In Canada, we lease general office space in Mississauga, Ontario, under a lease expiring in October 2030 and warehouse and printing operation space in Mississauga, Ontario, under a separate lease also expiring in October 2018.
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 three-year period ended December 31, 2017. As a result, the following discussion should be read in conjunction with the consolidated financial statements and accompanying notes that are included herein. 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 in “Risk Factors”. Actual results may differ materially from those contained in any forward-looking statements.
The relative strength and stability of financial markets and economies in the United States and Canada affect our growth and profitability. Our business is, and we expect will continue to be, influenced by a number of industry-wide and product-specific trends and conditions. Economic conditions, including unemployment levels and consumer confidence, influence investment and spending decisions by middle-income consumers, who are generally our primary clients. These conditions and factors also impact prospective recruits’ perceptions of the business opportunity that becoming a Primerica sales representative offers, which can drive or dampen recruiting. Consumer spending and borrowing levels affect how consumers evaluate their savings and debt management plans. In addition, interest rates and equity market returns impact consumer demand for the savings and investment products we distribute. Our 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 in Canada, as reported in U.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 in U.S. dollars. The effects of these trends and conditions are discussed below and in the Results of Operations section.
Our ability to increase the size of our independent sales force is largely based on the success of our sales force’s recruiting efforts as well as training and motivating recruits to get licensed to sell life insurance. We believe that recruitment and licensing levels are important to sales force trends, and growth in recruiting and licensing is usually indicative of future growth in the overall size of the sales force. Recruiting changes do not always result in commensurate changes in the size of our licensed sales force because new recruits may obtain the requisite licenses at rates above or below historical levels.
The size of our life-licensed sales force increased to 126,121 sales representatives at December 31, 2017 from 116,827 at December 31, 2016 and 106,710 at December 31, 2015, primarily due to strong recruiting trends in recent periods and lower non-renewals during the year. The growth in the number of our life-licensed sales representatives as of December 31, 2017 was not significantly affected by the additional recruits from the hurricane-affected areas who received the IBA fee waivers.
The face amount of term life insurance policies in force increased 5% during 2017 as compared to 2016 primarily due to the positive impact of strong policy sales and the consistent level of terminations as a percentage of the beginning face amount in force, which allowed issued face amount to outpace policy terminations face amount. As a percentage of the beginning face amount in force, issued face amount as well as terminations remained relatively consistent with the prior year. The continued strengthening of the Canadian dollar spot rate relative to the U.S. dollar also favorably impacted the face amount in force during 2017. Our average issued face amount increased modestly in 2017 to approximately $244,800 compared to approximately $241,500 in 2016.
We receive recordkeeping fees by mutual fund positions. An individual client account may include multiple mutual fund positions. We may also receive fees earned for custodial services that we provide to clients with retirement plan accounts that hold positions in these mutual funds.
Product sales. The increase in investment and savings product sales in 2017 from 2016 was largely attributed to the positive impact of market performance on consumer demand for U.S. retail mutual funds in recent periods as well as increased sales of managed investments reflecting the launch of the Primerica Advisors Lifetime Investment Platform product during the second quarter of 2017. These increases were partially offset by lower sales of variable annuity products, in line with the industry, as well as lower sales of fixed indexed annuity products reflecting strong prior year sales, lower demand for principal protection products by our clients in 2017, and a continued shift in larger size trades to managed accounts and retail mutual funds.
In 2016, investment and savings product sales decreased from 2015 largely due to lower variable annuity sales, partially offset by positive sales in U.S. retail mutual fund and fixed indexed annuity sales. Our annuity sales activity in 2016 was consistent with an industry-wide shift from variable annuities to fixed indexed annuities while positive market performance in periods leading up to and including 2016 increased demand for U.S. retail mutual funds.
Rollforward of client asset values. Client asset values followed a multi-year growth trend during 2017 primarily due to strong market performance that continued in 2017 combined with the positive net inflows from product sales. Additionally, the strengthening of the Canadian dollar spot rate relative to the U.S. dollar also contributed to the increase in client asset values in 2017.
The growth in client asset values in 2016 from 2015 was also driven by strong market performance and positive net inflows from product sales. The impact of the translated value of client assets in Canada due to the strengthening of the Canadian dollar relative to the U.S. dollar also contributed to the increase in client asset values in 2016 from 2015.
Average number of fee-generating positions. The average number of fee-generating positions increased slightly in 2017 from 2016, while also increasing in 2016 from 2015, reflecting the layered effect of growth in new product sales outpacing redemptions for those mutual funds and managed accounts investments that are serviced on the Company’s recordkeeping and custodial services platform. Partially offsetting the growth in recordkeeping fee-generating positions in 2017 was the launch of the Lifetime Investment Platform, for which we do not earn recordkeeping fees, and the closing of the Freedom Portfolios product line to new investments, for which we do earn recordkeeping fees.
also issued new exemptions and amended several existing exemptions. On February 3, 2017, the President of the United States issued a memorandum directing the DOL to review the DOL Fiduciary Rule and the exemptions to determine whether they should be revised or rescinded. The DOL Fiduciary Rule and transitional exemptions became applicable on June 9, 2017, with the final exemptions scheduled to go into effect on July 1, 2019. The period from June 9, 2017 to July 1, 2019 is referred to as the “Transition Period.” The DOL has stated that it is conducting the mandated review and will make the determinations directed by the President’s memorandum during the Transition Period.
Redomestication. Primerica Life Insurance Company (“Primerica Life”), our principal life insurance underwriting company, redomesticated from Massachusetts to Tennessee in 2017. As a Tennessee-domiciled life insurance company, Primerica Life will incur lower retaliatory premium taxes and representatives licensing fees than previously incurred as a Massachusetts-domiciled life insurance company. The impact of the reduction in these taxes and fees in 2017 is discussed in the “Results of Operations” section included elsewhere in MD&A. The redomestication of Primerica Life to Tennessee also allows Primerica Life to adopt the NAIC’s model regulation for determining statutory accounting reserves using a principle-based approach (“principle-based reserves” or “PBR”) effective January 1, 2018. For discussion regarding the impact of PBR on our consideration of future redundant reserve financing transactions, refer to the “Liquidity and Capital Resources” section included elsewhere in MD&A.
U.S Tax Reform. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”) was enacted in the United States. The Tax Reform Act includes a broad range of changes to federal tax legislation including changes to corporate and personal income tax rates, income tax deductions, and international tax provisions. The Tax Reform Act represents the most significant and fundamental changes to the U.S. tax code since 1986.
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.
Interest Rates. We use an assumption for future interest rates that initially reflects the current low interest rate environment gradually increasing to a level consistent with historical experience. Both DAC and the future policy benefit reserve liability increase with the assumed interest rate. Since DAC is higher than the future policy benefit reserve liability in the early years of a policy, a lower assumed interest rate generally will result in lower profits. In the later years, when the future policy benefit reserve liability is higher than DAC, a lower assumed interest rate generally will result in higher profits. 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 Term Life Insurance segment in an amount equal to the assumed net interest accreted to the segment’s U.S. generally accepted accounting principles (“U.S. GAAP”)-measured future policy benefit reserve liability less DAC. All remaining net investment income, and therefore the impact of actual interest rates, is attributed to the Corporate and Other Distributed Products segment.
Insurance expenses. Insurance expenses are reduced by the allowances received from coinsurance. There is no impact on insurance expenses associated with our YRT contracts.
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 recordkeeping positions and custodial-fee-generating accounts we administer.
Sales. We earn commissions and fees, such as dealer re-allowances, and marketing and support 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 in the United States and Canada, as well as by the size and productivity of our 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 our 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.
sales of a higher proportion of mutual fund products sold will impact the timing and amount of revenue we earn given the marketing, support, recordkeeping and custodial services we provide for the various mutual fund products we distribute.
The year-over-year increase in the year-end exchange rates used by the Company to translate our Canadian dollar functional currency assets and liabilities into U.S. dollars was 7% in 2017 from 2016 and 4% from 2016 to 2015. The year-over-year increase in the
average exchange rates used by the Company to translate our Canadian dollar functional currency revenues and expenses into U.S. dollars was 2% in 2017 from 2016 and it decreased 4% in 2016 from 2015.
During the year ended December 31, 2017, the Company recognized the estimated transition effect of revaluing its deferred tax assets and liabilities and the inclusion of mandatory deemed repatriation of foreign earnings due to the enactment of the Tax Reform Act. The transition effect on the Company’s net income is described in the Results of Operations section included elsewhere in MD&A. The reduction of the federal corporate tax rate, effective January 1, 2018, will reduce the amount of federal income taxes incurred by the Company.
In particular, the balance of DAC in our Term Life Insurance segment is susceptible to differences between estimated persistency assumptions and actual persistency experienced. If actual lapses are different from pricing assumptions for a particular period, the amount of DAC amortized for that period will be affected. For example, if actual annual lapses at each policy duration are 10% higher, the additional DAC balance as of December 31, 2017 that would be amortized is approximately $20 million. To further illustrate, if we expect 1,000 policies in the first policy duration to lapse, this sensitivity demonstration assumes that an additional 10%, or 1,100 in total, first duration policies actually lapse. We believe that a 10% higher annual lapse rate is a reasonably possible variation. Higher lapses in the early durations would have a greater effect on DAC amortization since the DAC balances are higher at the earlier durations. Due to the inherent uncertainties in making assumptions about future events, materially different experience from expected results in persistency could result in a material increase or decrease of DAC amortization in a particular period. Differences between actual and expected persistency also impact the balance of future policy benefit reserves and reinsurance recoverables as discussed below.
Future Policy Benefit Reserves and Reinsurance. Liabilities for future policy benefits on our term life insurance products have been computed using a net level method and include assumptions as to mortality, persistency, interest rates, and other assumptions based on our historical experience, modified as necessary for new business to reflect anticipated trends and to include provisions for possible adverse deviation. Reserves related to reinsured policies are accounted for using assumptions consistent with those used to determine the future policy benefit reserves and are included in Reinsurance recoverables in our consolidated balance sheets. Similar to the term
life insurance DAC discussion above, we do not modify the assumptions used to establish future policy benefit reserves during the policy term unless recoverability testing deems them to be inadequate and there is no remaining DAC associated with the underlying policies. Our results depend significantly upon the extent to which our actual experience is consistent with the assumptions we used in determining our future policy benefit reserves. Our future policy benefit reserve assumptions and estimates require significant judgment and, therefore, are inherently uncertain. We cannot determine with precision the ultimate amounts that we will pay for actual claims or the timing of those payments.
For additional information on future policy benefits and reinsurance, see Note 1 (Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies) and Note 6 (Reinsurance) to our consolidated financial statements included elsewhere in this report.
Income Taxes. We account for income taxes using the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to (i) temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and (ii) operating loss and tax credit carryforwards. Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not applicable to the periods in which we expect the temporary difference will reverse. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. For example, as of December 31, 2017, we measured our deferred tax assets and liabilities for temporary differences subject to U.S. federal income tax using the 21% statutory rate that becomes effective on January 1, 2018 as a result of the Tax Reform Act enacted on December 22, 2017. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date and, therefore, we have recognized the impact from the previous 35% statutory rate to the updated 21% statutory rate through income during the year-ended December 31, 2017.
In light of the multiple tax jurisdictions in which we operate, our tax returns are subject to routine audit by the Internal Revenue Service and other taxation authorities. These audits at times may produce alternative views regarding particular tax positions taken in the year(s) of review. As a result, the Company records uncertain tax positions, which require recognition at the time when it is deemed more likely than not that the position in question will be upheld. Although management believes that the judgment and estimates involved are reasonable and that the necessary provisions have been recorded, changes in circumstances or unexpected events could adversely affect our financial position, results of operations, and cash flows.
Invested Assets. We hold primarily fixed-maturity securities, including bonds and redeemable preferred stocks, and equity securities, including common and non-redeemable preferred stock. We have classified these invested assets as available-for-sale, except for the securities of our U.S. broker-dealer subsidiary, which we have classified as trading securities. We also hold a credit-enhanced note, which we classified as a held-to-maturity security that was issued in exchange for a surplus note with an equal principal amount as part of a redundant reserve financing transaction. All of these securities are carried at fair value, except for the held-to-maturity security, which is carried at amortized cost. Unrealized gains and losses on available-for-sale securities, except for other-than-temporary impairments (“OTTI”) discussed below, are included as a separate component of other comprehensive income in our statements of comprehensive income. Beginning January 1, 2018, changes in unrealized gains and losses on available-for-sale equity securities will be recognized in net income due to the adoption of Accounting Standards Update No. 2016-01, Financial Instruments-Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). Changes in fair value of trading securities are included in net income in the accompanying consolidated statements of income in the period in which the change occurred.
OTTI. The determination of whether a decline in fair value of available-for-sale securities below amortized cost is other-than-temporary is subjective. Furthermore, this determination can involve a variety of assumptions and estimates, particularly for invested
assets that are not actively traded in established markets. We evaluate a number of quantitative and qualitative factors when determining the impairment status of individual securities, including issuer-specific risks as well as relevant macroeconomic risks.
Realized investment gains (losses), including OTTI. Primarily reflects the difference between amortized cost and amounts realized on the sale of invested assets, as well as OTTI charges.
Primerica, Inc. and Subsidiaries Results. Our results of operations for the years ended December 31, 2017, 2016, and 2015 were as follows:
Total revenues. Total revenues increased in 2017 from 2016 primarily due to the cumulative effect of incremental premiums on term life insurance policies that are not subject to the IPO coinsurance transactions, as well as higher direct premiums reflecting strong term life insurance policy sales in recent periods. Commissions and fees from our Investment and Savings Products segment increased in 2017 compared to 2016 largely as a result of growth in client asset values, reflecting strong market performance and positive net inflows.
Other, net revenues increased during 2017 compared to 2016 largely due to the increase in fees collected for POL subscriptions, consistent with subscriber growth, as the size of our independent sales force has increased. The increase in these fees was accompanied by higher technology spending incurred primarily to support and enhance POL as noted below in the “Total benefits and expenses” section.
subject to deposit method accounting. This increase was partially offset by approximately $2.1 million of lower investment income due to lower yield on a slightly larger invested asset portfolio.
After factoring in the transition impact of the Tax Reform Act, our effective income tax rate in 2017 was 2.1% lower than our effective income tax rate in 2016. This remaining year-over-year change in our effective tax rate was primarily attributable to the recognition of excess tax benefits of approximately $6.1 million resulting from the difference between the share price of our common stock on the grant date of equity awards and the date that the sales restrictions on these awards lapsed. This recognition resulted from the adoption of Accounting Standards Update No 2016-09 (“ASU 2016-09”) Compensation-Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting, effective January 1, 2017.
In 2016 and 2015, our effective tax rate was relatively consistent at 35.0%, and 34.7%, respectively.
Net premiums. Direct premiums grew in 2017 from 2016 primarily due to the increase in the number of new policies issued in recent periods and growth in the in-force book of business. The change in ceded premiums includes approximately $46.8 million in higher
non-level YRT reinsurance ceded premiums as business not subject to the IPO coinsurance transactions ages, largely offset by approximately $44.9 million in lower coinsurance ceded premiums due to the run-off of business subject to the IPO coinsurance transactions. The continued impact from the increase in direct premiums combined with the minimal change in ceded premiums caused net premiums to grow at a higher rate than direct premiums. Additionally, net premiums increased as beginning in 2017, policies reaching the end of their initial level term period are no longer ceded under the IPO coinsurance transactions.
Direct premiums in 2016 increased in comparison to 2015 largely due to the increase in the number of new policies issued in recent periods. The change in ceded premiums primarily includes approximately $54.6 million in higher non-level YRT reinsurance ceded premiums as business not subject to the IPO coinsurance transactions ages, partially offset by approximately $48.4 million in lower coinsurance ceded premiums due to the run-off of business subject to the IPO coinsurance transactions. The sustained impact of growth in direct premiums and the run-off of business subject to the IPO coinsurance transactions resulted in net premiums growing faster than direct premiums.
Insurance commissions. Insurance commissions for 2017 increased in comparison to 2016 primarily due to higher non-deferred commissions on new business in 2017 and renewed policies that reached the end of their initial level term period in 2017 and are no longer ceded under the IPO coinsurance agreements. Insurance commissions in 2016 remained relatively consistent with 2015.
Investment and Savings Products Segment. Our results of operations for the Investment and Savings Products segment for the years ended December 31, 2017, 2016, and 2015 were as follows:
The modest increase in commissions and fees in 2016 from 2015 was largely attributable to the decline in sales-based revenues, which was primarily driven by lower variable annuity sales. Asset-based revenues increased in 2016 compared to 2015 due to the increase in average client asset values. Account-based revenues also increased in 2016 compared to 2015 primarily due to an increase in our account-based fee structure on U.S. qualified accounts, which accounted for a year-over-year increase of approximately $4.1 million, as well as the increase in the average number of fee-generating positions in mutual funds and managed accounts investments that are serviced on the Company’s recordkeeping and custodial services platform.
In 2016, amortization of DAC on our Canadian segregated funds product was lower compared to 2015 largely due to the impact of favorable 2016 segregated funds market performance.
Insurance commissions increased in 2016 compared with 2015 largely due to a change in the trail commission rate earned by the sales force on our Canadian segregated funds during the second quarter of 2015.
Sales commissions. The increase in sales-and asset-based commissions was relatively consistent with the growth in sales- and asset-based revenues, respectively. 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 was relatively consistent with the increase in asset-based revenues excluding Canadian segregated funds.
Other operating expenses. Other operating expenses increased in 2017 from 2016 largely due to growth in expenses of approximately $2.4 million based on client assets, higher costs of approximately $1.8 million related to the launch of the new Primerica Advisors Lifetime Investments Platform during the second quarter of 2017, and technology spending of approximately $1.7 million for a new
Total revenues. The largest component of the decrease in total revenues in 2017 from 2016 was attributable to the decline in realized investment gains (losses), including OTTI as well as lower allocated investment income net of investment expenses. Realized investment gains (losses), including OTTI losses were lower in 2017 versus 2016 primarily due to gains recognized in the second quarter of 2016 from the sale certain securities pursuant to which the Company was able to reduce its exposure to specific issuers. Also contributing to the decreased in total revenues was the decline in net premiums due to the run-off of NBLIC’s discontinued lines of insurance. These decreases in total revenues were partially offset by the increase in commissions and fees due to the stronger sales of other fee-based distributed products.
Total revenues in 2016 increased in comparison to 2015 mostly due to the increase in realized investment gains (losses), including OTTI losses from the gains recognized in the second quarter of 2016 as well as a lower amount of impairments on certain investments in our invested asset portfolio. Also contributing to the increase in revenues in 2016 from 2015 was higher commissions and fees due to the sales growth in other fee-based distributed products. The continued run-off of NBLIC’s non-term life insurance block of business slightly offset the increase in total revenues in 2016 versus 2015.
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 the U.S. and Canada. In addition, as of December 31, 2017, we did not hold any country of issuer concentrations outside of the U.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.
Deferred policy acquisition costs, net. The increase in DAC was primarily a result of the cumulative impact of incremental commissions and expenses deferred as a result of new business in 2017, which was not subject to the IPO coinsurance agreements.
uses of funds by the Parent Company include the payments of stockholder dividends, interest on notes payable, general operating expenses, and income taxes, as well as repurchases of shares outstanding. During 2017, our life insurance underwriting companies declared and paid ordinary dividends of $160.9 million to the Parent Company. See Note 15 (Statutory Accounting and Dividend Restrictions) to our consolidated financial statements included elsewhere in this report for more information on insurance subsidiary dividends and statutory restrictions. In addition, our non-life insurance subsidiaries declared and paid dividends of approximately $96.0 million to the Parent Company in 2017. At December 31, 2017, the Parent Company had cash and invested assets of approximately $112.1 million.
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 anticipate that cash flows from our businesses will continue to provide sufficient operating liquidity over the next 12 months. We do not expect after tax cash flows to change significantly as a result of the Tax Reform Act given that lower tax payments caused by the reduction of the U.S. federal corporate income tax rate to 21% effective January 1, 2018 will be largely offset by provisions in the Tax Reform Act that extend the time period for which we are able to realize tax deductions for deferred acquisition costs and policy reserves from our insurance businesses.
Operating activities. The increase in cash flows from operating activities during 2017 versus 2016 was driven by higher cash receipts from the collection of premium revenues in excess of benefits and claims paid in our Term Life Insurance segment. Growth in direct premiums as well as the additional layering of net premiums from term life insurance policies not subject to the IPO coinsurance transactions has continued to generate positive incremental cash flows. The impact of growing net premiums, as discussed earlier in the “Results of Operations” section, contributed to positive incremental cash flows after payments are made for policy acquisition costs during the first year that policies are issued. In addition, the timing of receipts for reinsured claims as of year-end contributed to the increase in cash provided by operating activities in 2017 as compared with 2016. The increase in operating cash flows was partially offset by higher year-over-year payments for policy acquisition costs associated with the increase in issued term life insurance policies in 2017 as well as the timing impact of Canadian income tax remittances attributable to the 2016 tax year.
The moderate decrease in cash used in investing activities in 2016 from 2015 was primarily driven by lower purchases of fixed-maturity securities as the Company accumulated a higher balance of short-term cash equivalent investments at the end of the year in pursuit of opportunities to reinvest in a rising interest rate environment. The decrease in cash used was partially offset by higher capital expenditures in 2016 for our information technology infrastructure.
In Canada, an insurer’s minimum capital requirement is overseen by the Office of the Superintendent of 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 of December 31, 2017, Primerica Life Canada was in compliance with Canada’s minimum capital requirements as determined by OSFI.
We have established Peach 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 2016 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. PLIC plans to adopt PBR on January 1, 2018 and NBLIC will adopt PBR when adopted by the state insurance department in New York. The new principle-based reserve regulation will significantly reduce the statutory policy benefit reserve requirements, but will only apply for business issued after the effective date. As a result, we expect that the adoption of PBR will significantly reduce the need to engage in future redundant reserve financing transactions for business issued after the effective date. See Note 4 (Investments), Note 10 (Debt) and Note 16 (Commitments and Contingent Liabilities) to our consolidated financial statements included elsewhere in this report for more information on these redundant reserve financing transactions.
As of December 31, 2017, Primerica Life’s financial strength ratings were as follows:
Short-Term Borrowings. We had no short-term borrowings as of or during the year ended December 31, 2017.
Income tax payable represents income taxes owed at year-end and includes the estimated tax on mandatory deemed repatriated Canadian earnings stipulated by the Tax Reform Act.
We have audited the accompanying consolidated balance sheets of Primerica, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and financial statement schedules I, II, III, and IV (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Subsequent Events. The Company has evaluated subsequent events for recognition and disclosure for events and transactions after the date of the consolidated financial statements at December 31, 2017.
Equity securities, including common and nonredeemable preferred stocks, are classified as AFS and are carried at fair value. When quoted market values are unavailable, we obtain estimates from independent pricing services or estimates fair value based upon a comparison to quoted issues of the same issuer or of other issuers with similar characteristics.
Embedded conversion options associated with fixed-maturity securities are bifurcated from the fixed-maturity security host contracts and separately recognized as equity securities. The change in fair value of these bifurcated conversion options is recorded in realized gains (losses), including OTTI in the accompanying consolidated statements of income.
Cash and Cash Equivalents. Cash and cash equivalents include cash on hand, money market instruments, and all other highly liquid investments purchased with an original or remaining maturity of three months or less at the date of acquisition.
DAC for term life insurance policies is amortized over the initial premium-paying period of the related policies in proportion to premium income. DAC for Canadian segregated funds is amortized over the life of the underlying policies at a constant rate based on
Intangible Assets. Intangible assets are amortized over their estimated useful lives. Any intangible asset that was deemed to have an indefinite useful life is not amortized but is subject to an annual impairment test. An impairment exists if the carrying value of the indefinite-lived intangible asset exceeds its fair value. For the other intangible assets, which are subject to amortization, an impairment is recognized if the carrying amount is not recoverable and exceeds the fair value of the intangible asset.
We have an indefinite-lived intangible asset related to the 1989 purchase of the right to contract with our sales force. This asset represents the core distribution model of our business, which is our primary competitive advantage to profitably distribute term life insurance and investment and savings products on a significant scale, and as such, is considered to have an indefinite life. This indefinite-lived intangible asset is supported by a significant portion of the discounted cash flows of our future business. We assessed this asset for impairment as of October 1, 2017 and determined that no impairment had occurred. There have been no subsequent events requiring further analysis.
Funds. Separate account operating results relating to contract holders’ interests are excluded from our consolidated statements of income.
Policyholder Liabilities. Future policy benefits are accrued over the current and expected renewal periods of the contracts. Liabilities for future policy benefits on traditional life insurance products have been computed using a net level method, including assumptions as to interest rates, mortality, persistency, and other assumptions based on our experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviation. The underlying mortality tables are the Society of Actuaries (“SOA”) 65-70, SOA 75-80, SOA 85-90, and the 91 Bragg, modified to reflect various underwriting classifications and assumptions. Interest rate reserve assumptions at December 31, 2017 and 2016 ranged from approximately 3.5% to 7.0%. For policies issued in 2010 and after, we have been using an increasing interest rate assumption to reflect the historically low interest rate environment. The liability for policy claims and other benefits payable on traditional life insurance products includes estimated unpaid claims that have been reported to us and claims incurred but not yet reported.
New Accounting Principles. In March 2016, the FASB issued Accounting Standards Update No 2016-09 Compensation-Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 intends to simplify several aspects of the accounting for share-based payment transactions, including the recognition of income tax consequences of awards, the classification of awards as either equity or liabilities, the method of recognizing award forfeitures, and the presentation of items within the statement of cash flows. The most notable impact on the Company’s financial statements involved the change in accounting for the income tax consequences associated with share-based payment transactions in the income statement. Prior to the adoption of ASU 2016-09, the tax effect of the difference between the cumulative compensation cost of a share-based award recognized for financial reporting purposes and the deduction of the award for tax purposes (“excess tax benefits or deficiencies”) was recognized as an adjustment to additional paid-in capital in the statement of stockholders’ equity. The amendments in ASU 2016-09 require that the excess tax benefits or deficiencies be recognized as a reduction to or an increase of income tax expense in the income statement. We adopted the amendments in ASU 2016-09 pertaining to excess tax benefits or deficiencies in 2017 on a prospective basis, which resulted in a reduction of income tax expense of approximately $6.1 million for the excess tax benefit of share-based transactions for the year ended December 31, 2017. ASU 2016-09 also changes the presentation of excess tax benefits or deficiencies in the cash flow statement from a financing activity to an operating activity. Therefore, we have presented the excess tax benefits or deficiencies as cash flows from operating activities within the accompanying consolidated statements of cash flows for all periods presented. The adoption of all other amendments outlined in ASU 2016-09 had either no impact to our financial statements or an immaterial impact to our financial statements.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments-Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 intends to enhance the reporting model for financial instruments and addresses certain aspects of recognition, measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. The amendments in ASU 2016-01 are effective for the Company beginning in fiscal year 2018. The recognition and measurement provisions of ASU 2016-01 will be adopted by means of a cumulative-effect adjustment to the balance sheet as of January 1, 2018 and its primary impact on the Company will be the recognition of all unrealized gains and losses on available-for-sale equity securities in net income. Currently, all unrealized gains and losses (except for other-than-temporary impairment) on available-for-sale equity securities are recognized in other comprehensive income (loss). The impact of adopting this standard will result in an immaterial adjustment to retained earnings on January 1, 2018, equal to the value of the net unrealized gains on available-for-sale equity securities as of December 31, 2017. See Note 4 (Investments) for more details of unrealized gains and losses on available-for-sale equity securities held by the Company as of December 31, 2017.
In February 2016, FASB issued Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases (ASC 842) that requires lessees to recognize lease assets and lease liabilities on the balance sheet. The amendments in ASU 2016-02 are effective for the Company beginning in fiscal year 2019, with early adoption permitted. The Company intends to adopt the amendments in ASU 2016-02 beginning in the first quarter of 2019. We expect the primary impact will be the recognition of our operating lease obligations and corresponding right to use assets on our balance sheet, which mainly consist of our executive and home office operations and other real estate leases of office space as well as office equipment. We anticipate that the impact of adopting this standard will result in an increase to assets and liabilities that is generally consistent with our remaining lease obligations as listed in Note 16 “Commitments and Contingent Liabilities” plus any new operating lease commitments agreed to before the effective date.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (“ASU 2016-13”), Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. ASU 2016-13 introduces new guidance for accounting for credit losses on financial instruments within its scope by replacing the current approach that delays recognition until it is probable a loss has been incurred with a new approach that estimates an allowance for anticipated credit losses on the basis of an entity’s own expectations. The objective of the new approach for estimating credit losses is to require consideration of a broader range of forward-looking information, which is expected to result in earlier recognition of credit losses on financial instruments. AFS debt securities are excluded from the scope of financial instruments that require measurement of credit losses on the basis of a forward-looking expected loss estimate under ASU 2016-13. The incurred probable loss approach for measuring credit losses on AFS debt securities will remain under ASU 2016-13 but will be presented as an allowance rather than as a write-down. Therefore, an entity will be allowed to reverse credit losses previously recorded on AFS debt securities in situations where the estimate of credit losses on those securities has declined. The amendments in ASU 2016-13 also preclude an entity from considering the length of time an AFS debt security has been in an unrealized loss position to avoid recording a credit loss and remove the requirement to consider recoveries or declines in fair value after the balance sheet date. The amendments in ASU 2016-13 are effective for the Company beginning in fiscal year 2020. The Company is currently in the process of evaluating its impact on the Company’s consolidated financial statements.
Insurance expenses and other operating expenses directly attributable to the Term Life Insurance and the Investment and Savings Products segments are recorded directly to the applicable segment. We allocate certain other revenue and operating expenses that are not directly attributable to a specific operating segment based on the relative sizes of our life-licensed and securities-licensed independent sales forces. These allocated items include fees charged for access to our proprietary sales force support system and costs incurred for field technology, supervision, training and certain miscellaneous costs. We also allocate certain technology and occupancy costs to our operating segments based on estimated usage. Any remaining unallocated revenue and expense items, as well as realized investment gains and losses, are reported in the Corporate and Other Distributed Products segment. We measure income and loss for the segments on an income before income taxes basis.
AFS Securities. The period-end cost or amortized cost, gross unrealized gains and losses, and fair value of AFS fixed-maturity and equity securities were as follows:
Investments on Deposit with Governmental Authorities. As required by law, we have investments on deposit with governmental authorities and banks for the protection of policyholders. The fair values of investments on deposit were approximately $11.1 million and $18.2 million as of December 31, 2017 and 2016, respectively.
AFS fixed-maturity and equity securities with a cost basis in excess of their fair values were approximately $529.2 million and $450.9 million as of December 31, 2017 and 2016, respectively.
The securities noted above were considered to be other-than-temporarily impaired due to our intent to sell them; adverse credit events, such as news of an impending filing for bankruptcy; analyses of the issuer’s most recent financial statements or other information in which liquidity deficiencies, significant losses and large declines in capitalization were evident; or analyses of rating agency information for issuances with severe ratings downgrades that indicated a significant increase in the possibility of default. We also recognized OTTI related to invested assets held at the Parent Company that we intended to sell to fund share repurchases, as well as impairments on equity securities where we do not expect to recover its cost basis.
The rollforward of the OTTI recognized in net income for all fixed-maturity securities still held was as follows:
As of December 31, 2017, no OTTI have been recognized on the LLC Note held-to-maturity security.
In assessing fair value of our investments, we use a third-party pricing service for approximately 94% of our securities that are measured at fair value on a recurring basis. The remaining securities are primarily thinly traded securities, such as private placements, and are valued using models based on observable inputs on public corporate spreads having similar characteristics (e.g., sector, average life and quality rating) and liquidity and yield based on quality rating, average life and treasury yields. All observable data inputs are corroborated by independent third-party data. In the absence of sufficient observable inputs, we utilize non-binding broker quotes, which are reflected in our Level 3 classification as we are unable to evaluate the valuation technique(s) or significant inputs used to develop the quotes. Therefore, we do not internally develop the quantitative unobservable inputs used in measuring the fair value of Level 3 investments. However, we do corroborate pricing information provided by our third-party pricing servicing by performing a review of selected securities. Our review activities include obtaining detailed information about the assumptions, inputs and methodologies used in pricing the security; documenting this information; and corroborating it by comparison to independently obtained prices and or independently developed pricing methodologies.
We obtain independent pricing quotes based on observable inputs as of the end of the reporting period for all securities in Level 2. Those inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, quoted prices for similar instruments in markets that are not active, and other relevant data. We monitor these inputs for market indicators, industry and economic events. We recognize transfers into new levels and out of previous levels as of the end of the reporting period, including interim reporting periods, as applicable. There were no material transfers between Level 1 and Level 2 or between Level 1 and Level 3 during the years ended December 31, 2017 and 2016.
The carrying amounts for cash and cash equivalents, receivables, accrued investment income, accounts payable, cash collateral and payables for security transactions approximate their fair values due to the short-term nature of these instruments. Consequently, such financial instruments are not included in the above table.
Three of the IPO coinsurance agreements satisfy U.S. GAAP risk transfer rules. Under these agreements, we ceded between 80% and 90% of our term life future policy benefit reserves, and we transferred a corresponding amount of assets to the IPO coinsurers. These transactions did not impact our future policy benefit reserves. As such, we have recorded an asset for the same amount of risk transferred in reinsurance recoverables. We also reduced DAC by a corresponding amount, which reduces future amortization expenses. In addition, we are transferring between 80% and 90% of all future premiums and benefits and claims associated with these policies to the corresponding reinsurance entities. We receive ongoing ceding allowances, which are reflected as a reduction to insurance expenses, to cover policy and claims administration expenses as well as certain corporate overhead charges under each of these reinsurance contracts.
Reinsurance recoverables includes ceded reserve balances and ceded claim liabilities. Reinsurance recoverables and financial strength ratings by reinsurer were as follows:
This entity, which is rated AA- by S&P, ultimately assumed FRAC's obligations under the 80% Canada Coinsurance Agreement as a result of the Munich Re Novation Agreement.
In determining DAC amortization expense for term life insurance policies, we use interest rates available at the time a policy is issued. For policies issued in 2010 and after, we have been using an increasing interest rate assumption based on the historically low interest rate environment. Interest rate assumptions at December 31, 2017 and 2016 ranged from 3.5% to 7.0%.
We periodically assess the exposure related to these contracts to determine whether any additional liability should be recorded. As of December 31, 2017 and 2016, an additional liability for these contracts was deemed to be unnecessary.
At December 31, 2017, we had $375.0 million in principal amount of publicly-traded, senior unsecured notes (the “Senior Notes”). The Senior Notes were issued in 2012 at a price of 99.843% of the principal amount with an annual interest rate of 4.75%, payable semi-annually in arrears on January 15 and July 15, and are scheduled to mature on July 15, 2022. As of December 31, 2017, we were in compliance with the covenants of the Senior Notes. No events of default occurred on the Senior Notes during the year ended December 31, 2017.
On December 22, 2017, the Tax Reform Act was enacted in the United States, which includes a broad range of tax reforms affecting businesses, including corporate tax rates, business deductions, and international tax provisions. Under U.S. GAAP, the effects of new legislation are recognized upon enactment, which, for federal legislation, is the date the president signs a bill into law. Accordingly, we have recognized the tax effects of the Tax Reform Act during the year ended December 31, 2017. Amounts recognized as of December 31, 2017 represent reasonable estimates based on obtaining, preparing, and analyzing the information necessary to account for the tax effects of the Tax Reform Act under Accounting Standards Codification Topic 740 (“ASC 740”). However, the breadth and complexity of reforms included in the Tax Reform Act combined with the lack of precedent in its application may result in changes to the tax effects recognized when interpretations of the legislation are finalized, including the Company’s application of any additional guidance that may be issued by U.S. tax authorities. The Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 which allows companies to recognize provisional amounts for the tax effects resulting from the enactment of the Tax Reform Act for which the accounting under ASC 740 is incomplete but a reasonable estimate can be determined. Adjustments to these provisional amounts, if any, are to be completed within a measurement period not to exceed one year. Specifically, the Company identified the following areas that are incomplete and susceptible to adjustment when the necessary information is available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting:
The Company does not have the information necessary to make a policy election for whether it will account for any taxes, to which it may be subject, in regard to global intangible low-taxed income, as recognized as incurred or recognized as deferred taxes. As such, no tax effects have been recognized as of December 31, 2017 for the global intangible low-taxed income provisions of the Tax Reform Act.
A provisional amount for the mandatory deemed repatriation of Canadian earnings has been recognized as of December 31, 2017. However, the provisional amount could be subject to change upon completion of the Company’s total post-1986 foreign earnings and profits calculation and foreign tax credit determination as of the dates specified in the Tax Reform Act.
A provisional amount has been recognized for the timing difference for the haircut on deductibility of future policy benefit reserves prescribed in the Tax Reform Act. However, the provisional amount could be subject to change upon the Company’s final computation of the prescribed haircut as it relates to insurance contracts identified with cash value features. Adjustments to the provisional amount are not expected to impact the Company’s effective income tax rate or net deferred tax liability position but could impact the timing of when such temporary differences are eliminated.
Income tax expense. Income tax expense (benefit) consists of the following:
Prior to the enactment of the Tax Reform Act, deferred income tax assets and liabilities were measured using the 35% U.S. federal statutory tax rate that was expected to be applicable when those temporary differences were recognized in taxable income. The Tax Reform Act reduced the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. The reduction in the U.S. federal
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, carryback and carryforward periods, and tax planning strategies in making this assessment. As of December 31, 2017, management identified excess foreign tax credits of approximately $40.4 million that could not be used to offset the mandatory deemed repatriation of foreign earnings tax stipulated by the Tax Reform Act and believes it will not be able to utilize these foreign tax credits in the future. Therefore, the Company established a deferred tax asset for these foreign tax credits with a corresponding full valuation allowance. With the exception of these foreign tax credits, management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize its deferred tax assets. Therefore, there were no other deferred tax asset valuation allowances at December 31, 2017 or 2016.
The major tax jurisdictions in which we operate are the United States and Canada. We are currently open to tax audit by the Internal Revenue Service for the year ended December 31, 2014 and thereafter for federal income tax purposes. We are currently open to audit in Canada for tax years ended December 31, 2013 and thereafter for federal and provincial income tax purposes.
RSUs granted to management have time-based vesting requirements with equal and annual graded vesting over approximately three years subsequent to the grant date, but also provide for such awards to vest upon voluntary termination of employment by any employee who is “retirement eligible” as of his or her termination date. In order to be retirement eligible, an employee must be at least 55 years old and his or her age plus years of service with the Company must equal at least 75.
The following table summarizes employee and director restricted stock and RSU activity during the years ended December 31, 2017, 2016, and 2015.
As of December 31, 2017, there was approximately $45.0 thousand of total unrecognized compensation cost related to unvested options, and the weighted-average period over which cost will be recognized was approximately 0.5 years.
The following table summarizes non-employee RSU activity during the years ended December 31, 2017, 2016, and 2015.
The most significant assumptions in the put option models are the volatility assumptions. We derive volatility assumptions primarily from the historical volatility of our common stock using terms comparable to the sale restriction terms.
Our U.S. insurance subsidiaries are required to report their results of operations and financial position to state authorities on the basis of statutory accounting practices prescribed or permitted by such authorities and the National Association of Insurance Commissioners (“NAIC”), which is a comprehensive basis of accounting other than U.S. GAAP. Prescribed statutory accounting practices include a variety of publications of the NAIC, as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The Company’s principal life insurance company, Primerica Life, prepares its statutory financial statements on the basis of accounting practices prescribed or permitted by the NAIC and the Tennessee Department of Commerce and Insurance (“Tennessee DOCI”) and includes the statutory financial statements of its wholly owned
Primerica Life’s statutory ordinary dividend capacity is based on the greater of: (1) the previous year’s statutory net gain from operations (excluding pro rata distributions of any class of the insurer’s own securities) or (2) 10% of the previous year-end statutory surplus (net of capital stock). Dividends that, together with the amount of other distributions or dividends made within the preceding 12 months, exceed this statutory limitation are referred to as extraordinary dividends and require advance notice to the Tennessee DOCI, and are subject to potential disapproval. Dividends paid from other than statutory unassigned surplus require approval of the commissioner of the Tennessee DOCI.
Primerica Life’s investment basis in NBLIC, Peach Re, and Vidalia Re reflect their statutory capital and surplus amounts recorded in accordance with statutory accounting practices prescribed or permitted by the NAIC and/or each subsidiary’s state of domicile; New York and Vermont. Peach Re was formed as a special-purpose financial captive insurance company and, with the explicit permission of the Vermont DOI, has included the value of a letter of credit serving as collateral for its policy reserves as an admitted asset in its statutory capital and surplus. This permitted accounting practice was critical to the organization and operational plans of Peach Re and explicitly included in the licensing order issued by the Vermont DOI. The impact of this permitted practice as of December 31, 2017 was approximately $353.5 million on Peach Re’s statutory capital and surplus. As of December 31, 2017, even if Peach Re had not been permitted to include the letter of credit as an admitted asset, Primerica Life would not have been below the minimum statutory capital and surplus level that triggers a regulatory action event. Vidalia Re does not have any permitted accounting practices that are not encompassed in prescribed statutory accounting practices.
Primerica Life Canada’s capacity to pay ordinary dividends to its parent is limited by OSFI regulations to the extent that its capital exceeds internal capital targets. OSFI requires companies to set internal target levels of capital sufficient to provide for all the risks of the insurer, including risks specified in OSFI’s capital guidelines. As of December 31, 2017 and 2016, Primerica Life Canada’s statutory capital and surplus satisfied regulatory requirements and was approximately $331.3 million and $286.7 million, respectively.
In Canada, dividends can be paid subject to the paying insurance company continuing to have adequate capital and forms of liquidity as defined by OSFI following the dividend payment and upon 15 days minimum notice to OSFI. Primerica Life Canada’s dividend capacity at January 1, 2018 is estimated to be approximately $40.9 million, which is calculated based on satisfying the Company’s internal capital targets.
Commitments. We lease office equipment and office and warehouse space under various noncancellable operating lease agreements that expire through June 2028. Total minimum rent expense was $7.5 million, $7.0 million, and $7.2 million for the years ended December 31, 2017, 2016, and 2015, respectively. We had no contingent rent expense during 2017, 2016, or 2015.
Under the Credit Facility Agreement, Deutsche Bank issued a letter of credit in the initial amount of $450.0 million with a term of approximately 14 years (the “LOC”) for the benefit of Primerica Life, the direct parent of Peach Re. Subject to certain conditions, the amount of the LOC periodically increased up to a maximum amount of approximately $507.0 million, which was reached in 2014. Pursuant to the terms of the Credit Facility Agreement, in the event amounts are drawn under the LOC by Primerica Life, Peach Re will be obligated, subject to certain limited conditions, to reimburse Deutsche Bank for the amount of any draws and interest thereon. Peach Re has collateralized its obligations to Deutsche Bank by granting it a security interest in all of its assets with the exception of amounts held in a special account established to meet minimum asset thresholds required by state regulatory authorities. As of December 31, 2017, the Company was in compliance with all financial covenants under the Credit Facility Agreement.
The Company is currently undergoing multi-state unclaimed property audits by 30 jurisdictions, currently focusing on the life insurance claims paying practices of its subsidiaries, Primerica Life and NBLIC. Other jurisdictions may pursue similar audits. The potential outcome of such actions is difficult to predict but could subject the Company to adverse consequences, including, but not limited to, settlement payments, additional payments to beneficiaries and additional escheatment of funds deemed abandoned under state laws. At this time, the Company cannot reasonably estimate the likelihood or the impact of additional costs or liabilities that could result from the resolution of these matters.
We sponsor a defined contribution plan for the benefit of our employees. The expense associated with this plan was approximately $7.7 million, $7.4 million, and $6.7 million in 2017, 2016, and 2015, respectively.