Citigroup Inc is set to sell off a stake worth about $234 million in Primerica Inc, which sells life insurance and financial advice, and while the deal is far from perfect, some analysts think the offering could sell well.
Few other financial services companies cater to Primerica's niche- lower-middle-class and middle-class families. And the offering's valuation is relatively low compared to other life insurance companies.
Private equity firm Warburg Pincus will buy up to a third of the company, which is a vote of confidence in the business, analysts said. "Warburg Pincus has put this thing together and they expect to make money. If people buy at the IPO price they'll be buying right along with Warburg's price," said IPOdesktop.com President Francis Gaskins said on Friday.
Primerica's target audience is households with an annual income of $30,000 to $100,000. As the economy recovers, these households could feel more comfortable investing and buying life insurance products, analysts said.
There are definitely risks in buying Primerica shares. Primerica will not keep any of the proceeds from the offering, so the funds will not bolster the insurer.
Citi, which is leading the underwriters, is taking the IPO proceeds, and has taken substantial funds out of the business through dividends in recent years- nearly $1 billion since 2007. The bank will take another $622 million in dividends before the completion of the IPO, according to its prospectus. Those are funds that Primerica will not be able to invest in its growth. "When there is a spin-off generally the parent extracts its pound of flesh, which is certainly the case here," said Linda Killian, a portfolio manager with Connecticut-based Renaissance Capital. But Primerica can still grow at a healthy clip, Killian said.
"The company is a very sales-oriented company that focuses on the really middle income America that doesn't get a whole lot of financial services help from some of the larger companies that tend to focus on higher net worth individuals," Killian said.
Most of the risk - and profit - from life insurance policies that Primerica has sold in recent years will be ceded to Citigroup, but Killian estimates that Primerica could replenish its book in as short a period as four to five years. Primerica posted net income of about $495 million and revenue of $2.2 billion in 2009.
Primerica's strength is its sales force of more than 100,000 representatives. It focuses on households making $30,000 to $100,000 a year. This group is underinsured and needs to boost its investments, especially coming out of the financial crisis, said Clark Troy, a senior analyst at Aite Group.
The shock from the crisis has revealed to consumers that they might not be as well-prepared for retirement and other major milestones as they ought to be, Troy said. Middle class consumers may find Primerica's pitch persuasive, he added.
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