Primerica Unbundled

Over on Seeking Alpha, Duane Bair wrote an article New Regulations Could Destroy Primerica.  As with some opinionated pieces, I chose to rebut

One has to consider (unfortunately) that the author has to resort to sensationalism in his headline in order to attract this audience. Yes it’s true new rules are being considered (in Canada as well). Yes it is true PRI is in opposition. I find it difficult to believe that PRI’s “destruction” is imminent. If enacted as proposed, the rule changes could very well spur some fundamental changes in their operation.

Forget about their MLM structure (I didn’t say pyramid), their reliance on one product (term life), or the sales methods (replacing whole life with annuities). This strategy – while sound – is dated. The proliferation of lower cost products (i.e., ETFs) will force their hand.

I would not wager against their ability to transform due in part to the energy and passion of their sales force. However their ability to sell annuities to a new generation will become increasingly difficult. With additional investment in training, licensing and operational changes PRI could highly successful albeit with lower commissions and ultimately less agents. Only if they fail to evolve will your doomsday prediction become reality.

Now this got me to consider … if PRI as an investment is a worthwhile choice or if the sum of its’ parts is a better value.  Primerica is a difficult animal to analyze as they publicly report as little as possible.  Some of their investments are not readily marketable, reinsurance is at times with non-public or foreign entities and allocations of revenue may be imprecise – even when PRI’s annual report is the source of most of the data.  With these caveats, my attempt to unravel the mystery follows.

Primerica defines their operations across three segments.  First is Term Life Insurance.  This segment I would rate as a wash.  First they choose to reinsure 80-90% of the policies written which means they are paying other insurance companies to shoulder the risk.  Second, this segment carries the bulk of corporate expenses.  Finally – I believe – the sales force churn is premeditated.  With little main stream advertising, a massive sales force can identify prospects inexpensively with minimal downside risk.  The churn is a byproduct of a limited prospect pool.

As a prospect evolves to client, the second segment, Investment and Savings, comes into play.  This is essentially the sale of annuities and mutual funds.  Per their 10K, 94% of this segment’s sales are concentrated with four companies.

The final segment, Other Distributed Products, also includes management fees and corporate income from investments.

Now for the assumptions:

  • Holdings/revenue from non-US companies were excluded.  The revenues were allocated to US companies within the same segment.  This eliminated ForEx issues but also eliminated companies based in Canada (4), Netherlands (1), France (1), Spain (1) and Italy (1).  Likewise, foreign investment income was excluded and reallocated.
  • Finally, all holdings are not provided on the 10K – only ones deemed significant.  Therefore, several minor holdings have – most likely – been excluded.

So I created a motif to track the holdings which can be viewed here.  As a point of reference PRI’s price per share at creation was 43.51.  My assumption is the embedded (higher) sales costs with the Primerica model will suppress their returns versus a basket of stocks that they hold as investments, companies whose products they broker and/or ones they have business relationships with.  But my mind will remain open during the course of this analysis which I expect to last throughout 2016.  I expect to post quarterly updates on this analysis as well.

I currently own WU and WFC which was cause for their exclusion.  I also have a position in MFC (Canada) and was excluded.  I also have a position in PRI which is the subject.  I currently have no position in the motif: GE, IBM, DFS, WRE, GS, C, DRE, IVZ, LM, BEN, BK, GNW, ALL, MORN, EFX, LNC, MET or AIG but intend to initiate one in the near future. 

Dear Mr Schultz

As a loyal patron and Starbucks shareholder for many years, I have to voice my displeasure at your latest endeavor, Starbucks Evenings.  Frankly, I think the concept lacks merit for many reasons which I believe will significantly degrade the brand.  I’m sure you remember the state of the business upon your premature return from retirement.  Surprisingly, this time you are in the lead for this fateful journey.

I’m still not sure about the La Boulange failure, but am willing to attribute it to a difference of management styles.  The Fizzio experiment has failed to gain traction.  Both of these did little to contribute to your core customer’s experience.  In fact both increased customer wait times and dissatisfaction.  At my local Starbucks I’ve seen many customers walk into – and immediately walk out of without ordering – because of the lines which I fear will be exacerbated with Evenings.  My issues are itemized as follows:

  • Why would I pay a premium for a Starbucks craft beer?  Wouldn’t I much prefer the craft brew at the local ice house?
  • A beer and/or wine bar has a different atmosphere from a coffee shop.  I would be less inclined to let my child buy a cake pop in an adult geared establishment.
  • Few – if any – shops that I’ve visited have excess capacity.  The remodeling is being performed (in most cases) with no additional seating capacity.  What does that say about ambiance?  Or if you prefer – can you say “cattle call”?

I can continue, but you get the drift.  Starbucks has been successful being masterful in a select niche.  Conversely, Starbucks has consistently failed when attempting to be all things to the masses.

I would encourage you to review your approach.  Perhaps Starbucks branded bars in nightlife areas rather than bars in your neighborhood Starbucks.  Is the pursuit of profits worth the costs of retrofits, licensing, compliance and alienation of a subset of your current clientele?

Double Dipping

As I’ve mentioned previously, part of my inspiration comes from articles over on SA.  This week is likewise in this vein as one of Nicholas Mushaike’s articles struck a nerve.

I don’t expect to be following in his footsteps as the Asian companies are too foreign to me and the semiconductor industry too cyclical.  But the gist of the article highlighted some parallels with my investing approach that I decided to present in today’s blog.

As anyone reading my blog knows, a portion of my portfolio resides in financials, primarily regional banks. There are two ways I’ve found to capitalize on relationships.

  • The first is through client business relationships.  For example, DST has a relationship with Wells Fargo for receivable financing.  I profit (through dividends) from this.  Wells Fargo has business relationships with same of my other holdings (FAF, WEC, JNS).
  • The other way is to invest in what I refer to as publicly traded “banker’s banks”.  One example is PNC who provided financing for WSBC‘s acquisition of ESB Financial.  A more recent example is CFR providing financing for FFIN’s acquisition of FBC Bancshares.

By monitoring SEC filings you can become aware of these types of relationships.  Unfortunately, on merger financing the target is not disclosed – but still, it is profitable lending which is a driver of dividends.

Different from Nicholas’ approach – yes.  However I do believe the apple hasn’t fallen too far from the tree.

Labor Day Weekend

minions

© Universal Studios

Time for all of us minions to relax and reflect.  No concerns of Asian markets – at least until Tuesday.  No worries of when or if or by how much the Fed will (or will not) hike rates.  Just the opportunity to enjoy the day until reality – and our own personal Dr. Gru – (i.e., the boss) reappears.

From the headlines

The Washington State Supreme Court declared charter schools unconstitutional.  Why care?  Well, if you own EPR, you have exposure to charter schools.  Although they have no properties in the state of Washington, it bears keeping an eye on to identify possible contagion.

Other topics from the blogosphere primarily dealt with keeping a shopping list up to date and readily available.  This by Dividend Diplomats caught my attention first, although RoseNose is always a good read.  Personally, I would much prefer buying opportunities to be spaced a little further apart so I could more fully take advantage of them.