investment income 10,680 16,140 (5,460 ) (34 )% 34,264 41,485 (7,221 ) (17 )% Realized investment gains (losses) 1,410 642 768 * 3,876 (7,645 ) 11,521 * Other, net 1,103 923 180 20 % 2,978 2,742 236 9 % Total revenues 35,515 34,325 1,190 3 % 100,916 79,884 21,032 26 % Benefits and expenses: Benefits and claims 3,729 3,957 (228 ) (6 )% 14,413 14,443 (30 ) * Amortization of DAC 347 295 52 18 % 857 808 49 6 % Insurance expenses 1,367 1,309 58 4 % 4,086 4,300 (214 ) (5 )% Insurance commissions 320 371 (51 ) (14 )% 926 1,072 (146 ) (14 )% Sales commissions 8,290 5,780 2,510 43 % 21,909 14,487 7,422 51 % Interest expense 7,529 7,221 308 4 % 21,814 21,614 200 1 % Other operating expenses 35,298 25,596 9,702 38 % 100,034 77,111 22,923 30 % Total benefits and expenses 56,880 44,529 12,351
28 % 164,039 133,835 30,204 23 %
Loss before income taxes
* Less than 1% or not meaningful.
Results for the Three Months Ended
Total revenues. Total revenues increased slightly during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 led by an increase in commissions and fees, which was primarily the result of the continued expansion of ourU.S. mortgage distribution business. Closed mortgage loan volume of$337.6 million generated mortgage commission revenues of$6.7 million during the three months endedSeptember 30, 2021 compared to closed mortgage loan volume of$160.0 million and mortgage commission revenues of$3.0 million during the three months endedSeptember 30, 2020 . These increases were partially offset by lower net investment income. The decrease in net investment income was attributed to the items discussed in thePrimerica, Inc. and Subsidiaries Results of Operations section above as well as the impact of more net investment income being allocated to theTerm Life Insurance segment. Total benefits and expenses. Total benefits and expenses increased during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 as a result of higher other operating expenses primarily due to approximately$10.0 million in transaction-related expenses incurred in connection with the acquisition of e-TeleQuote. Sales commissions and other operating expenses were$2.3 million higher driven by increased sales in ourU.S. mortgage distribution business.
Results for the Nine Months Ended
Total revenues. Total revenues increased during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 in large part due to growth in commissions and fees, which was primarily the result of the continued expansion of ourU.S. mortgage distribution business. Closed mortgage loan volume of$898.5 million generated mortgage commission revenues of$17.7 million during the nine months endedSeptember 30, 2021 compared to closed mortgage loan volume of$238.7 million and mortgage commission revenues of$4.6 million during the nine months endedSeptember 30, 2020 . Also contributing to the increase in total revenues were realized investment gains recognized in the 2021 period versus realized investment losses recognized in the 2020 period as discussed in thePrimerica, Inc. and Subsidiaries Results of Operations section above. These increases were partially offset by a decrease in net investment income during the nine months endedSeptember 30, 2021 versus the nine months endedSeptember 30, 2020 , which is primarily attributable to the impact of more net investment income being allocated to theTerm Life Insurance segment. Total benefits and expenses. Total benefits and expenses increased during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 as a result of higher other operating expenses due to approximately$12.1 million in transaction-related expenses incurred in connection with the acquisition of e-TeleQuote. Also contributing to the increase in other operating expenses were higher technology and employee related expenses. Sales commissions and other operating expenses were$8.9 million higher driven by increased sales in ourU.S. mortgage distribution business. 45 --------------------------------------------------------------------------------
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 ofSeptember 30, 2021 , 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. 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.
Details on asset mix (excluding our held-to-maturity security) were as follows:
September 30, 2021 December 31, 2020
Average rating of our fixed-maturity
portfolio A
A
Average duration of our fixed-maturity portfolio 4.8 years 4.7 years Average book yield of our fixed-maturity portfolio 3.23%
3.44%
The distribution of fixed-maturity securities in our investment portfolio
(excluding our held-to-maturity security) by rating, including those classified
as trading securities, were as follows:
September 30, 2021 December 31, 2020
Amortized cost (1) % Amortized cost (1) %
(Dollars in thousands)
AAA $ 453,451 18 % $ 433,763 19 %
AA 277,258 11 % 294,429 13 %
A 593,750 24 % 515,752 22 %
BBB 1,078,570 43 % 979,867 42 %
Below investment grade 102,746 4 % 90,947 4 %
Not rated 8,322 * 2,780 *
Total $ 2,514,097 100 % $ 2,317,538 100 %
(1) Includes trading securities at fair value and available-for-sale securities
at amortized cost.
* Less than 1%.
46
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The ten largest holdings within our fixed-maturity invested asset portfolio
(excluding our held-to-maturity security) were as follows:
September 30, 2021
Amortized Unrealized Credit
Issuer Fair value cost (1) gain (loss) rating
(Dollars in thousands)
Government of Canada $ 15,769 $ 15,306 $ 463 AAA
TC Energy Corp 12,925 12,597 328 BBB+
ConocoPhillips 12,449 11,057 1,392 A-
Enbridge Inc 12,009 11,650 359 BBB+
Province of Alberta Canada 11,766 11,377 389 A
Province of Quebec Canada 11,251 10,330 921 AA-
Western & Southern Mutual Holdings 10,417 9,641 776 AA-
Province of Ontario Canada 10,389 10,024 365 A+
Capital One Financial Corp 10,280 9,874 406 BBB
Fairfax Financial Holdings Ltd 10,122 9,880 242 BBB-
Total - ten largest holdings $ 117,377 $ 111,736 $ 5,641
Total - fixed-maturity securities $ 2,621,755 $ 2,514,097
Percent of total fixed-maturity securities 4 % 4 %
(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.
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, repurchases of common shares outstanding, interest on notes payable and our Revolving Credit Facility, general operating expenses, and income taxes. Additionally, over the next four years, use of funds at the Parent Company are expected to include the purchase of the remaining 20% minority interest of e-TeleQuote. As ofSeptember 30, 2021 , the Parent Company had cash and invested assets of$192.4 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. e-TeleQuote is a senior health insurance distributor of Medicare-related insurance plans. e-Tele-Quote collects cash receipts over a number of years after selling a plan, while the cash outflow for commission expense and other acquisition costs to sell the plans are generally recognized at the time of enrollment. Therefore, as a growing business, net cash flows at e-TeleQuote are expected to be negative for several years, with the Parent Company providing working capital to e-TeleQuote. 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. We have maintained strong cash flows despite the COVID-19 pandemic due to strong persistency and reinsurance on ceded mortality claims. 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, additional borrowings against our revolving credit facility, sales of common stock or debt instruments in the capital markets, 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. 47 -------------------------------------------------------------------------------- Cash Flows. The components of the changes in cash and cash equivalents were as follows: Nine months ended September 30, Change 2021 2020 $ (In thousands) Net cash provided by (used in) operating activities$ 435,121 $ 403,953 $ 31,168 Net cash provided by (used in) investing activities (722,557 ) (58,077 ) (664,480 ) Net cash provided by (used in) financing activities 62,275 (272,450 ) 334,725 Effect of foreign exchange rate changes on cash 3,170 575 2,595 Change in cash and cash equivalents$ (221,991 ) $
74,001
Operating Activities. Cash provided by operating activities during the nine months endedSeptember 30, 2021 increased compared to the nine months endedSeptember 30, 2020 largely due to higher cash generated by ourTerm Life Insurance and Investment and Savings Products segments. In ourTerm Life Insurance segment, the increase in cash receipts from higher premiums have more than offset increases in payments for claims and deferred policy acquisition costs. In our Investment and Savings Products segment, the increase in sales-based and asset-based revenue in the 2021 period generated higher net cash flows from operations as compared to the comparable 2020 period. Investing Activities. Cash used in investing activities increased during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 primarily due to the purchase of e-TeleQuote and higher purchases of investment securities. During the 2020 period, we temporarily paused purchases of investment securities in order to preserve liquidity at the onset of the COVID-19 pandemic. In addition, during the nine months endedSeptember 30, 2021 , purchases of securities within our investment portfolio increased due to higher interest rates which provided more attractive investment opportunities for the Company. The increase in purchases in 2021 was partially offset by higher sales of investment securities as the Company accumulated cash to fund the e-TeleQuote acquisition. Financing Activities. Financing activities was a source of cash during the nine months endedSeptember 30, 2021 compared to a use of cash during the nine months endedSeptember 30, 2020 as we did not execute share repurchases in 2021 in order to accumulate cash used to fund the acquisition of e-TeleQuote onJuly 1, 2021 . In addition, during the nine months endedSeptember 30, 2021 , cash provided by financing activities included$125 million borrowed from our Revolving Credit Facility to purchase e-TeleQuote.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.
As of
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 ofSeptember 30, 2021 ,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 only for business issued after the effective date. As a result, we expect that the 48 -------------------------------------------------------------------------------- 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 2020 Annual Report for more information on these redundant reserve financing transactions. Short-Term Borrowings. 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 ofSeptember 30, 2021 . No events of default occurred during the three and nine months endedSeptember 30, 2021 . OnJuly 1, 2021 , as part of the acquisition of e-TeleQuote,Primerica Health issued the$15.0 million Majority Shareholder Note. The Majority Shareholder Note matures and is payable in cash onJuly 1, 2022 . The rate of interest payable is 1.5% per annum.
Rating Agencies. There have been no changes to
ratings or Primerica Life's financial strength ratings since
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 ofSeptember 30, 2021 . Credit Facility Agreement. OnJune 22, 2021 , we amended and restated our unsecured$200.0 million revolving credit facility ("Revolving Credit Facility") with a syndicate of commercial banks. The Revolving Credit Facility has a scheduled termination date ofJune 22, 2026 . Amounts outstanding under the Revolving Credit Facility are borrowed, at our discretion, on the basis of either a LIBOR rate loan, or a base rate loan. LIBOR rate loans bear interest at a periodic rate equal to one-, three-, six-, or 12-month LIBOR, plus an applicable margin. Base rate loans bear interest at the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50% and (c) one-month LIBOR plus 1.00%, plus an applicable margin. The Revolving Credit Facility contains language providing for a benchmark replacement in the event that LIBOR is no longer available. 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 1.00% to 1.625% per annum and for base rate loans ranging from 0.00% 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 0.10% to 0.225% per annum of the aggregate amount of the$200.0 million commitment of the lenders under the Revolving Credit Facility that remains undrawn. As ofSeptember 30, 2021 ,$125.0 million was drawn under the Revolving Credit Facility. As ofSeptember 30, 2021 , we were in compliance with the covenants of the Revolving Credit Facility. Furthermore, no events of default have occurred under the Revolving Credit Facility in the three and nine months endedSeptember 30, 2021 .
Contractual Obligations Update. There have been no material changes in
contractual obligations from those disclosed in the 2020 Annual Report.
49
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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:
• 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;
• 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 the
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;
• non-compliance with applicable regulations could lead to revocation of our
subsidiary's status as a non-bank custodian;
• licensing requirements will impact the size of the mortgage loan sales force;
• our
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;
• the effects of economic down cycles could materially adversely affect our
business, financial condition and results of operations;
• major public health pandemics, epidemics or outbreaks, specifically, the novel
coronavirus COVID-19 ("COVID-19") pandemic, or other catastrophic events,
could materially adversely impact our business, financial condition and
results of operations;
• in the event of a disaster, our business continuity plan may not be
sufficient, which could have a material adverse effect on our business,
financial condition and results of operations;
• if one of our, or a third-party partner's, 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;
50
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• credit deterioration in, and the effects of interest rate fluctuations and
changes to benchmark reference interest rates 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 expected credit losses
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 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;
• 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;
• the current legislative and regulatory climate with regard to financial
services may 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;
• 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 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;
• any acquisition, of or investment in, businesses that we may undertake that
does not close as anticipated, perform as we expect, or that is difficult for
us to integrate could materially adversely impact our business, financial
condition and results of operations; • the market price of our common stock may fluctuate;
• due to our very limited history with e-TeleQuote, we cannot be certain that
its business strategy will be successful or that we will successfully address
the risks below or any risks not known to us that may become material;
• a failure by e-TeleQuote to comply with the requirements of
government's
carrier partners may harm e-TeleQuote's business which could have a material
adverse effect on our business, financial condition and results of operations;
• Legislative or regulatory changes to Medicare Advantage or changes to the
implementing guidance by the
harm e-TeleQuote's business which could have a material adverse effect on our
business, financial condition and results of operations;
• e-TeleQuote's inability to acquire or generate leads on commercially viable
terms, convert leads to sales or if customer policyholder retention is lower
than assumed, any of which could adversely impact our business;
• e-TeleQuote's inability to enroll individuals during the Medicare annual
election period may harm its business which could adversely impact our
business, financial condition and results of operations;
• the loss of a key carrier, or the modification of commission rates or
underwriting practices with a key carrier partner could harm e-TeleQuote's
business which could adversely impact our business, financial condition and
results of operations; and
• if e-TeleQuote's business is subject to cyber-attacks, security breaches or
otherwise unable to safeguard the security and privacy of confidential data,
including personal health information, its business may be harmed which could
have a material adverse effect on our business, financial condition and
results of operations.
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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