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.