| Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies | (1) Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies Description of Business . Primerica, Inc. (the “Parent Company”), together with its subsidiaries (collectively, “we”, “us” or the “Company”), is a leading provider of financial products and services to middle-income households in the United States and Canada 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 acquired 80 % of e-TeleQuote Insurance, Inc. and subsidiaries (collectively, “e-TeleQuote”) through our subsidiary, Primerica Health, Inc. (“Primerica Health”) on July 1, 2021 and the remaining 20 % of e-TeleQuote on July 1, 2022 . e-TeleQuote markets Medicare-related insurance products underwritten by third-party health insurance carriers to eligible Medicare participants through its licensed health insurance agents. Our other primary subsidiaries include the following entities: Primerica Financial Services, LLC, a general agency and marketing company; Primerica Life Insurance Company (“Primerica Life”), our principal life insurance company; Primerica Financial Services (Canada) Ltd., a holding company for our Canadian operations, which includes Primerica Life Insurance Company of Canada (“Primerica Life Canada”) and PFSL Investments Canada Ltd.; and PFS Investments Inc., an investment products company and broker-dealer. Primerica Life, domiciled in Tennessee, owns National Benefit Life Insurance Company, a New York insurance company. Peach Re, Inc. (“Peach Re”) and Vidalia Re, Inc. (“Vidalia Re”) are special purpose financial captive insurance companies and wholly owned subsidiaries of Primerica Life. Peach Re and Vidalia Re have each entered into separate coinsurance agreements with Primerica Life whereby Primerica Life has ceded certain level-premium term life insurance policies to Peach Re and Vidalia Re (respectively, the “Peach Re Coinsurance Agreement” and the “Vidalia Re Coinsurance Agreement”). Basis of Presentation . We prepare our financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). These principles are established primarily by the Financial Accounting Standards Board (“FASB”). The accompanying unaudited condensed consolidated financial statements contain all adjustments, generally consisting of normal recurring accruals, which are necessary to fairly present the balance sheets as of September 30, 2023 and December 31, 2022, the statements of income, comprehensive income, and stockholders’ equity for the three and nine months ended September 30, 2023 and 2022, and cash flows for the nine months ended September 30, 2023 and 2022. Results of operations for interim periods are not necessarily indicative of results for the entire year or of the results to be expected in future periods. These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are sufficient to make the information not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Annual Report”). Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect financial statement balances, revenues and expenses and cash flows, as well as the disclosure of contingent assets and liabilities. Management considers available facts and knowledge of existing circumstances when establishing the estimates included in our financial statements. The most significant items that involve a greater degree of accounting estimates and actuarial determinations subject to change in the future are the valuation of investments, deferred policy acquisition costs (“DAC”), future policy benefit reserves and corresponding amounts recoverable from reinsurers, renewal commissions receivable, income taxes, and valuation of intangible assets and goodwill. Estimates for these and other items are subject to change and are reassessed by management in accordance with U.S. GAAP. Actual results could differ from those estimates. Consolidation. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and those entities required to be consolidated under U.S. GAAP. All material intercompany profits, transactions, and balances among the consolidated entities have been eliminated. New Accounting Principles. In August 2018, the FASB issued Accounting Standards Update No. 2018-12 , Financial Services—Insurance (Topic 944) — Targeted Improvements to the Accounting for Long-Duration Contracts (“ASU 2018-12” or “LDTI”). The amendments in this update changed accounting guidance for insurance companies that issue long-duration contracts, such as term life insurance and segregated funds products. ASU 2018-12 requires companies that issue long-duration insurance contracts to review assumptions used in measuring the liability for future policy benefits (“LFPB”) and DAC, including mortality, disability, and persistency, at least annually and update as necessary instead of locking those assumptions at contract inception and reflecting differences in assumptions and actual performance as the experience occurs. ASU 2018-12 also changed how insurance companies that issue long-duration contracts amortize DAC and determine and update the discount rate assumptions used in measuring both the LFPB and ceded reserves that are part of reinsurance recoverables while increasing the level of financial statement disclosures required. The Company adopted ASU 2018-12 on January 1, 2023 through the modified retrospective method, which applies the provisions of the standard by pivoting off the historical December 31, 2020 liability for future policy benefits (“Pre-transition Reserve”) and DAC balances just prior to January 1, 2021 (the “Transition Date”). Upon adoption, the Company recorded the following adjustments to its consolidated balance sheet as of the Transition Date. • LDTI requires entities to use market observable rates, based on an upper-medium grade fixed income instrument yield, to measure future policy benefits reserves each period. The difference between the LFPB calculated using market observable rates and the Pre-transition Reserve was recognized as part of accumulated other comprehensive income (“AOCI”) at the Transition Date. Given how low market observable rates were at the Transition Date, we recorded a reduction to AOCI of approximately $ 1.5 billion, net of income tax, as of January 1, 2021. Market observable rates have increased since the Transition Date, which resulted in a cumulative increase to AOCI of $ 377.6 million as of September 30, 2023. • Under LDTI, policies are grouped into cohorts and the net premium ratio for each policy cohort is used to calculate the LFPB. At the Transition Date, the “Net Premium Ratio” is defined as the present value of future benefits, which includes claim settlement expenses less the Pre-transition Reserve divided by the present value of the gross premiums. Expected future benefits and gross premiums use best estimate cash flow assumptions, and the locked-in discount rate at the Transition Date is used in the calculation. Under LDTI, a cohort’s Net Premium Ratio is capped at 100 %. The adjustment necessary at the Transition Date to cap the Net Premium Ratio for cohorts at 100 % was approximately $ 23 million, which was recognized as a reduction to retained earnings as of January 1, 2021. The identified impact from capping the Net Premium Ratio at 100 % was solely attributable to a limited amount of older policy year cohorts. The Company’s restated permanent and temporary stockholders’ equity from the Transition Date through December 31, 2022 is as follows:
Year ended December 31,
2022 2021
(Unaudited) (Unaudited)
(In thousands)
Equity attributable to Primerica, Inc./Permanent stockholders’ equity
Common stock:
Balance, beginning of period $ 394 $ 393
Repurchases of common stock ( 28 ) ( 1 )
Net issuance of common stock 2 2
Balance, end of period 368 394
Paid-in capital:
Balance, beginning of period 5,224 -
Share-based compensation 33,624 31,043
Net issuance of common stock ( 2 ) ( 2 )
Repurchases of common stock ( 41,079 ) ( 25,817 )
Redemption of noncontrolling interest in consolidated entities 2,233 -
Balance, end of period - 5,224
Retained earnings:
Balance, beginning of period 2,085,665 1,705,786
Cumulative effect of adoption of new accounting standards - ASU 2018-12, net of income tax - ( 22,847 )
Adjusted balance 2,085,665 1,682,939
Net income 472,067 477,362
Dividends ( 83,783 ) ( 74,636 )
Repurchases of common stock ( 320,332 ) -
Balance, end of period 2,153,617 2,085,665
Accumulated other comprehensive income (loss), net of income tax:
Balance, beginning of period ( 1,165,856 ) 129,706
Cumulative effect of adoption of new accounting standards - ASU 2018-12 - ( 1,510,618 )
Adjusted balance ( 1,165,856 ) ( 1,380,912 )
Effect of change in discount rate assumptions on the liability for future policy benefits 1,368,596 272,442
Change in foreign currency translation adjustment ( 20,826 ) 6,969
Change in net unrealized investment gains (losses) during the period: ( 304,645 ) ( 64,355 )
Balance, end of period ( 122,731 ) ( 1,165,856 )
Total permanent stockholders’ equity $ 2,031,254 $ 925,427
Redeemable noncontrolling interests in consolidated entities/Temporary stockholders’ equity
Balance, beginning of period $ 7,271 $ -
Acquisition of noncontrolling interest - 8,438
Net income (loss) attributable to noncontrolling interests ( 5,038 ) ( 1,377 )
Changes in noncontrolling interests in consolidated entities, net - 210
Redemption of noncontrolling interest in consolidated entities ( 2,233 ) -
Balance, end of period $ - $ 7,271 The impact of LDTI on the Company’s audited consolidated balance sheet as of December 31, 2022 as previously reported before the adoption of LDTI (“Previously Reported”) is as follows:
Consolidated Balance Sheet
December 31, 2022
As Previously Reported Adoption Impacts (Unaudited) As Adjusted (Unaudited)
(In thousands, except per-share amounts)
Assets:
Investments:
Fixed-maturity securities available-for-sale, at fair value (amortized cost: $ 2,801,415 ) $ 2,495,456 $ - $ 2,495,456
Fixed-maturity security held-to-maturity, at amortized cost (fair value: $ 1,340,265 ) 1,444,920 - 1,444,920
Short-term investments available-for-sale, at fair value (amortized cost: $ 69,393 ) 69,406 - 69,406
Equity securities, at fair value (historical cost: $ 29,430 ) 35,404 - 35,404
Trading securities, at fair value (cost: $ 4,229 ) 3,698 - 3,698
Policy loans and other invested assets 48,713 - 48,713
Total investments 4,097,597 - 4,097,597
Cash and cash equivalents 489,240 - 489,240
Accrued investment income 20,885 - 20,885
Reinsurance recoverables 4,015,909 ( 806,369 ) 3,209,540
Deferred policy acquisition costs, net 3,081,886 106,616 3,188,502
Renewal commissions receivable 200,043 - 200,043
Agent balances, due premiums and other receivables 254,276 - 254,276
Goodwill 127,707 - 127,707
Intangible assets, net 185,525 - 185,525
Deferred income taxes 101,333 ( 7,701 ) 93,632
Operating lease right-of-use assets 40,500 - 40,500
Other assets 428,259 - 428,259
Separate account assets 2,305,717 - 2,305,717
Total assets $ 15,348,877 $ ( 707,454 ) $ 14,641,423
Liabilities and Stockholders’ Equity:
Liabilities:
Future policy benefits $ 7,390,800 $ ( 1,092,894 ) $ 6,297,906
Unearned and advance premiums 15,422 - 15,422
Policy claims and other benefits payable 538,250 - 538,250
Other policyholders’ funds 483,769 - 483,769
Note payable 592,905 - 592,905
Surplus note 1,444,469 - 1,444,469
Income tax payable 36,876 - 36,876
Deferred income taxes 91,457 75,685 167,142
Operating lease liabilities 45,995 - 45,995
Other liabilities 580,780 - 580,780
Payable under securities lending 100,938 - 100,938
Separate account liabilities 2,305,717 - 2,305,717
Commitments and contingent liabilities (see Commitments and Contingent Liabilities note)
Total liabilities 13,627,378 ( 1,017,209 ) 12,610,169
Temporary Stockholders’ Equity
Redeemable noncontrolling interests in consolidated entities - - -
Permanent Stockholders’ Equity
Equity attributable to Primerica, Inc.:
Common stock ($ 0.01 par value; authorized 500,000 shares; issued and outstanding 36,824 shares) 368 - 368
Paid-in capital - - -
Retained earnings 1,973,403 180,214 2,153,617
Accumulated other comprehensive income (loss), net of income tax: -
Effect of change in discount rate assumptions on the liability for future policy benefits - 130,416 130,416
Unrealized foreign currency translation gains (losses) ( 11,404 ) ( 875 ) ( 12,279 )
Net unrealized investment gains (losses) on available-for-sale securities ( 240,868 ) - ( 240,868 )
Total permanent stockholders’ equity 1,721,499 309,755 2,031,254
Total liabilities and temporary and permanent stockholders’ equity $ 15,348,877 $ ( 707,454 ) $ 14,641,423 The impact of LDTI on the Company’s Previously Reported condensed consolidated statement of income for the three and nine months ended September 30, 2022 is as follows:
Condensed Consolidated Statement of Income
Three months ended September 30, 2022 Nine months ended September 30, 2022
As Previously Reported (Unaudited) Adoption Impacts (Unaudited) As Adjusted (Unaudited) As Previously Reported (Unaudited) Adoption Impacts (Unaudited) As Adjusted (Unaudited)
(In thousands, except per-share amounts)
Revenues:
Direct premiums $ 810,079 $ - $ 810,079 $ 2,417,639 $ - $ 2,417,639
Ceded premiums ( 404,870 ) - ( 404,870 ) ( 1,223,804 ) - ( 1,223,804 )
Net premiums 405,209 - 405,209 1,193,835 - 1,193,835
Commissions and fees 225,468 - 225,468 717,956 - 717,956
Investment income net of investment expenses 40,629 - 40,629 112,148 - 112,148
Interest expense on surplus note ( 16,283 ) - ( 16,283 ) ( 47,613 ) - ( 47,613 )
Net investment income 24,346 - 24,346 64,535 - 64,535
Realized investment gains (losses) 292 - 292 924 - 924
Other investment gains (losses) ( 2,991 ) - ( 2,991 ) ( 4,765 ) - ( 4,765 )
Investment gains (losses) ( 2,699 ) - ( 2,699 ) ( 3,841 ) - ( 3,841 )
Other, net 20,965 - 20,965 60,709 - 60,709
Total revenues 673,289 - 673,289 2,033,194 - 2,033,194
Benefits and expenses:
Benefits and claims 171,293 ( 11,897 ) 159,396 511,619 ( 40,270 ) 471,349
Future policy benefits remeasurement (gain) loss - 1,514 1,514 - 668 668
Amortization of deferred policy acquisition costs 90,925 ( 24,848 ) 66,077 262,367 ( 67,606 ) 194,761
Sales commissions 105,915 - 105,915 359,602 - 359,602
Insurance expenses 57,552 - 57,552 176,521 - 176,521
Insurance commissions 7,666 - 7,666 22,982 - 22,982
Contract acquisition costs 13,446 - 13,446 53,479 - 53,479
Interest expense 6,802 - 6,802 20,469 - 20,469
Goodwill impairment loss 60,000 - 60,000 60,000 - 60,000
Other operating expenses 73,791 - 73,791 239,952 - 239,952
Total benefits and expenses 587,390 ( 35,231 ) 552,159 1,706,991 ( 107,208 ) 1,599,783
Income before income taxes 85,899 35,231 121,130 326,203 107,208 433,411
Income taxes 34,092 7,477 41,569 90,069 23,033 113,102
Net income 51,807 27,754 79,561 236,134 84,175 320,309
Net income (loss) attributable to noncontrolling interests - - - ( 5,038 ) - ( 5,038 )
Net income attributable to Primerica, Inc. $ 51,807 $ 27,754 $ 79,561 $ 241,172 $ 84,175 $ 325,347
Earnings per share attributable to common stockholders:
Basic earnings per share $ 1.38 $ 0.74 $ 2.12 $ 6.26 $ 2.19 $ 8.45
Diluted earnings per share $ 1.37 $ 0.74 $ 2.11 $ 6.24 $ 2.18 $ 8.42
Weighted-average shares used in computing earnings
Basic 37,438 - 37,438 38,342 - 38,342
Diluted 37,541 - 37,541 38,452 - 38,452 Transition Impact on the Liability for Future Policy Benefits. The Company adopted ASU 2018-12 using the modified retrospective transition method. As part of the transition disclosures, ASU 2018-12 requires a reconciliation of the adoption impacts to the Company’s LFPB, separated between the changes in the present value of expected net premiums and the present value of expected future policy benefits as of the Transition Date. These balances are presented before reinsurance and income taxes for the Term Life Insurance segment, which makes up the substantial portion of the Company ’s long-duration insurance contract liabilities.
Transition Impact at January 1, 2021
(In thousands)
Present Value of Expected Premiums Term Life
Balance at December 31, 2020 $ 10,867,358
Impact to retained earnings from capping Transition Date net premium ratio ( 137,112 )
Balance at original discount rate 10,730,246
Effect of changes in discount rate assumptions 2,774,082
Balance at January 1, 2021 $ 13,504,328
Present Value of Expected Future Policy Benefits
Balance at December 31, 2020 $ 17,445,700
Effect of changes in discount rate assumptions 5,624,494
Balance at January 1, 2021 $ 23,070,194 Recently-issued accounting guidance not discussed above is not applicable, is not material to our unaudited condensed consolidated financial statements, or did not or is not expected to have a material impact on our business. Changes to Accounting Policies . All significant accounting policies remain unchanged from the 2022 Annual Report except for the following: DAC. We defer incremental direct costs of successful contract acquisitions that result from and are essential to the contract transaction(s) and that would not have been incurred had the contract transaction(s) not occurred. These deferred policy acquisition costs mainly include commissions, underwriting costs and certain other policy issuance expenses associated with successful contract acquisitions. All other acquisition-related costs, including unsuccessful acquisition and renewal efforts, are charged to expense as incurred. Also, administrative costs, rent, depreciation, occupancy, equipment, and all other general overhead costs are considered indirect costs and are charged to expense as incurred. DAC for term life insurance policies is amortized on a constant-level basis over the expected term of the contracts using face amount as the unit of measure. Contracts are grouped by cohorts consistent with the grouping used in estimating the LFPB. The cohorts are defined by the legal entity that issued the policy and the year the policy was issued. Assumptions of face amounts used to amortize DAC for term life insurance policies, including persistency and mortality, are consistent with the assumptions used in estimating the LFPB. DAC for Canadian segregated funds is amortized on a constant-level basis over the expected term of the contracts using policy count as the unit of measure. Contracts are grouped by cohorts based on the issue year of the policy. Interest is not accrued on unamortized DAC balances, and DAC is not subject to impairment testing. Separate Accounts. The separate accounts are primarily comprised of contracts issued by the Company through its subsidiary, Primerica Life Canada, pursuant to the Insurance Companies Act (Canada). The Insurance Companies Act authorizes Primerica Life Canada to establish the separate accounts. The separate accounts are represented by individual variable insurance contracts. Purchasers of variable insurance contracts issued by Primerica Life Canada have a direct claim to the benefits of the contract that entitles the holder to units in one or more investment funds (the “Funds”) maintained by Primerica Life Canada. The Funds invest in assets that are held for the benefit of the owners of the contracts. The Funds’ assets are administered by Primerica Life Canada and are held separate and apart from the general assets of the Company. The liabilities reflect the variable insurance contract holders’ interests in the Funds’ net assets based upon actual investment performance of the respective Funds. These Funds primarily consist of a series of branded investment funds known as the Asset Builder Funds, a registered retirement fund known as the Strategic Retirement Income Fund (“SRIF”), and a money market fund known as the Cash Management Fund. The principal investment objective of the Asset Builder Funds is to achieve long-term growth while preserving capital. The principal objective of the SRIF is to provide a stream of investment income during retirement plus the opportunity for modest capital appreciation. The Asset Builder Funds and the SRIF use diversified portfolios of publicly-traded Canadian stocks, investment-grade corporate bonds, Government of Canada bonds, and foreign equity investments to achieve their objectives. The Cash Management Fund invests in government guaranteed short-term bonds and short-term commercial and bank papers, with the principal investment objective being the provision of interest income while maintaining liquidity and preserving capital. Under these contract offerings, benefit payments to contract holders or their designated beneficiaries are only due upon death of the annuitant or upon reaching a specific maturity date. Benefit payments are based on the value of the contract holder’s units in the portfolio at the payment date, but are guaranteed to be no less than 75 % of the contract holder’s contribution, adjusted for withdrawals. Account values are not guaranteed for withdrawn units if contract holders make withdrawals prior to the maturity dates. Maturity dates for contracts investing in the Asset Builder Funds and Cash Management Fund vary by contract and range from 10 years from the contract issuance date to December 31, 2070 . Contracts investing in the SRIF mature when the policyholder reaches age 100, which is a minimum of 20 year s after issue . The SRIF is designed to provide periodic retirement income payments and as such, regular withdrawals, subject to legislated minimums, are anticipated. The cumulative effects of the periodic withdrawals are expected to substantially reduce both account and minimum guaranteed values prior to maturity. Both the asset and the liability for the separate accounts reflect the net value of the underlying assets in the portfolio as of the reporting date. Primerica Life Canada’s exposure to losses under the guarantee at the time of account maturity is limited to contract holder accounts that have declined in value more than 25 %, adjusted for withdrawals since the contribution date, prior to maturity. As maturity dates are of a long-term nature, the likelihood that guarantee payments will be required at any given point is very small. Additionally, the portfolios consist of a very large number of individual contracts, further spreading the risk related to the guarantee. The length of the contract terms provides significant opportunity for the underlying portfolios to recover any short-term losses prior to maturity or the death of the contract holder. The Company has estimated the fair value associated with the market risk benefits provided by these limited guarantees to be immaterial. Furthermore, the Funds’ investment allocations are aligned with the maturity risks of the related contracts and include investments in Government Strip Bonds and floating-rate notes. Future Policy Benefits. The LFPB on traditional life insurance products is established for future policy benefits, which includes death benefits, waiver of premium benefits and claim settlement expenses. The LFPB is calculated as the present value of expected future benefits less the present value of expected future net premiums receivable under the contracts. Net premiums are defined as the portion of the gross premiums received from policyholders that are needed to pay for all benefits. The assumptions underlying the LFPB include mortality, persistency, disability rates, and other assumptions that reflect our best estimate based on our historical experience and modified, as necessary, to reflect non-recurring and/or anticipated trends. The LFPB is estimated by grouping insurance policies into cohorts. Policy cohorts for the Term Life Insurance segment are based on the legal entity that issued the policy and the year the policy was issued. The cash flows and assumptions underlying the LFPB are unlocked each quarter to reflect differences between actual and expected experience. In general, assumption changes, to the extent necessary, are expected to only occur during the third quarter when we update our experience studies. However, they may occur at any time based on emerging experience. The impact of unlocking will be partly reflected in the current period and partly spread to future periods based on the remaining duration of the impacted cohort(s). The catch-up is retroactive back to the later of the Transition Date or issue date, after reinsurance recoverables and is recognized as a remeasurement gain or loss as a separate component of benefits and claims expense in the unaudited condensed consolidated statements of income. The ceded reserve balances included in reinsurance recoverables are calculated in the same manner as the LFPB by cohort and apply best estimate assumptions and quarterly unlocking. The Company uses discount rates applied by country to align with local currency cash flows. Discount rates consist of yield curves that are developed using Bloomberg’s Evaluated Pricing Product (BVAL) based on senior unsecured fixed rate bonds ratings of A+, A or A-. The discount rate assumption is updated quarterly, and the impact of remeasuring the net LFPB, after reinsurance recoverables from changes in the locked-in discount rate assumption is reflected in other comprehensive income in the consolidated statements of comprehensive income. The LFPB we establish is necessarily based on estimates, assumptions and our analysis of historical experience. Factors that could cause prospective assumptions to be different from historical experience include but are not limited to changes to our term life product series, economic and societal trends, new pharmaceutical drugs, and the impact of regulatory changes. Our results depend upon the extent to which our actual experience is consistent with the assumptions we use in determining the LFPB. The assumptions and estimates underlying the LFPB require significant judgment and, therefore, are inherently uncertain. Reclassifications. Certain reclassifications have been made to prior period amounts to conform to current period reporting classifications. These reclassifications had no impact on net income or total stockholders’ equity. |
