KBW: Primerica Risk Discounted, Stock Will Outperform

• Primerica, Inc. PRI shares are down 21 percent year-to-date, declining steadily after hitting $55.09 on February 13.
• Keefe, Bruyette and Woods’ Ryan Krueger assumed coverage of the company with an Outperform rating and a price target of $53.
• Although DOL is a real risk, Krueger believes that the risk is already overly discounted, and that the company’s underlying fundamentals continue to be robust.

Analyst Ryan Krueger mentioned that Primerica is different from traditional life insurers and has “low risk liabilities, modest asset leverage, high free-cash-flow, and a 16%+ ROE.” The company has 101,000 exclusive sales representatives who distribute term life and 3rd party investment products to middle income households.

Krueger pointed out that the substantial contribution of the mortality focused term life business and 3rd party distribution fees “significantly reduces” the company’s sensitivity to interest rates and asset leverage, while also boosting free cash flow.

With recruiting and sales momentum in term life being strong recently, Krueger estimates Primerica’s sales growth this year at 11 percent as well as “low-to-mid single digit sales growth” for the longer term.

“Combined with a reduced premium base post a substantial 2010 reinsurance transaction leads to a 9% annual earnings growth expectation over the next few years,” the analyst added.

While the Investment & Savings Product [ISP] division generated 40 percent of Primerica’s earnings, and 54 percent of this seems to be “insulated” from the DOL proposal. The remaining 46 percent is “at risk to varying degrees,” Krueger wrote.

In the report Keefe, Bruyette and Woods noted, “Combined with the asset-based NPV analysis, we believe a 20-25% haircut to ISP value for DOL risk is appropriate.” “We forecast low-teens EPS growth in a non-DOL affected scenario,” Krueger said, while adding that the Outperform rating was based on “overly discounted DOL risk and strong underlying fundamentals.”