Description

Company/Industry Background

Primerica is a leading provider of financial products for lower-and-middle-income households in the US and Canada with 130,000 licensed sales representatives. The company underwrites term life insurance and distributes mutual funds and other financial products on behalf of third parties.

Unlike most financial institutions, Primerica focuses on underserved consumers. The company’s clients are generally households with less than $100,000 of annual income that have inadequate or no life insurance coverage and often need help with retirement goals. Primerica relies on a unique distribution model to effectively address this population. The commissions or fees earned on this business aren’t enough to support a traditional branch network, a marketing budget, or a fixed salary employee base. As a result, Primerica uses a grass-roots, commission-based, part-time salesforce that would be difficult and costly for a potential competitor to replicate.

Primerica was founded in 1977, before becoming part of Travelers and then Citigroup in the 1990’s. Although Travelers insurance was spun off from Citigroup in 2002, Primerica remained a part of Citigroup until it IPO’d in April 2010.

The company has two segments: Term-Life and Investment & Savings Products. Term-life makes up ~60% of operating profit and Investment & Savings Products make up 40%. Importantly, both businesses leverage Primerica’s sales force. 

Competitive Advantage #1: Grass-Roots Distribution

Primerica’s key competitive advantage is its 130,000 person licensed sales force, that looks much different than the sales-arm of the typical financial institution. This sales force of independent commission-based reps gives Primerica a competitive cost advantage in selling financial products to middle income families.

The sheer size of Primerica’s sales force is not replicable. In fact, for most life insurance companies, term-life insurance is a “loss-leader” product, while their focus is on more profitable variable annuities and whole universal life products. Primerica can sell term-life insurance profitably because its representatives predominantly work part-time to generate supplemental income, getting paid only on what they sell.   

Primerica’s representatives are like franchisees, who can build their own independent financial services businesses, leveraging the company’s training, marketing, sales tools, and business management systems. As Primerica puts it, “you’re in business for yourself, but not by yourself.” The costs associated with becoming an independent Primerica representative are relatively low and primarily offset the cost of obtaining a life insurance license including pre-licensing training, exams, and license appointment fees. New representatives pay a one-time fee of $99, plus $25 per month.

Primerica is attractively compensated for its strong distribution, while maintaining a variable cost structure, which results in a stable operating margin.

Competitive Advantage #2: Targeting an Underserved Market

Primerica’s other advantage is that it hunts where others don’t. Primerica’s clients generally have $30,000 to $100,000 of household family income. Primerica’s average face amount of term insurance issued was $335,000 in 2021. For comparison, in the United States, the most common term-life policy is a 40-year old buying a 20-year $500,000 policy. And, Lincoln Financial (a competitor) issues life insurance policies with an average face amount over $1 million.

By having a salesforce that targets an underserved market, Primerica faces less competitive pressure than if it sold to a more affluent population. 

Resilience: Primerica is resilient because of its recurring premiums, its variable cost structure, and its predictable claims pattern.

The beauty of this business is that it benefits from persistency. Primerica has a life-in-force of $913 billion that requires minimal ongoing sales or operating expenses maintain. Even if no new policies were written, it would take nearly 15 years for this base of business to run-off. Even if they wrote no new business, I estimate they could earn around $50 per share, cumulatively (or ~35% of the market cap) over the next 6 years.

Concern #1: Life Insurance Products and Accounting are Complex

Primerica is much different than traditional life insurance companies. Unlike other insurance companies which make most of their money selling complex annuities and whole life insurance, Primerica focuses on term life insurance. The company’s motto is “Buy Term Invest The Rest.”

Primerica’s business model looks much different than other traditional life insurance companies. Effectively, Primerica is capital-light compared to its peers. It generates almost no profit from investment income and its investment assets to equity ratio is well below that of comparable companies.

One of the main reasons for this is that Primerica reinsures more than 85% of its mortality risk, as you can see in the chart below. This has been coming down slightly over time, as a pre-IPO co-insurance agreement rolls off the books for legacy business, but Primerica expects to reinsure between 80-90% of its mortality risk going forward.

Effectively, Primerica retains the value-added profits associated with distribution and minimizes the risk associated with investment assets and mortality rates. This aligns its profits with its competitive advantage and reduces uncertainty.  

Concern #2: Can’t This be Disrupted by Tech?

You would think, but the key concept is that life insurance is sold, not bought. There’s already plenty of ads for life insurance and if you seek out life insurance on your own, you don’t need to go through Primerica. That’s existed for years, tech disruptors aren’t revolutionaries. This also goes back to the size of the policies. The customer acquisition cost of capturing a low-priced policy is similar to the cost of capturing a high-priced policy. People who are purchasing lower-priced policies also don’t tend to be as financially literate, so they need more handholding and convincing. If you were a tech company, would you try to disrupt PRI for a $300,000 policy or would you try to disrupt someone for a $3 million policy?

Let’s think about the cost of acquiring for a competing insure-tech company. The commission on an average term-life policy is around $1,500. Advertising for insurance on Google, costs about $300 per click. If you assume a 10% conversion rate (clicks / purchases), that’s about $3,000 in advertising costs alone. For a high-priced policy, that’s a good investment. But for a lower-priced policy, it is not, as the advertising costs alone are about double the commission Primerica pays its representatives.

Concern #3: Multi-Level Marketing

This business has been around for 40 years and has continued to grow. If it was that bad for the employees, would the business model work this well, for so long? Another argument that makes this different from Herbal Life is that with Primerica you don’t need to purchase any inventory (like you do with Herbal Life), so the possibility of actual financial loss from signing up for Primerica is limited to the $49-99 you pay for the pre-license registration.  And, there is a lot of longevity for a large portion of the salesforce. 26,000 agents have been with PRI for 10+ years and 10,000 for 20+ years.

Concern #4: Capital Allocation

Primerica’s capital allocation has historically been excellent. But, in 2021, they did a suboptimal acquisition. But management took prompt action, acknowledged the misjudgment, and minimized the subsequent capital investment into the business. This was a rare mistake and the company’s first acquisition in over 10 years, since the IPO. Going forward, I expect Primerica to return to share buybacks as the key component of its capital allocation strategy.   

Senior Health Business Acquisition Detail

e-TeleQuote is a senior health insurance distributor of Medicrae-related insurance. Primerica was long looking for an adjacent business that could leverage its massive salesforce. The thesis was that Primerica’s representatives could generate low-cost leads for e-TeleQuote agents. If successful, this would be a “win-win” for both Primerica’s salesforce, who would have an additional product to promote, and for e-Telequote’s agents who would get incremental referrals.

I don’t love E-Telequote for two reasons: 1) it consumes cash and will continue to for the next 5 years, despite accounting for about 10% of earnings. 2) only 10% of leads are expected to be generated by Primerica’s sales force, so it will operate in a competitive market where they don’t have as clear of a competitive advantage. And, within the first year of ownership, Primerica realized that the Medicare referral business turned out to be more competitive than they expected.

Most of the leads for e-Telequote won’t come from PRI agents. In 3Q21, just 1.5% of submitted applications were sourced by PRI reps. Over time, they expect that to increase to 10%. That means that e-Telequote is using Google, or other media, to generate leads, which is very competitive and doesn’t exhibit the same type of stickiness that the PRI rep has with people in the community.

Management is pretty clear that this was a one-off deal and are already back to share repurchases after a less than one year pause. Going forward, e-TeleQuote is not expected to consume any of the company’s future cash flows.

The Numbers and Key Modeling Assumptions:

The company has grown EPS at a 16% annualized rate over the past 12 years and I expect double-digit EPS growth going forward. In part, this is due to a technical tailwind as the company runs-off its pre-IPO business (which contractually utilizes a high level of reinsurance). As a result, Primerica’s term-life premiums should grow at about 6% per year, above the 4% expected life insurance in-force face value growth.

Margins should be similar to past levels, supported by Primerica’s variable cost structure.

Catalyst

EPS growth, buybacks, and 'pack the briefcase for work' execution.