Primerica Starts Strong for Citigroup

NEW YORK ( TheStreet) -- Wall Street is embracing Primerica ( PRI) Thursday as the insurance and financial products seller not only priced its initial public offering above expectations, but is seeing an impressive surge in the stock on its first day of trading.
Primerica

Shares of the Citigroup ( C)-spinoff were recently quoted at $19.49, up nmore than 30% from their pricing at $15 each. The $320.4 million offering of 21.4 million shares originally called for the sale of 18 million shares priced at between $12-$14 per share.

The reception represents a nice windfall for Citigroup, which still owns 43% of Primerica's outstanding stock. If an overallotment option granted to underwriters for the sale of an additional 3.2 million Primerica shares is granted, Citigroup's ownership will go down to 39%. The company, in the midst of a massive restructuring stemming from the financial crisis, still plans to divest the rest of its interest in the Duluth, ga.-based Primerica "as soon as is practicable" so heavy investor demand for the new issue has to be seen as a good thing.

Private equity firm Warburg Pincus also has to be happy. According to the S-1 filing related to the sale, Warburg Pincus was buying 17.2 million common shares, as well as warrants to purchase an additional 4.3 million shares. The firm's initial outlay was capped at the lesser of the cost for 23.9% of the pro forma number of common shares, or the number of common shares that can be purchased for $230 million. It also had the option of buying an additional $100 million worth of Primerica common stock in a separate, concurrent sale.

Citigroup said its GAAP assets would be reduced by $5 billion in the second quarter as a result of IPO and the Warburg Pincus transactions, and it called the move "in line with Citi's strategy to reduce non-core assets, tightly manage risks and optimize the value of assets in Citi Holdings," its portfolio of so-called "bad bank" or non-core assets.

The Primerica debut caps a busy week from an equity markets perspective for Citigroup as it follows confirmation from the U.S. Treasury on Monday that it plans to sell its 27percent stake in the company by the end of 2010.

The stock has slumped since that announcement, losing 6% through Wednesday's close at $4.05. The Treasury's cost basis for its stake is $3.25 per share, so it was sitting on a paper profit of around $6.2 billion for its 7.7 billion shares when the yesterday's closing bell sounded. Citigroup shares were up 1.5% to $4.12 in recent trades.

Primerica sells term life insurance, variable annuities and various mutual fund products to middle-income consumers. It relies heavily on leads generated by new sales recruits, and says it has more than 100,000 licensed representatives. The model prompted skepticism from Morningstar analyst Jim Ryan, who recommended avoiding the IPO.

" E ven though the company has recruited north of 200,000 bodies over the each of the past five years, the number of licensed insurance and mutual fund representatives has remained flat at about 125,000 per year, indicating an extremely high fallout rate," Ryan says in commentary on Morningstar's Web site. "The average sales representative sells only two and a half new policies per year, a paltry amount by any measure, and we think marketing through independent representatives cedes all control of the customer to salespeople who can easily switch to another company."

Investors appear to choosing for today at least to look past this criticism, as well as some regulatory concerns raised by the company in its official filings, to concentrate on its earnings.

According to its S-1, Primerica posted net income of $494.6 million on revenue of $2.22 billion in 2009, up from a profit of $167.7 million on slightly lower revenue in 2008. The higher profit resulted from the absence of charges recording in 2008 related to goodwill impairment of certain assets that declined in value due to the financial crisis.

-- Written by Michael Baron in New York.