Primerica Not That Independent

Financial products distributor Primerica (NYSE:PRI) went public on April 1, 2010 at a price of $15 per share. The stock ran quickly after the offering but has recently settled down at just over $23 per share. The current valuation looks reasonable overall, but Primerica's fortunes remain closely tied to its former parent IN PICTURES: Obtaining Credit In A Bad Economy

Business Overview
Primerica bills itself as a leading distributor of financial products to middle class households in the U.S. The sale of term life insurance and investment products constitutes its two primary business segments. A third corporate segment provides loans, prepaid legal services, and other insurance products sales. Its mutual fund offerings stem from distributing the products of Legg Mason (NYSE:LM), Van Kampen and MetLife (NYSE:MET).

Second Quarter Revenue Review
Comparability from previous quarters is difficult because Primerica was spun off from Citigroup (NYSE:C) on April 1, 2010. As such, Primerica is just getting going as an independent company. Also, on March 31 the firm entered into a number of reinsurance agreements with Citigroup, including giving up between 80-90% of the upside and downside of existing term life insurance policies. Citigroup also continues to hold a large percentage of Primerica stock - recent data puts its ownership at less than 40%. Private equity firm Warburg Pincus also owns a sizable chunk of Primerica.

Primerica did report that operating revenue increased 3.1% to $233.9 million. Highlights included a 13.6% increase in its sales force of individuals who qualify as independent contractors and run their own businesses that sell Primerica-based products. The firm also saw 26.3% growth in investment and savings products. The corporate unit accounted for 16% of total quarterly revenues.

Profit Recap
Operating income fell 10% to $61.4 million, as modest 0.7% growth in the insurance unit and an impressive 29% improvement in investment product profitability was offset by losses in the corporate segment. Reported earnings came in at 29 cents per diluted share.

The Bottom Line
With a current forward P/E of 12.5, shares of Primerica are reasonably valued. They also trade at a reasonable 127% premium to quarter-end book value of just over $18 per share. Future growth will depend on the ability to build out the sales force and compete with the likes of Ameriprise Financial (NYSE:AMP) and similar firms that sell investment products. Firms that are spun out to compete on their own also have a solid track record of growing on their own, though Primerica remains closely tied to its former parent.

The agreement with Citigroup to cede much of the benefits from its term life insurance portfolio will reduce cash flow, which the firm acknowledged in its S-1 filing when it went public. Citi also hamstrung Primerica with $300 million in debt, and there are other contractual agreements to which Primerica is bound to adhere. (Learn more about the insurance industry in The History of Insurance In America.)

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