XNYS:PRI Primerica Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNYS:PRI (Primerica Inc): Fair Value Estimate
Premium
XNYS:PRI (Primerica Inc): Consider Buying
Premium
XNYS:PRI (Primerica Inc): Consider Selling
Premium
XNYS:PRI (Primerica Inc): Fair Value Uncertainty
Premium
XNYS:PRI (Primerica Inc): Economic Moat
Premium
XNYS:PRI (Primerica Inc): Stewardship
Premium
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-34680
 

Primerica, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
27-1204330
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
3120 Breckinridge Boulevard
Duluth, Georgia
30099
(Address of principal executive offices)
(ZIP Code)
(770) 381-1000
(Registrant’s telephone number, including area code)
Not applicable.
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨   No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
As of July 31, 2012
Common Stock, $.01 Par Value
 
60,028,946 shares



TABLE OF CONTENTS
 
 
Page
 
 
 
 



i


PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
June 30,
2012
 
December 31,
2011
 
(unaudited)
 
 
(In thousands, except per-share amounts)
Assets
 
 
 
Investments:
 
 
 
Fixed-maturity securities available for sale, at fair value (amortized cost: $1,663,776 in 2012 and $1,811,359 in 2011)
$
1,823,729

 
$
1,959,156

Equity securities available for sale, at fair value (cost: $25,033 in 2012 and $21,329 in 2011)
31,811

 
26,712

Trading securities, at fair value (cost: $29,262 in 2012 and $9,793 in 2011)
29,038

 
9,640

Policy loans
24,187

 
25,982

Other invested assets
14

 
14

Total investments
1,908,779

 
2,021,504

Cash and cash equivalents
108,062

 
136,078

Accrued investment income
20,220

 
21,579

Due from reinsurers
3,903,028

 
3,855,318

Deferred policy acquisition costs, net
990,558

 
904,485

Premiums and other receivables
167,746

 
163,845

Intangible assets, net (accumulated amortization: $59,920 in 2012 and $58,218 in 2011)
70,226

 
71,928

Other assets
281,818

 
268,485

Separate account assets
2,500,640

 
2,408,598

Total assets
$
9,951,077

 
$
9,851,820

Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Future policy benefits
$
4,723,359

 
$
4,614,860

Unearned premiums
9,476

 
7,022

Policy claims and other benefits payable
236,717

 
241,754

Other policyholders’ funds
347,763

 
340,766

Note payable
300,000

 
300,000

Income taxes
82,755

 
81,316

Other liabilities
329,538

 
381,496

Payable under securities lending
143,963

 
149,358

Separate account liabilities
2,500,640

 
2,408,598

Total liabilities
8,674,211

 
8,525,170

Stockholders’ equity:
 
 
 
Common stock of ($.01 par value. Authorized 500,000 in 2012 and 2011 and issued 59,868 shares in 2012 and 64,883 shares in 2011)
599

 
649

Paid-in capital
693,717

 
835,232

Retained earnings
426,936

 
344,104

Accumulated other comprehensive income, net of income tax:
 
 
 
Unrealized foreign currency translation gains
50,458

 
51,248

Net unrealized investment gains (losses):
 
 
 
Net unrealized investment gains not other-than-temporarily impaired
107,187

 
97,082

Net unrealized investment losses other-than-temporarily impaired
(2,031
)
 
(1,665
)
Total stockholders’ equity
1,276,866

 
1,326,650

Total liabilities and stockholders’ equity
$
9,951,077

 
$
9,851,820

See accompanying notes to condensed consolidated financial statements.


1


PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income - Unaudited
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except per-share amounts)
Revenues:
 
 
 
 
 
 
 
Direct premiums
$
570,073

 
$
560,881

 
$
1,131,110

 
$
1,112,950

Ceded premiums
(415,815
)
 
(435,564
)
 
(833,978
)
 
(857,802
)
Net premiums
154,258

 
125,317

 
297,132

 
255,148

Commissions and fees
106,761

 
108,698

 
210,666

 
214,814

Net investment income
23,605

 
27,229

 
49,702

 
55,855

Realized investment gains, including other-than-temporary impairment losses
4,321

 
2,035

 
6,452

 
2,362

Other, net
11,580

 
11,816

 
23,174

 
23,268

Total revenues
300,525

 
275,095

 
587,126

 
551,447

Benefits and expenses:
 
 
 
 
 
 
 
Benefits and claims
68,925

 
57,272

 
136,858

 
114,907

Amortization of deferred policy acquisition costs, net
28,205

 
23,975

 
54,736

 
47,204

Sales commissions
51,475

 
50,273

 
101,192

 
100,711

Insurance expenses
24,589

 
26,988

 
47,033

 
42,786

Insurance commissions
6,458

 
9,534

 
14,954

 
18,532

Interest expense
8,506

 
6,998

 
15,416

 
13,995

Other operating expenses
40,446

 
41,590

 
81,551

 
81,591

Total benefits and expenses
228,604

 
216,630

 
451,740

 
419,726

Income before income taxes
71,921

 
58,465

 
135,386

 
131,721

Income taxes
25,741

 
20,845

 
47,450

 
46,830

Net income
$
46,180

 
$
37,620

 
$
87,936

 
$
84,891

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.73

 
$
0.50

 
$
1.35

 
$
1.12

Diluted
$
0.72

 
$
0.49

 
$
1.33

 
$
1.11

 
 
 
 
 
 
 
 
Weighted-average shares used in computing earnings per share:
 
 
 
 
 
 
 
Basic
61,531

 
73,457

 
63,332

 
73,067

Diluted
62,687

 
74,201

 
64,481

 
74,028

 
 
 
 
 
 
 
 
Supplemental disclosures:
 
 
 
 
 
 
 
Total impairment losses
$
(203
)
 
$
(66
)
 
$
(904
)
 
$
(333
)
Impairment losses recognized in other comprehensive income before income taxes
76

 

 
563

 

Net impairment losses recognized in earnings
(127
)
 
(66
)
 
(341
)
 
(333
)
Other net realized investment gains
4,448

 
2,101

 
6,793

 
2,695

Realized investment gains, including other-than-temporary impairment losses
$
4,321

 
$
2,035

 
$
6,452

 
$
2,362

See accompanying notes to condensed consolidated financial statements.


2


PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income - Unaudited
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Net income
$
46,180

 
$
37,620

 
$
87,936

 
$
84,891

Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
Unrealized investment gains (losses):
 
 
 
 
 
 
 
Change in unrealized holding gains (losses) on investment securities
3,931

 
16,081

 
21,445

 
12,443

Reclassification adjustment for realized investment (gains) losses included in net income
(4,640
)
 
(2,073
)
 
(6,461
)
 
(2,293
)
Foreign currency translation adjustments:
 
 
 
 
 
 
 
Change in unrealized foreign currency translation gains (losses)
(4,177
)
 
1,041

 
(869
)
 
3,647

Total other comprehensive income (loss) before income taxes
(4,886
)
 
15,049

 
14,115

 
13,797

Income tax expense (benefit) related to items of other comprehensive income (loss)
(298
)
 
4,903

 
5,166

 
2,825

Other comprehensive income (loss), net of income taxes
(4,588
)
 
10,146

 
8,949

 
10,972

Total comprehensive income
$
41,592

 
$
47,766

 
$
96,885

 
$
95,863

See accompanying notes to condensed consolidated financial statements.


3


PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity - Unaudited
 
Six months ended June 30,
 
2012
 
2011
 
(In thousands, except per-share amounts)
Common stock:
 
 
 
Balance, beginning of period
$
649

 
$
728

Repurchases of common stock
(62
)
 
(2
)
Net issuance of common stock
12

 
10

Balance, end of period
599

 
736

Paid-in capital:
 
 
 
Balance, beginning of period
835,232

 
1,010,635

Share-based compensation
17,353

 
16,246

Net issuance of common stock
(12
)
 
(10
)
Repurchases of common stock
(160,817
)
 
(4,108
)
Net capital contributed by (to) Citi
1,961

 
(1,424
)
Balance, end of period
693,717

 
1,021,339

Retained earnings:
 
 
 
Balance, beginning of period
344,104

 
194,225

Net income
87,936

 
84,891

Dividends ($0.08 per share in 2012 and $0.04 per share in 2011)
(5,104
)
 
(3,027
)
Balance, end of period
426,936

 
276,089

Accumulated other comprehensive income:
 
 
 
Balance, beginning of period
146,665

 
150,940

Change in foreign currency translation adjustment, net of income tax expense (benefit) of $(79) in 2012 and $0 in 2011
(790
)
 
3,647

Change in net unrealized investment gains (losses) during the period, net of income taxes:
 
 
 
Change in net unrealized investment gains (losses) not-other-than temporarily impaired, net of income tax expense (benefit) of $5,441 in 2012 and $2,825 in 2011
10,105

 
7,325

Change in net unrealized investment gains (losses) other-than-temporarily impaired, net of income tax expense (benefit) of $(196) in 2012 and $0 in 2011
(366
)
 

Balance, end of period
155,614

 
161,912

Total stockholders’ equity
$
1,276,866

 
$
1,460,076

See accompanying notes to condensed consolidated financial statements.


4


PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows - Unaudited 
 
Six months ended June 30,
 
2012
 
2011
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
87,936

 
$
84,891

Adjustments to reconcile net income to cash provided by (used in) operating activities:
 
 
 
Change in future policy benefits and other policy liabilities
113,712

 
35,579

Deferral of policy acquisition costs
(141,151
)
 
(134,704
)
Amortization of deferred policy acquisition costs, net
54,736

 
47,204

Change in income taxes
431

 
(13,074
)
Realized investment gains, including other-than-temporary impairments
(6,452
)
 
(2,362
)
Accretion and amortization of investments
(304
)
 
(1,910
)
Depreciation and amortization
4,911

 
5,265

Change in due from reinsurers
(47,710
)
 
18,515

Change in premiums and other receivables
(3,826
)
 
(11,575
)
Trading securities sold (acquired), net
14,639

 
(13,505
)
Share-based compensation
13,196

 
12,061

Other, net
(77,309
)
 
(32,585
)
Net cash provided by (used in) operating activities
12,809

 
(6,200
)
Cash flows from investing activities:
 
 
 
Available-for-sale investments sold, matured or called:
 
 
 
Fixed-maturity securities - sold
213,317

 
36,635

Fixed-maturity securities - matured or called
124,320

 
230,947

Equity securities
1,246

 
3,026

Available-for-sale investments acquired:
 
 
 
Fixed-maturity securities
(209,197
)
 
(267,793
)
Equity securities
(3,086
)
 
(73
)
Other, net
148

 
(82
)
Cash collateral received (returned) on loaned securities, net
(5,395
)
 
(18,384
)
Sales (purchases) of short-term investments using securities lending collateral, net
5,395

 
18,384

Net cash provided by (used in) investing activities
126,748

 
2,660

Cash flows from financing activities:
 
 
 
Dividends
(5,104
)
 
(3,027
)
Common stock repurchased
(160,879
)
 
(4,110
)
Net cash provided by (used in) financing activities
(165,983
)
 
(7,137
)
Effect of foreign exchange rate changes on cash
(1,590
)
 
(1,310
)
Change in cash and cash equivalents
(28,016
)
 
(11,987
)
Cash and cash equivalents, beginning of period
136,078

 
126,038

Cash and cash equivalents, end of period
$
108,062

 
$
114,051

See accompanying notes to condensed consolidated financial statements.


5


PRIMERICA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
(1)
Summary of Significant Accounting Policies
Description of Business. Primerica, Inc. (the "Parent Company") together with its subsidiaries (collectively, "we" or the "Company") is a leading distributor of financial products to middle income households in the United States and Canada. We assist our clients in meeting their needs for term life insurance, which we underwrite, and mutual funds, annuities and other financial products, which we distribute primarily on behalf of third parties. Our primary subsidiaries include the following entities: Primerica Financial Services, Inc., a general agency and marketing company; Primerica Life Insurance Company ("Primerica Life"), our principal life insurance company; Primerica Financial Services (Canada) Ltd., a holding company for our Canadian operations, which includes Primerica Life Insurance Company of Canada ("Primerica Life Canada"); and PFS Investments, Inc., an investment products company and broker-dealer. Primerica Life, domiciled in Massachusetts, owns National Benefit Life Insurance Company ("NBLIC"), a New York life insurance company. Each of these entities was indirectly wholly owned by Citigroup Inc. (together with its non-Primerica affiliates, "Citi") through March 31, 2010.
We capitalized Peach Re, Inc. ("Peach Re"), a special purpose financial captive insurance company and wholly owned subsidiary of Primerica Life, and Primerica Life ceded to Peach Re certain level premium term life insurance policies pursuant to a coinsurance agreement (the "Peach Re Coinsurance Agreement"), effective March 31, 2012.
Basis of Presentation. We prepare our financial statements in accordance with U.S. generally accepted accounting principles ("GAAP"). These principles are established primarily by the Financial Accounting Standards Board ("FASB"). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect financial statement balances, revenues and expenses and cash flows as well as the disclosure of contingent assets and liabilities. Management considers available facts and knowledge of existing circumstances when establishing the estimates included in our financial statements.
The most significant items that involve a greater degree of accounting estimates and actuarial determinations subject to change in the future are the valuation of investments, deferred policy acquisition costs assets ("DAC"), future policy benefit reserves and income taxes. Estimates for these and other items are subject to change and are reassessed by management in accordance with GAAP. Actual results could differ from those estimates.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and those entities required to be consolidated under applicable accounting standards. All material intercompany profits, transactions, and balances among the consolidated entities have been eliminated.
The accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, which are necessary to fairly present the balance sheets as of June 30, 2012 and December 31, 2011, the statements of income and comprehensive income for the three and six months ended June 30, 2012 and 2011, and the statements of stockholders' equity and cash flows for the six months ended June 30, 2012 and 2011. Results of operations for interim periods are not necessarily indicative of results for the entire year or of the results to be expected in future periods.
These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and the regulations of the Securities and Exchange Commission (the "SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated and combined financial statements and notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2011, as modified and updated by our Current Report on Form 8-K filed with the SEC on May 8, 2012 (together, the "2011 Annual Report").
Reclassifications. Certain reclassifications have been made to prior-period amounts to conform to current-period reporting classifications. Concurrent with our January 1, 2012 adoption of ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts ("ASU 2010-26"), certain expenses were reclassified among sales commission, insurance expenses, insurance commissions and other operating expenses. These reclassifications had no impact on net income, total stockholders’ equity or income before income taxes by segment.
Significant Accounting Policies. All significant accounting policies remain unchanged from the 2011 Annual Report.


6


New Accounting Principles.
We retrospectively adopted ASU 2010-26 in our fiscal year beginning January 1, 2012. The impact of adoption was as follows:
 
(In thousands, except
per-share amounts)
Reduction as of January 1, 2011:
 
Deferred policy acquisition costs, net
$
114,265

Stockholders' equity
74,964

 
 
Reduction as of December 31, 2011:
 
Deferred policy acquisition costs, net
$
146,152

Stockholders' equity
95,991

 
 
Reduction for the three months ended June 30, 2011:
 
Income before income taxes
$
9,696

Net income
6,403

Basic earnings per share
0.08

Diluted earnings per share
0.09

 
 
Reduction for the six months ended June 30, 2011:
 
Income before income taxes
$
17,585

Net income
11,599

Basic earnings per share
0.16

Diluted earnings per share
0.15

The adoption of ASU 2010-26 had no impact on our cash flows or required capital.
In accordance with ASU 2010-26, we only defer the costs of acquiring new business to the extent that they result directly from and are essential to the contract transaction(s) and would not have been incurred had the contract transaction(s) not occurred. These deferred policy acquisition costs mainly include commissions and policy issuance expenses. The recovery of such costs is dependent on the future profitability of the related policies, which, in turn, is dependent principally upon mortality, persistency, investment returns, and the expense of administering the business, as well as upon certain economic variables, such as inflation. DAC is subject to recoverability testing annually and when impairment indicators exist. We make certain assumptions regarding persistency, expenses, interest rates and claims. These assumptions may not be modified, or unlocked, unless recoverability testing deems them to be inadequate. We update assumptions for new business to reflect the most recent experience. DAC is amortized over the premium-paying period of the related policies in proportion to annual premium income. Due to the inherent uncertainties in making assumptions about future events, materially different experience from expected results in persistency could result in a material increase or decrease of DAC amortization in a particular period. All other acquisition-related costs, including unsuccessful acquisition and renewal efforts, are charged to expense as incurred. Administrative costs, rent, depreciation, occupancy, equipment, and all other general overhead costs are considered indirect costs and are charged to expense as incurred.
Deferrable acquisitions costs for Canadian segregated funds are amortized over the life of the policies in relation to historical and future estimated gross profits before amortization. The gross profits and resulting DAC amortization will vary with actual fund returns, redemptions and expenses. The adoption of ASU 2010-26 did not impact the accounting for acquisition costs related to Canadian segregated funds.


7


The balances of and activity in DAC, which reflects the retrospective adoption of ASU 2010-26 for all periods presented, were as follows:
 
Six months ended June 30,
 
2012
 
2011
 
(In thousands)
DAC balance, beginning of period
$
904,485

 
$
738,946

Capitalization
141,151

 
134,704

Amortization
(54,736
)
 
(47,204
)
Foreign exchange and other
(342
)
 
7,338

DAC balance, end of period
$
990,558

 
$
833,784

Fair Value Measurement Amendments. In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement ("ASU 2011-04"). The primary provisions of ASU 2011-04 result in common fair value measurement and disclosure requirements for U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes the wording used to describe the requirements for measuring fair value and for disclosing information about fair value measurement, including requiring quantitative disclosures about the unobservable inputs used in fair value measurements. The amendments in the update were applied prospectively for our fiscal year beginning January 1, 2012. This update did not result in a significant impact on our financial position or results of operations.
(2) Segment Information
We have two primary operating segments – Term Life Insurance and Investment and Savings Products. We also have a Corporate and Other Distributed Products segment. Assets by segment were as follows: 
 
June 30,
2012
 
December 31,
2011
 
(In thousands)
Assets:
 
 
 
Term life insurance segment
$
6,241,977

 
$
6,009,162

Investment and savings products segment
2,692,115

 
2,591,137

Corporate and other distributed products segment
1,016,985

 
1,251,521

Total assets
$
9,951,077

 
$
9,851,820

The Investment and Savings Products segment includes assets held in separate accounts. Excluding separate accounts, Investment and Savings Products segment assets were as follows: 
 
June 30,
2012
 
December 31,
2011
 
(In thousands)
Investment and savings products segment assets, excluding separate accounts
$
192,462

 
$
183,622



8


Results of operations by segment were as follows: 
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Term life insurance segment
$
162,732

 
$
131,641

 
$
314,536

 
$
268,603

Investment and savings products segment
102,967

 
104,586

 
203,101

 
205,432

Corporate and other distributed products segment
34,826

 
38,868

 
69,489

 
77,412

Total revenues
$
300,525

 
$
275,095

 
$
587,126

 
$
551,447

 
 
 
 
 
 
 
 
Income (loss) before income taxes:
 
 
 
 
 
 
 
Term life insurance segment
$
51,724

 
$
36,026

 
$
96,007

 
$
85,742

Investment and savings products segment
29,444

 
30,470

 
58,314

 
61,509

Corporate and other distributed products segment
(9,247
)
 
(8,031
)
 
(18,935
)
 
(15,530
)
Total income before income taxes
$
71,921

 
$
58,465

 
$
135,386

 
$
131,721

Results of operations by country were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Revenues by country:
 
 
 
 
 
 
 
United States
$
246,703

 
$
222,909

 
$
477,460

 
$
445,312

Canada
53,822

 
52,186

 
109,666

 
106,135

Total revenues
$
300,525

 
$
275,095

 
$
587,126

 
$
551,447

 
 
 
 
 
 
 
 
Income before income taxes by country:
 
 
 
 
 
 
 
United States
$
54,265

 
$
42,652

 
$
102,038

 
$
99,658

Canada
17,656

 
15,813

 
33,348

 
32,063

Total income before income taxes
$
71,921

 
$
58,465

 
$
135,386

 
$
131,721



9


(3) Investments
The period-end cost or amortized cost, gross unrealized gains and losses, and fair value of fixed-maturity and equity securities in our available-for-sale portfolio follow: 
 
June 30, 2012
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
 
(In thousands)
Securities available for sale, carried at fair value:
 
 
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
 
 
U.S. government and agencies
$
8,981

 
$
888

 
$

 
$
9,869

Foreign government
97,414

 
14,118

 
(148
)
 
111,384

States and political subdivisions
27,839

 
3,524

 
(2
)
 
31,361

Corporates (1)
1,181,368

 
120,760

 
(3,906
)
 
1,298,222

Mortgage- and asset-backed securities
348,174

 
26,695

 
(1,976
)
 
372,893

Total fixed-maturity securities
1,663,776

 
165,985

 
(6,032
)
 
1,823,729

Equity securities
25,033

 
7,154

 
(376
)
 
31,811

Total fixed-maturity and equity securities
$
1,688,809

 
$
173,139

 
$
(6,408
)
 
$
1,855,540

____________________
(1)
Includes $3.1 million of other-than-temporary impairment losses recognized in accumulated other comprehensive income.
 
December 31, 2011
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
 
(In thousands)
Securities available for sale, carried at fair value:
 
 
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
 
 
U.S. government and agencies
$
10,050

 
$
935

 
$

 
$
10,985

Foreign government
97,206

 
14,818

 
(179
)
 
111,845

States and political subdivisions
28,264

 
2,671

 

 
30,935

Corporates (1)
1,250,702

 
111,346

 
(7,847
)
 
1,354,201

Mortgage- and asset-backed securities
425,137

 
29,398

 
(3,345
)
 
451,190

Total fixed-maturity securities
1,811,359

 
159,168

 
(11,371
)
 
1,959,156

Equity securities
21,329

 
5,689

 
(306
)
 
26,712

Total fixed-maturity and equity securities
$
1,832,688

 
$
164,857

 
$
(11,677
)
 
$
1,985,868

____________________
(1)
Includes $2.6 million of other-than-temporary impairment losses recognized in accumulated other comprehensive income.
Certain available-for-sale securities were sold during the three months ended June 30, 2012 to finance the repurchase of shares in April 2012 (see Note 7 for additional information).


10


The net effect on stockholders’ equity of unrealized gains and losses on available-for-sale securities was as follows: 
 
June 30,
2012
 
December 31,
2011
 
(In thousands)
Net unrealized investment gains (losses) including foreign currency translation adjustment and other-than-temporary impairments:
 
 
 
Fixed-maturity and equity securities
$
166,731

 
$
153,180

Currency swaps
(23
)
 
96

Foreign currency translation adjustment
(4,929
)
 
(6,481
)
Other-than-temporary impairments
3,124

 
2,562

Net unrealized investment gains excluding foreign currency translation adjustment and other-than-temporary impairments
164,903

 
149,357

Deferred income taxes
(57,716
)
 
(52,275
)
Net unrealized investment gains excluding foreign currency translation adjustment and other-than-temporary impairments, net of tax
$
107,187

 
$
97,082

We also maintain a portfolio of fixed-maturity securities that are classified as trading securities. The carrying value of these securities was as follows: 
 
June 30,
2012
 
December 31,
2011
 
(In thousands)
Fixed-maturity securities classified as trading, carried at fair value
$
29,038

 
$
9,640

All of our available-for-sale mortgage- and asset-backed securities represent variable interests in variable interest entities ("VIEs"). We are not the primary beneficiary of these VIEs because we do not have the power to direct the activities that most significantly impact the entities’ economic performance. The maximum exposure to loss as a result of our involvement in these VIEs equals the carrying value of the securities.
As required by law, the Company has investments on deposit with governmental authorities and banks for the protection of policyholders. The fair value of investments on deposit was as follows: 
 
June 30,
2012
 
December 31,
2011
 
(In thousands)
Fair value of investments on deposit with governmental authorities
$
19,309

 
$
19,100

We participate in securities lending transactions with broker-dealers and other financial institutions to increase investment income with minimal risk. We require minimum collateral on securities loaned equal to 102% of the fair value of the loaned securities. We accept collateral in the form of securities, which we are not able to sell or encumber, and to the extent the collateral declines in value below 100%, we require additional collateral from the borrower. Any securities collateral received is not reflected on our balance sheet. We also accept collateral in the form of cash, all of which we reinvest. For loans involving unrestricted cash collateral, the collateral is reported as an asset with a corresponding liability representing our obligation to return the collateral. We continue to carry the lent securities as investment assets on our balance sheet during the terms of the loans, and we do not report them as sales. Cash collateral received and reinvested was as follows: 
 
June 30,
2012
 
December 31,
2011
 
(In thousands)
Securities lending collateral
$
143,963

 
$
149,358



11


The scheduled contractual maturity distribution of the available-for-sale fixed-maturity portfolio at June 30, 2012 follows. 
 
Amortized cost
 
Fair value
 
(In thousands)
Due in one year or less
$
112,493

 
$
116,017

Due after one year through five years
551,201

 
594,914

Due after five years through 10 years
603,657

 
684,617

Due after 10 years
48,251

 
55,288

 
1,315,602

 
1,450,836

Mortgage- and asset-backed securities
348,174

 
372,893

Total fixed-maturity securities
$
1,663,776

 
$
1,823,729

Expected maturities may differ from scheduled contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.
Investment Income. The components of net investment income were as follows: 
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Fixed-maturity securities
$
23,797

 
$
27,462

 
$
49,559

 
$
56,474

Equity securities
244

 
165

 
467

 
353

Policy loans and other invested assets
261

 
320

 
611

 
648

Cash and cash equivalents
111

 
65

 
246

 
135

Market return on deposit asset underlying 10% reinsurance agreement
574

 
650

 
1,604

 
1,159

Gross investment income
24,987

 
28,662

 
52,487

 
58,769

Investment expenses
(1,382
)
 
(1,433
)
 
(2,785
)
 
(2,914
)
Net investment income
$
23,605

 
$
27,229

 
$
49,702

 
$
55,855



12


The components of net realized investment gains (losses) as well as details on gross realized investment gains and losses and proceeds from sales or other redemptions were as follows: 
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Net realized investment gains (losses):
 
 
 
 
 
 
 
Gross gains from sales
$
4,506

 
$
2,145

 
$
6,542

 
$
2,957

Gross losses from sales
(56
)
 
(6
)
 
(57
)
 
(331
)
Gross gains from securities transferred from available-for-sale to trading
323

 

 
323

 

Gross losses from securities transferred from available-for-sale to trading
(6
)
 

 
(6
)
 

Other-than-temporary impairment losses
(127
)
 
(66
)
 
(341
)
 
(333
)
Gains (losses) from bifurcated options
(319
)
 
(38
)
 
(9
)
 
69

Net realized investment gains (losses)
$
4,321

 
$
2,035

 
$
6,452

 
$
2,362

Gross realized investment gains (losses) reclassified from accumulated other comprehensive income
$
4,640

 
$
2,073

 
$
6,461

 
$
2,293

Proceeds from sales or other redemptions
$
196,096

 
$
106,848

 
$
338,883

 
$
270,608

Other-Than-Temporary Impairment. We conduct a review each quarter to identify and evaluate impaired investments that have indications of possible other-than-temporary impairment ("OTTI"). An investment in a debt or equity security is impaired if its fair value falls below its cost. Factors considered in determining whether an unrealized loss is temporary include the length of time and extent to which fair value has been below cost, the financial condition and near-term prospects for the issue, and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery, which may be maturity. For additional information, see Note 3 to the consolidated and combined financial statements in our 2011 Annual Report.
Investments in fixed-maturity and equity securities with a cost basis in excess of fair value were as follows: 
 
June 30,
2012
 
December 31,
2011
 
(In thousands)
Fixed-maturity and equity securities with cost basis in excess of fair value
$
126,930

 
$
286,718



13


The following tables summarize, for all securities in an unrealized loss position, the aggregate fair value and the gross unrealized loss by length of time such securities have continuously been in an unrealized loss position: 
 
June 30, 2012
 
Less than 12 months
 
12 months or longer
 
Fair value
 
Unrealized
losses
 
Number
of
securities
 
Fair value
 
Unrealized
losses
 
Number
of
securities
 
(Dollars in thousands)
Fixed-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Foreign government
$
6,945

 
$
(148
)
 
12
 
$

 
$

 
0
States and political subdivisions
1,750

 
(2
)
 
3
 

 

 
0
Corporates
75,791

 
(2,282
)
 
125
 
13,030

 
(1,624
)
 
23
Mortgage- and asset-backed securities
9,878

 
(114
)
 
14
 
11,101

 
(1,862
)
 
22
Total fixed-maturity securities
94,364

 
(2,546
)
 

 
24,131

 
(3,486
)
 

Equity securities
1,314

 
(75
)
 
13
 
713

 
(301
)
 
12
Total fixed-maturity and equity securities
$
95,678

 
$
(2,621
)
 

 
$
24,844

 
$
(3,787
)
 

 
December 31, 2011
 
Less than 12 months
 
12 months or longer
 
Fair value
 
Unrealized
losses
 
Number
of
securities
 
Fair value
 
Unrealized
losses
 
Number
of
securities
 
(Dollars in thousands)
Fixed-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Foreign government
$
7,150

 
$
(179
)
 
10
 
$

 
$

 
0
States and political subdivisions

 

 
0
 

 

 
0
Corporates
188,643

 
(6,979
)
 
185
 
4,092

 
(868
)
 
11
Mortgage- and asset-backed securities
49,026

 
(478
)
 
60
 
25,280

 
(2,867
)
 
30
Total fixed-maturity securities
244,819

 
(7,636
)
 

 
29,372

 
(3,735
)
 

Equity securities
850

 
(306
)
 
78
 

 

 
0
Total fixed-maturity and equity securities
$
245,669

 
$
(7,942
)
 

 
$
29,372

 
$
(3,735
)
 

The amortized cost and fair value of available-for-sale fixed-maturity securities in default were as follows:
 
June 30,
2012
 
December 31,
2011
 
Amortized cost
 
Fair value
 
Amortized cost
 
Fair value
 
(In thousands)
Fixed-maturity securities in default
$
3,704

 
$
4,695

 
$
3,983

 
$
5,168



14


Impairment charges recognized in earnings on available-for-sale securities were as follows: 
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Impairments on fixed-maturity securities not in default
$
126

 
$
63

 
$
340

 
$
324

Impairments on fixed-maturity securities in default

 

 

 
4

Impairments on equity securities
1

 
3

 
1

 
5

Total impairment charges
$
127

 
$
66

 
$
341

 
$
333

The fixed-maturity and equity securities noted above were considered to be other-than-temporarily impaired due to adverse credit events, such as news of an impending filing for bankruptcy; analyses of the issuer’s most recent financial statements or other information in which liquidity deficiencies, significant losses and large declines in capitalization were evident; or analyses of rating agency information for issuances with severe ratings downgrades that indicated a significant increase in the possibility of default.
As of June 30, 2012, the unrealized losses on our invested asset portfolio were largely caused by interest rate sensitivity and changes in credit spreads. We believe that fluctuations caused by interest rate movement have little bearing on the recoverability of our investments. Because the declines in fair value were mostly attributable to changes in interest rates and not credit quality, and because we have the ability to hold these investments until a market price recovery or maturity as well as no present intention to dispose of them, we do not consider these investments to be other-than-temporarily impaired.
Net impairment losses recognized in earnings were as follows: 
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Impairment losses related to securities which the Company does not intend to sell or more-likely-than-not will not be required to sell:
 
 
 
 
 
 
 
Total OTTI losses recognized
$
161

 
$
2

 
$
861

 
$
2

Less portion of OTTI loss recognized in accumulated other comprehensive income (loss)
76

 

 
563

 

Net impairment losses recognized in earnings for securities which the Company does not intend to sell or more-likely-than-not will not be required to sell before recovery
85

 
2

 
298

 
2

OTTI losses recognized in earnings for securities which the Company intends to sell or more-likely-than-not will be required to sell before recovery
42

 
64

 
43

 
331

Net impairment losses recognized in earnings
$
127

 
$
66

 
$
341

 
$
333



15


The roll-forward of the credit-related losses recognized in income for all fixed-maturity securities still held follows. 
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Cumulative OTTI credit losses recognized for securities still held, beginning of period
$
32,213

 
$
40,634

 
$
34,072

 
$
41,129

Additions for OTTI securities where no credit losses were recognized prior to the beginning of the period
10

 

 
10

 
4

Additions for OTTI securities where credit losses have been recognized prior to the beginning of the period
116

 
63

 
330

 
324

Reductions due to sales, maturities or calls of credit impaired securities
(911
)
 
(807
)
 
(2,984
)
 
(1,567
)
Cumulative OTTI credit losses recognized for securities still held, end of period
$
31,428

 
$
39,890

 
$
31,428

 
$
39,890

Derivatives. We use foreign currency swaps to reduce our foreign exchange risk due to direct investment in foreign currency-denominated debt securities. The aggregate notional balance and fair value of these currency swaps follow. 
 
June 30,
2012
 
December 31,
2011
 
(In thousands)
Aggregate notional balance of currency swaps
$
5,878

 
$
5,878

Aggregate fair value of currency swaps
(1,987
)
 
(2,032
)
The change in fair value of these currency swaps is reflected in other comprehensive income as they effectively hedge the variability in cash flows from these foreign currency-denominated debt securities.
The embedded conversion options associated with fixed-maturity securities are bifurcated from the fixed-maturity security host contracts and separately recognized as equity securities. We recognize the change in fair value of these bifurcated conversion options in realized investment gains, including other-than-temporary impairment losses. The fair value of these bifurcated options follows.
 
June 30,
2012
 
December 31,
2011
 
(In thousands)
Aggregate fair value of embedded conversion options bifurcated from host contract
$
7,227

 
$
8,583

We have a deferred loss related to closed forward contracts that were used to mitigate our exposure to foreign currency exchange rates that resulted from the net investment in our Canadian operations. The amount of deferred loss included in accumulated other comprehensive income was as follows: 
 
June 30,
2012
 
December 31,
2011
 
(In thousands)
Deferred loss related to closed forward contracts
$
26,385

 
$
26,385

While we have no current intention to do so, these deferred losses will not be recognized until such time as we sell or substantially liquidate our Canadian operations.
(4)
Fair Value of Financial Instruments
Fair value is the price that would be received upon the sale of an asset in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect


16


our view of market assumptions in the absence of observable market information. We classify and disclose all invested assets carried at fair value in one of the following three categories:
Level 1. Quoted prices for identical instruments in active markets. Level 1 primarily consists of financial instruments whose value is based on quoted market prices in active markets, such as exchange-traded common stocks and actively traded mutual fund investments;
Level 2. Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 includes those financial instruments that are valued using industry-standard pricing methodologies, models or other valuation methodologies. Various inputs are considered in deriving the fair value of the underlying financial instrument, including interest rate, credit spread, and foreign exchange rates. All significant inputs are observable, or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include: certain public and private corporate fixed-maturity and equity securities; government or agency securities; certain mortgage- and asset-backed securities and certain non-exchange-traded derivatives, such as currency swaps and forwards; and
Level 3. Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Level 3 consists of financial instruments whose fair value is estimated based on industry-standard pricing methodologies and models using significant inputs not based on, nor corroborated by, readily available market information. Valuations for this category primarily consist of non-binding broker quotes. Financial instruments in this category primarily include less liquid fixed-maturity corporate securities.
As of each reporting period, all assets and liabilities recorded at fair value are classified in their entirety based on the lowest level of input (Level 3 being the lowest). Significant levels of estimation and judgment are required to determine the fair value of certain of our investments. The factors influencing these estimations and judgments are subject to change in subsequent reporting periods.
The estimated fair value and hierarchy classifications for assets and liabilities that are measured at fair value on a recurring basis were as follows: 
 
June 30, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Fair value assets:
 
 
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
 
 
U.S. government and agencies
$

 
$
9,869

 
$

 
$
9,869

Foreign government

 
111,384

 

 
111,384

States and political subdivisions

 
31,361

 

 
31,361

Corporates
249

 
1,290,884

 
7,089

 
1,298,222

Mortgage- and asset-backed securities

 
369,899

 
2,994

 
372,893

Total fixed-maturity securities
249

 
1,813,397

 
10,083

 
1,823,729

Equity securities
24,525

 
7,238

 
48

 
31,811

Trading securities

 
29,038

 

 
29,038

Separate accounts

 
2,500,640

 

 
2,500,640

Total fair value assets
$
24,774

 
$
4,350,313

 
$
10,131

 
$
4,385,218

Fair value liabilities:
 
 
 
 
 
 
 
Currency swaps
$

 
$
1,987

 
$

 
$
1,987

Separate accounts

 
2,500,640

 

 
2,500,640

Total fair value liabilities
$

 
$
2,502,627

 
$

 
$
2,502,627



17


 
December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Fair value assets:
 
 
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
 
 
     U.S. government and agencies
$

 
$
10,985

 
$

 
$
10,985

     Foreign government

 
111,845

 

 
111,845

     States and political subdivisions

 
30,935

 

 
30,935

     Corporates
256

 
1,349,021

 
4,924

 
1,354,201

     Mortgage- and asset-backed securities

 
449,228

 
1,962

 
451,190

          Total fixed-maturity securities
256

 
1,952,014

 
6,886

 
1,959,156

Equity securities
18,069

 
8,592

 
51

 
26,712

Trading securities

 
9,640

 

 
9,640

Separate accounts

 
2,408,598

 

 
2,408,598

          Total fair value assets
$
18,325

 
$
4,378,844

 
$
6,937

 
$
4,404,106

Fair value liabilities:
 
 
 
 
 
 
 
Currency swaps
$

 
$
2,032

 
$

 
$
2,032

Separate accounts

 
2,408,598

 

 
2,408,598

           Total fair value liabilities
$

 
$
2,410,630

 
$

 
$
2,410,630

In assessing fair value of our investments, we use a third-party pricing service for approximately 94% of our securities. The remaining securities are primarily thinly traded securities valued using models based on observable inputs on public corporate spreads having similar tenors (e.g., sector, average life and quality rating) and liquidity and yield based on quality rating, average life and treasury yields. All observable data inputs are corroborated by independent third-party data. In the absence of sufficient observable inputs, we utilize non-binding broker quotes, which are reflected in our Level 3 classification as we are unable to evaluate the valuation technique(s) or significant inputs used to develop the quotes. Therefore, we do not internally develop the quantitative unobservable inputs used in measuring the fair value of Level 3 investments. However, we do corroborate pricing information provided by our third-party pricing servicing by performing a review of selected securities. Our review activities include obtaining detailed information about the assumptions, inputs and methodologies used in pricing the security; documenting this information; and corroborating it by comparison to independently obtained prices and or independently developed pricing methodologies.
Furthermore, we perform internal reasonableness assessments on fair value determinations within our portfolio throughout the month and at month-end, including pricing variance analyses and comparisons to alternative pricing sources and benchmark returns. If a fair value appears unusual relative to these assessments, we will re-examine the inputs and may challenge a fair value assessment made by the pricing service. If there is a known pricing error, we will request a reassessment by the pricing service. If the pricing service is unable to perform the reassessment on a timely basis, we will determine the appropriate price by requesting a reassessment from an alternative pricing service or other qualified source as necessary. We do not adjust quotes or prices except in a rare circumstance to resolve a known error.
Because many fixed-maturity securities do not trade on a daily basis, fair value is determined using industry-standard methodologies by applying available market information through processes such as U.S. Treasury curves, benchmarking of similar securities, sector groupings, quotes from market participants and matrix pricing. Observable information is compiled and integrates relevant credit information, perceived market movements and sector news. Additionally, security prices are periodically back-tested to validate and/or refine models as conditions warrant. Market indicators and industry and economic events are also monitored as triggers to obtain additional data. For certain structured securities with limited trading activity, industry-standard pricing methodologies use adjusted market information, such as index prices or discounting expected future cash flows, to estimate fair value. If these measures are not deemed observable for a particular security, the security will be classified as Level 3 in the fair value hierarchy.
Where specific market information is unavailable for certain securities, pricing models produce estimates of fair value primarily using Level 2 inputs along with certain Level 3 inputs. These models include matrix pricing. The


18


pricing matrix uses current treasury rates and credit spreads received from third-party sources to estimate fair value. The credit spreads incorporate the issuer’s industry- or issuer-specific credit characteristics and the security’s time to maturity, if warranted. Remaining un-priced securities are valued using an estimate of fair value based on indicative market prices that include significant unobservable inputs not based on, nor corroborated by, market information, including the utilization of non-binding broker quotes.
The roll-forward of the Level 3 assets measured at fair value on a recurring basis was as follows: 
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Level 3 assets, beginning of period
$
10,916

 
$
30,162

 
$
6,937

 
$
24,998

Net unrealized gains (losses) included in other comprehensive income
(504
)
 
(232
)
 
(336
)
 
(281
)
Net realized gains (losses) included in realized investment gains, including other-than-temporary impairment losses
45

 
871

 
(40
)
 
1,466

Purchases
1,117

 

 
2,416

 
4,000

Sales

 
(902
)
 

 
(3,823
)
Settlements
(384
)
 
(1,238
)
 
(738
)
 
(1,462
)
Transfers into Level 3

 
2

 
2,951

 
4,503

Transfers out of Level 3
(1,059
)
 
(16,398
)
 
(1,059
)
 
(17,136
)
Level 3 assets, end of period
$
10,131

 
$
12,265

 
$
10,131

 
$
12,265

We obtain independent pricing quotes based on observable inputs as of the end of the reporting period for all securities in Level 2. Those inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, quoted prices for similar instruments in markets that are not active, and other relevant data. We monitor these inputs for market indicators, industry and economic events. We recognize transfers into new levels and out of previous levels as of the end of the reporting period, including interim reporting periods, as applicable. There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2012 and 2011. In addition, there were no transfers between Level 1 and Level 3 during the six months ended June 30, 2012 and 2011.
Invested assets included in the transfer from Level 2 to Level 3 during the three months ended June 30, 2011 and the six months ended June 30, 2012 and 2011 primarily were fixed-maturity investments for which we were unable to corroborate independent broker quotes with observable market data. Invested assets included in the transfer from Level 3 to Level 2 during the three and six months ended June 30, 2012 and 2011 primarily were fixed-maturity securities and fixed-maturity securities with embedded conversion options for which we were able to obtain independent pricing quotes based on observable inputs.


19


The table below is a summary of the estimated fair value for financial instruments.
 
June 30, 2012
 
December 31, 2011
 
Carrying
value
 
Estimated
fair value
 
Carrying
value
 
Estimated
fair value
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Fixed-maturity securities
$
1,823,729

 
$
1,823,729

 
$
1,959,156

 
$
1,959,156

Equity securities
31,811

 
31,811

 
26,712

 
26,712

Trading securities
29,038

 
29,038

 
9,640

 
9,640

Policy loans
24,187

 
24,187

 
25,982

 
25,982

Other invested assets
14

 
14

 
14

 
14

Deposit asset underlying 10% reinsurance agreement
75,436

 
75,436

 
59,975

 
59,975

Separate accounts
2,500,640

 
2,500,640

 
2,408,598

 
2,408,598

Liabilities:
 
 
 
 
 
 
 
Note payable
$
300,000

 
$
334,782

 
$
300,000

 
$
329,779

Currency swaps
1,987

 
1,987

 
2,032

 
2,032

Separate accounts
2,500,640

 
2,500,640

 
2,408,598

 
2,408,598

The fair values of financial instruments presented above are estimates of the fair values at a specific point in time using various sources and methods, including market quotations and a complex matrix system that takes into account issuer sector, quality, and spreads in the current marketplace.
Recurring fair value measurements. Estimated fair values of investments in fixed-maturity securities are principally a function of current spreads and interest rates that are corroborated by independent third-party data. Therefore, the fair values presented are indicative of amounts we could realize or settle at the respective balance sheet date. We do not necessarily intend to dispose of or liquidate such instruments prior to maturity. Trading securities, which primarily consist of fixed-maturity securities, are carried at fair value. Equity securities, including common and non-redeemable preferred stocks, are carried at fair value. Currency swaps are stated at fair value. Segregated funds in separate accounts are carried at the underlying value of the variable insurance contracts, which is fair value.
Nonrecurring fair value measurements. Policy loans are carried at unpaid principal balances, which approximate fair value and are categorized as Level 3 fair value measurements. The deposit asset underlying the 10% reinsurance agreement represents the value of the assets backing the economic reserves held in support of a reinsurance agreement. The carrying value of this deposit asset approximates fair value, which is categorized as Level 3 in the fair value hierarchy. Other invested assets have a carrying value that approximates fair value and are categorized as Level 3 in the fair value hierarchy. The fair value of our note payable is a Level 2 fair value measurement and is based on observable inputs including prevailing interest rates and an estimated spread based on notes of comparable issuers and maturity.
The carrying amounts for cash and cash equivalents, receivables, accrued investment income, accounts payable, cash collateral and payables for security transactions approximate their fair values due to the short-term nature of these instruments. Consequently, such financial instruments are not included in the above table.


20


(5)
Reinsurance
Reinsurance ceded arrangements do not relieve the Company of its primary obligation to the policyholder. We monitor the concentration of credit risk we have with any reinsurer, as well as the financial condition of the reinsurers. Details on in-force life insurance follow. 
 
June 30,
2012
 
December 31,
2011
 
(Dollars in thousands)
Direct life insurance in force
$
672,899,761

 
$
669,938,841

Amounts ceded to other companies
(598,719,363
)
 
(596,975,143
)
Net life insurance in force
$
74,180,398

 
$
72,963,698

Percentage of reinsured life insurance in force
89
%
 
89
%
Due from reinsurers includes ceded reserve balances and ceded claim liabilities. Reinsurance receivable and financial strength ratings by reinsurer were as follows: 
 
June 30, 2012
 
December 31, 2011
Reinsurance
receivable
 
A.M. Best
rating
 
Reinsurance
receivable
 
A.M. Best
rating
(In thousands)
Prime Reinsurance Company (1)
$
2,471,318

 
NR
 
$
2,438,723

 
NR
Financial Reassurance Company 2010, Ltd. (1)
338,645

 
NR
 
335,396

 
NR
American Health and Life Insurance Company (1)
166,687

 
A-
 
164,387

 
A-
Due from Citi affiliate reinsurers
2,976,650

 
 
 
2,938,506

 
 
Swiss Re Life & Health America Inc. (2)
254,414

 
A+
 
252,912

 
A+
SCOR Global Life Reinsurance Companies
148,874

 
A
 
143,409

 
A
Generali USA Life Reassurance Company
113,820

 
A-
 
114,774

 
A-
Transamerica Reinsurance Companies
101,709

 
A+
 
103,873

 
A+
Munich American Reassurance Company
97,543

 
A+
 
99,240

 
A+
Korean Reinsurance Company
82,655

 
A
 
82,755

 
A
RGA Reinsurance Company
69,338

 
A+
 
67,740

 
A+
All other reinsurers
58,025

 
 
52,109

 
Due from reinsurers
$
3,903,028

 
 
 
$
3,855,318

 
 
____________________ 
NR – not rated
(1)
Amounts shown are net of their share of the reinsurance recoverable from other reinsurers.
(2)
Includes amounts ceded to Lincoln National Life Insurance and 100% retroceded to Swiss Re Life & Health America Inc.
(6)
Notes Payable
In April 2010, we issued to Citi a $300.0 million note (the "Citi note") as part of our corporate reorganization. The Citi note bore interest at an annual rate of 5.5%, payable semi-annually in arrears on January 15 and July 15. It was scheduled to mature on March 31, 2015. The Citi note required us to use our commercially reasonable efforts to repay the note in full at certain mutually agreeable dates, based on certain conditions. We were in compliance with the covenants of the Citi note at June 30, 2012. No events of default or defaults occurred during the six months ended June 30, 2012.
On July 16, 2012, we issued $375.0 million in principal amount of senior notes (the "Senior Notes") and used $300.0 million of the net cash proceeds to repay the Citi note in whole at a redemption price equal to 100% of the outstanding principal amount. We issued the Senior Notes at a price of 99.843% of the principal amount with an annual interest rate of 4.750%, payable semi-annually in arrears on January 15 and July 15, commencing on January 15, 2013. The Senior Notes mature on July 15, 2022.
As unsecured senior obligations, the Senior Notes rank equally in right of payment with all existing and future unsubordinated indebtedness. They will rank senior in right of payment to all existing and future subordinated indebtedness and are structurally subordinated in right of payment to all existing and future liabilities of our


21


subsidiaries. In addition, the Senior Notes contain covenants that restrict our ability to, among other things, create or incur any indebtedness that is secured by a lien on the capital stock of certain of our subsidiaries, and merge, consolidate or sell all or substantially all of our properties and assets.
(7)
Stockholders’ Equity
A reconciliation of the number of shares of our common stock follows. 
 
Six months ended June 30,
 
2012