PRIMERICA, INC. – 10-Q – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to inform the reader about matters affecting the financial condition and results of operations ofPrimerica, Inc. (the "Parent Company") and its subsidiaries (collectively, "we" or the "Company") for the period fromDecember 31, 2011 toJune 30, 2012 . As a result, the following discussion should be read in conjunction with MD&A and the consolidated and combined financial statements and notes thereto that are included in our Annual Report on Form 10-K for the year endedDecember 31, 2011 , as modified and updated by our Current Report on Form 8-K filed with theSEC onMay 8, 2012 (together, the "2011 Annual Report"). This discussion contains forward-looking statements that constitute our plans, estimates and beliefs. These forward-looking statements involve numerous risks and uncertainties, including, but not limited to those discussed under the heading "Risk Factors" in the 2011 Annual Report. Actual results may differ materially from those contained in any forward-looking statements. This MD&A is divided into the following sections: • Business Overview
• Critical Accounting Estimates
• Factors Affecting Our Results
• Results of Operations • Financial Condition
• Liquidity and Capital Resources
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Business Overview We are a leading distributor of financial products to middle income households inthe 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. We have two primary operating segments,Term Life Insurance and Investment and Savings Products, and a third segment, Corporate and Other Distributed Products.Term Life Insurance . We distribute the term life insurance products that we originate through our three issuing life insurance company subsidiaries:Primerica Life Insurance Company ("Primerica Life");National Benefit Life Insurance Company ("NBLIC"); and Primerica Life Insurance Company of Canada ("Primerica Life Canada"). Our in-force term insurance policies have level premiums for the stated term period. As such, the policyholder pays the same amount each year. Initial policy term periods are between 10 and 35 years. While premiums are guaranteed to remain level during the initial term period (up to a maximum of 20 years inthe United States ), our claim obligations generally increase as our policyholders age. In addition, we incur significant upfront costs in acquiring new insurance business. Our deferral and amortization of policy acquisition costs and reserving methodology are designed to match the recognition of premium revenues with the timing of policy lapses and the payment of expected claims obligations. OurTerm Life Insurance segment results are primarily driven by sales and policies in force, accuracy of our pricing assumptions, terms and use of reinsurance, investment income, and expenses. In connection with our corporate reorganization in 2010, we entered into certain reinsurance transactions with affiliates of Citigroup Inc. (the "Citi reinsurers") and ceded between 80% and 90% of the risks and rewards of our term life insurance policies that were in force at year-end 2009 (the "Citi reinsurance transactions"). We continue to administer all policies subject to these coinsurance agreements. Subsequent to the Citi reinsurance transactions, the revenues and earnings of ourTerm Life Insurance segment initially declined in proportion to the amount of revenues and earnings historically associated with the book of term life insurance policies that we ceded to the Citi reinsurers. As we have added new in-force business, our revenues and earnings have grown from these initial levels. With each successive period, we expect revenue and earnings growth to decelerate as the size of our in-force book grows and incremental sales have a reduced marginal effect on the size of the then-existing in-force book. Investment and Savings Products. We distribute mutual funds, managed accounts, annuities and segregated funds. Inthe United States , we distribute mutual fund and managed accounts products and variable and fixed annuity products of several third-party companies. In Canada, we offer our own Primerica-branded mutual funds, as well as mutual funds of other companies, and segregated funds, which are underwritten byPrimerica Life Canada . Results in our Investment and Savings Products segment are driven by sales of mutual funds and annuities, the value of assets in client accounts for which we earn ongoing service, distribution and advisory fees and the number of fee generating accounts for which we provide administration functions or retirement plan custodial services. While our investment and savings products all have similar long-term earnings characteristics, our results in a given fiscal period are affected by changes in the overall mix of products within these broad categories. Corporate and Other Distributed Products. Our Corporate and Other Distributed Products segment consists primarily of revenues and expenses related to other distributed products, including various insurance products, prepaid legal services and a credit information product. These products are distributed pursuant to distribution arrangements with third parties, except for certain life and disability insurance products underwritten by NBLIC, ourNew York life insurance subsidiary, that are not distributed through our independent agent sales force. In addition, our Corporate and Other Distributed Products segment includes corporate income (including net investment income) and expenses not allocated to other segments, interest expense on our note payable and realized gains and losses on our invested asset portfolio. Accounting Policy Change. EffectiveJanuary 1, 2012 , we adopted ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts ("ASU 2010-26"), and no longer defer certain indirect acquisition costs or costs attributable to unsuccessful efforts of acquiring life insurance policies. We adopted this accounting policy change retrospectively and, accordingly, our historical results have been adjusted to reflect the adoption on a consistent basis across all periods presented. As a result of this accounting change, we reduced stockholders' equity as ofDecember 31, 2011 by$96.0 million to $1.33 billion . This accounting change also reduced net income by$6.4 million to $37.6 million for the three months endedJune 30, 2011 and by$11.6 million to $84.9 million for the six months endedJune 30, 2011 . As a result of this accounting change, basic earnings per 26
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share decreased by$0.08 to$0.50 for the three months endedJune 30, 2011 and by$0.16 to$1.12 for the six months endedJune 30, 2011 while diluted earnings per share decreased by$0.09 to$0.49 for the three months endedJune 30, 2011 and by$0.15 to$1.11 for the six months endedJune 30, 2011 . For additional information regarding this accounting policy change, see Note 1 to our condensed consolidated financial statements and the Critical Accounting Estimates section below. Critical Accounting Estimates We prepare our financial statements in accordance with U.S. generally accepted accounting principles ("GAAP"). These principles are established primarily by theFinancial Accounting Standards Board ("FASB"). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions based on currently available information when recording transactions resulting from business operations. Our significant accounting policies are described in Note 1 to our consolidated and combined financial statements included in our 2011 Annual Report. The most significant items on the balance sheet are based on fair value determinations, accounting estimates and actuarial determinations which are susceptible to changes in future periods and which affect our results of operations and financial position. The estimates that we deem to be most critical to an understanding of our results of operations and financial position are those related to the valuation of investments, reinsurance, deferred policy acquisition costs, future policy benefit reserves, and income taxes. The preparation and evaluation of these critical accounting estimates involve the use of various assumptions developed from management's analyses and judgments. Subsequent experience or use of other assumptions could produce significantly different results. OnJanuary 1, 2012 , we retrospectively adopted the guidance in ASU 2010-26. During the six months endedJune 30, 2012 , there have been no changes in the items that we have identified as critical accounting estimates. For additional information regarding critical accounting estimates, see the Critical Accounting Estimates section of MD&A included in our 2011 Annual Report. Factors Affecting Our Results Economic Environment. The relative strength and stability of financial markets and economies inthe United States and Canada affect our growth and profitability. Our business is, and we expect will continue to be, influenced by a number of industry-wide and product-specific trends and conditions. Economic conditions, including unemployment levels and consumer confidence, influence investment and spending decisions by middle income consumers, who are generally our primary clients. These conditions and factors also impact prospective recruits' perceptions of the business opportunity that becoming a Primerica sales representative offers, which can drive or dampen recruiting. Consumer spending and borrowing levels remain under pressure, as consumers take a more conservative financial posture including reevaluating their savings and debt management plans. The effects of these trends and conditions are discussed in the Results of Operations section below. Independent Sales Force. Our ability to increase the size of our sales force is largely based on the success of our recruiting efforts and our ability to train and motivate recruits to obtain licenses to sell life insurance. We believe that recruitment levels are an important advance indicator of sales force trends, and growth in recruiting is usually indicative of future growth in the overall size of the sales force. However, because new recruits may obtain the requisite licenses at rates above or below historical levels, recruiting results do not always result in commensurate changes in the size of our licensed sales force. Details on new recruits and life-licensed sales representative activity were as follows: Three months ended June 30, Six months ended June 30, 2012 2011 2012 2011 New recruits 48,976 65,138 107,527 117,951 New life-licensed sales representatives 9,786 8,061 17,436 15,206 Recruiting of new representatives decreased for the three and six months endedJune 30, 2012 compared with the same periods a year ago. The decrease is largely attributable to strong prior year recruiting as a result of short-term incentives announced at ourJune 2011 biennial sales force convention. However, new life licenses grew in both the three and six months endedJune 30, 2012 versus the comparable periods in 2011. The increase in new life licenses was driven by our efforts to balance the emphasis on recruiting and licensing in both our messaging and 27
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incentive programs. Results were also driven by the introduction of streamlined life-licensing processes for new recruits. The size of our life-licensed insurance sales force was as follows:June 30 ,March 31 ,
December 31,
2012 2012
2011
Life-licensed insurance sales representatives 90,868 89,651
91,176
The size of our life-licensed insurance sales force atJune 30, 2012 was down slightly fromDecember 31, 2011 , but increased fromMarch 31, 2012 as a result of new representative life-licensing discussed above. Term Life Insurance Segment. OurTerm Life Insurance segment results are primarily driven by sales volumes, the accuracy of our pricing assumptions, terms and use of reinsurance, investment income and expenses. Sales and policies in force. Sales of new term policies and the size and characteristics of our in-force book of policies are vital to our results over the long term. Premium revenue is recognized as it is earned over the term of the policy and eligible acquisition expenses are deferred and amortized ratably with the level premiums of the underlying policies. However, because we incur significant cash outflows at or about the time policies are issued, including the payment of sales commissions and underwriting costs, changes in life insurance sales volume will have a more immediate effect on our cash flows. Historically, we have found that while sales volume of term life insurance products between fiscal periods may vary based on a variety of factors, the productivity of our individual sales representatives remains within a relatively narrow range and, consequently, our sales volume over the longer term generally correlates to the size of our sales force. The average number of life-licensed sales representatives and the number of term life insurance policies issued, as well as the average monthly rate of new policies issued per life-licensed sales representative, were as follows: Three months ended June 30, Six months ended June 30, 2012 2011 2012 2011 Average number of life-licensed sales representatives 90,461 91,457 90,329 92,231 Number of new policies issued 60,583 59,826 116,728 111,107 Average monthly rate of new policies issued per life-licensed sales representative .22x .22x .22x .20x Pricing assumptions. Our pricing methodology is intended to provide us with appropriate profit margins for the risks we assume. We determine pricing classifications based on the coverage sought, such as the size and term of the policy, and certain policyholder attributes, such as age and health. In addition, we utilize unisex rates for our term life insurance policies. The pricing assumptions that underlie our rates are based upon our best estimates of mortality, persistency and investment yields at the time of issuance, sales force commission rates, issue and underwriting expenses, operating expenses and the characteristics of the insureds, including sex, age, underwriting class, product and amount of coverage. Our results will be affected to the extent there is a variance between our pricing assumptions and actual experience. • Persistency. Persistency is a measure of how long our insurance policies
stay in force. As a general matter, persistency that is lower than our
pricing assumptions adversely affects our results over the long term
because we lose the recurring revenue stream associated with the policies
that lapse. Determining the near-term effects of changes in persistency is
more complicated. When persistency is lower than our pricing assumptions,
we must accelerate the amortization of DAC. The resultant increase in
amortization expense is offset by a corresponding release of reserves
associated with lapsed policies, which causes a reduction in benefits and
claims expense. The reserves associated with any given policy will change
over the term of such policy. As a general matter, reserves are lowest at
the inception of a policy term and rise steadily to a peak before
declining to zero at the expiration of the policy term. Accordingly,
depending on when the lapse occurs in relation to the overall policy term,
the reduction in benefits and claims expense may be greater or less than
the increase in amortization expense and, consequently, the effects on 28
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earnings for a given period could be positive or negative. Persistency levels will impact results to the extent actual experience deviates from the persistency assumptions used to price our products. • Mortality. Our profitability is affected to the extent actual mortality
rates differ from those used in our pricing assumptions. We mitigate a significant portion of our mortality exposure through reinsurance. Variances between actual mortality experience and the assumptions and estimates used by our reinsurers affect the cost and potentially the availability of reinsurance. • Investment Yields. For policies issued prior to 2010, we used a level investment yield rate which reflects yields available at that time. For policies issued in 2010 and after, we have been using an increasing interest rate assumption to reflect the historically low interest rate
environment. Both DAC and the reserve liability increase with the assumed
investment yield rate. Since DAC is higher than the reserve liability in
the early years of a policy, a lower assumed investment yield generally
will result in lower profits. In the later years, when the reserve
liability is higher than DAC, a lower assumed investment yield generally
will result in higher profits. These assumed investment yields, which like
other pricing assumptions are locked in at issue, impact the timing but
not the aggregate amount of DAC and reserve changes. Actual investment
yields will impact net investment income allocated to the Term Life
Insurance segment, but will not impact DAC or the reserve liability.
Reinsurance. We use reinsurance extensively, which has a significant effect on our results of operations. Since the mid-1990s, we have reinsured between 60% and 90% of the mortality risk on our U.S. term life insurance policies on a quota share yearly renewable term ("YRT") basis. In Canada, we previously utilized reinsurance arrangements similar to the U.S. in certain years and reinsured only face amounts above$500,000 in other years. However, in the first quarter of 2012, we entered into a YRT reinsurance arrangement inCanada similar to our U.S. program that reinsures 80% of the face amount for every policy sold. YRT reinsurance permits us to set future mortality at contractual rates by policy class. To the extent actual mortality experience is more or less favorable than the contractual rate, the reinsurer will earn incremental profits or bear the incremental cost, as applicable. In contrast to coinsurance, which is intended to eliminate all risks (other than counterparty risk of the reinsurer) and rewards associated with a specified percentage of the block of policies subject to the reinsurance arrangement, the YRT reinsurance arrangements we enter into are intended only to reduce volatility associated with variances between estimated and actual mortality rates. The effect of our reinsurance arrangements on ceded premiums and benefits and expenses on our statement of income follows: • Ceded premiums. Ceded premiums are the premiums we pay to reinsurers.
These amounts are deducted from the direct premiums we earn to calculate
our net premium revenues. Similar to direct premium revenues, ceded
coinsurance premiums remain level over the initial term of the insurance
policy. Ceded YRT premiums increase over the period that the policy has been in force. Accordingly, ceded YRT premiums generally constitute an increasing percentage of direct premiums over the policy term.
• Benefits and claims. Benefits and claims include incurred claim amounts
and changes in future policy benefit reserves. Reinsurance reduces
incurred claims in direct proportion to the percentage ceded. Coinsurance
also reduces the change in future policy benefit reserves in direct proportion to the percentage ceded while YRT reinsurance does not significantly impact benefit reserves. • Amortization of DAC. Amortization of DAC is reduced on a pro-rata basis for the coinsured business, including the business reinsured with Citi. There is no impact on amortization of DAC associated with our YRT contracts.
• Insurance expenses. Insurance expenses are reduced by the allowances
received from coinsurance, including the business reinsured with Citi.
There is no impact on insurance expenses associated with our YRT
contracts.
We may alter our reinsurance practices at any time due to the unavailability of YRT reinsurance at attractive rates or the availability of alternatives to reduce our risk exposure. We presently intend to continue ceding approximately 90% of our U.S. mortality risk on new business and approximately 80% of our Canadian mortality risk on new business. Net investment income.Term Life Insurance segment net investment income is composed of two elements: allocated net investment income and the market return associated with the deposit asset underlying the 10% 29
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reinsurance agreement we executed in connection with our corporate reorganization. Invested assets are allocated to the Term Life segment based on the book value of the invested assets necessary to meet statutory reserve requirements and our targeted capital objectives. Net investment income is also impacted by the performance of our invested asset portfolio and the market return on the deposit asset which can be affected by interest rates, credit spreads and the mix of invested assets. Expenses. Results are also affected by variances in client acquisition, maintenance and administration expense levels. Investment and Savings Products Segment. Our Investment and Savings Products segment results are primarily driven by sales, the value of assets in client accounts for which we earn ongoing management, service and distribution fees and the number of fee generating accounts we administer. Sales. We earn commissions and fees, such as dealer re-allowances, and marketing and support fees, based on sales of mutual fund and managed account products and annuities. Sales of investment and savings products are influenced by the overall demand for investment products inthe United States and Canada, as well as by the size and productivity of our sales force. We generally experience seasonality in our Investment and Savings Products segment results due to our high concentration of sales of retirement account products. These accounts are typically funded in February through April, coincident with our clients' tax return preparation season. While we believe the size of our sales force is a factor in driving sales volume in this segment, there are a number of other variables, such as economic and market conditions, that may have a significantly greater effect on sales volume in any given fiscal period. Asset values in client accounts. We earn marketing and distribution fees (trail commissions or, with respect to U.S. mutual funds, 12b-1 fees) on mutual fund and annuity assets inthe United States and Canada. Inthe United States , we also earn investment advisory fees on assets in the managed accounts program. In Canada, we earn management fees on certain mutual fund assets and on the segregated funds for which we serve as investment manager. Asset values are influenced by new product sales, ongoing contributions to existing accounts, redemptions and the change in market values in existing accounts. While we offer a wide variety of asset classes and investment styles, our clients' accounts are primarily invested in equity funds. Accounts. We earn recordkeeping fees for administrative functions we perform on behalf of several of our retail and managed mutual fund providers and custodial fees for services as a non-bank custodian for certain of our clients' retirement plan accounts. Sales mix. While our investment and savings products all have similar long-term earnings characteristics, our results in a given fiscal period will be affected by changes in the overall mix of products within these broad categories. Examples of changes in the sales mix that influence our results include the following: • sales of a higher proportion of mutual fund products of the several mutual
fund families for which we act as recordkeeper will generally increase our
earnings because we are entitled to recordkeeping fees on these accounts;
• sales of annuity products in
revenues in the period such sales occur than sales of other investment
products that either generate lower upfront revenues or, in the case of managed accounts and segregated funds, no upfront revenues; • sales and administration of a higher proportion of mutual funds that
enable us to earn marketing and support fees will increase our revenues
and profitability;
• sales of a higher proportion of retirement products of several mutual fund
families will tend to result in higher revenue generation due to our ability to earn custodial fees on these accounts; and
• sales of a higher proportion of managed accounts and segregated funds
products will generally extend the time over which revenues can be earned
because we are entitled to higher revenues based on assets under
management for these accounts in lieu of upfront revenues.
Corporate and Other Distributed Products Segment. We earn revenues and pay commissions and referral fees for various other insurance products, prepaid legal services and other financial products, all of which are originated by third parties. NBLIC also underwrites a mail-order student life policy and a short-term disability benefit policy, neither of which is distributed by our sales force, and has in-force policies from several discontinued lines of insurance. 30
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The Corporate and Other Distributed Products segment is affected by corporate income and expenses not allocated to our other segments, net investment income (other than net investment income allocated to ourTerm Life Insurance segment), general and administrative expenses (other than expenses that are allocated to ourTerm Life Insurance or Investment and Savings Products segments), equity awards granted to management and our sales force leaders at the time of our initial public offering, interest expense on notes payable and realized gains and losses on our invested asset portfolio. Capital Structure. Our financial results have also been affected by changes in our capital structure that have occurred since our corporate reorganization in 2010. Share repurchases and related financing arrangements. EffectiveMarch 31, 2012 ,Peach Re, Inc. ("Peach Re"), a special purpose financial captive insurance company and wholly owned subsidiary of Primerica Life, entered into a Credit Facility Agreement withDeutsche Bank (the "Credit Facility Agreement") to support certain obligations for a portion of the reserves (commonly referred to as Regulation XXX reserves) related to level premium term life insurance policies ceded to Peach Re from Primerica Life under the Peach Re Coinsurance Agreement. In connection with this transaction, Primerica Life obtained regulatory approval for the payment of an extraordinary dividend of$150.0 million to the Parent Company, which was paid inApril 2012 . The dividend was primarily funded by the sale of invested assets, and the proceeds were used to repurchase approximately 5.7 million shares of our common stock from private equity funds managed by Warburg Pincus LLC ("Warburg Pincus") for approximately$150.0 million inApril 2012 . In addition, we repurchased approximately 8.9 million shares of our common stock from Citi for approximately$200.0 million inNovember 2011 primarily using the proceeds from invested asset sales. We retired the common stock repurchased in each transaction, providing an accretive impact on earnings per share. The sales of invested assets used to fund the repurchases results in lower net investment income in periods following the sales. Notes payable. InApril 2010 , we issued a$300.0 million note to Citi as part of our corporate reorganization (the "Citi note"). We paid interest on the Citi note at an annual rate of 5.5%. OnJuly 16, 2012 , we repaid the Citi note with a portion of the proceeds received from the issuance of senior notes with an aggregate principal amount of$375.0 million (the "Senior Notes"). We issued the Senior Notes at a price of 99.843% of the principal amount. The Senior Notes bear interest at an annual rate of 4.750%. We anticipate using the remaining proceeds for general corporate purposes, including share repurchases. Future interest expense will be higher as the increase in the outstanding principal balance more than offsets the decrease in the stated interest rate. 31
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Results of
Three months ended June 30, Change Six months ended June 30, Change 2012 2011 $ % 2012 2011 $ % (Dollars in thousands) Revenues: Direct premiums $ 570,073 $ 560,881 $ 9,192 2
%
154,258 125,317 28,941 23
% 297,132 255,148 41,984 16 % Commissions and fees
106,761 108,698 (1,937 ) (2
)% 210,666 214,814 (4,148 ) (2 )% Net investment income
23,605 27,229 (3,624 ) (13 )% 49,702 55,855 (6,153 ) (11 )% Realized investment gains, including OTTI losses 4,321 2,035 2,286 * 6,452 2,362 4,090 * Other, net 11,580 11,816 (236 ) (2
)% 23,174 23,268 (94 ) * Total revenues
300,525 275,095 25,430 9 % 587,126 551,447 35,679 6 % Benefits and expenses: Benefits and claims 68,925 57,272 11,653 20
% 136,858 114,907 21,951 19 % Amortization of DAC
28,205 23,975 4,230 18
% 54,736 47,204 7,532 16 % Sales commissions 51,475
50,273 1,202 2
% 101,192 100,711 481 * Insurance expenses 24,589
26,988 (2,399 ) (9
)% 47,033 42,786 4,247 10 % Insurance commissions
6,458 9,534 (3,076 ) (32
)% 14,954 18,532 (3,578 ) (19 )% Interest expense
8,506 6,998 1,508 22
% 15,416 13,995 1,421 10 % Other operating expenses
40,446 41,590 (1,144 ) (3
)% 81,551 81,591 (40 ) * Total benefits and expenses
228,604 216,630 11,974 6
% 451,740 419,726 32,014 8 % Income before income taxes
71,921 58,465 13,456 23
% 135,386 131,721 3,665 3 % Income taxes
25,741 20,845 4,896 23 % 47,450 46,830 620 1 % Net income $ 46,180 $ 37,620 $ 8,560 23 % $ 87,936 $ 84,891 $ 3,045 4 %
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* Less than 1% or not meaningful Results for the Three and Six Months EndedJune 30, 2012 and 2011 Total revenues. Growth in revenues primarily was attributable to incremental premiums on term life insurance policies issued subsequent to the Citi reinsurance transactions ("New Term"), which was partially offset by lower net investment income resulting from sales of invested assets to facilitate our$200.0 million and$150.0 million share repurchase transactions inNovember 2011 andApril 2012 , respectively. Realized investment gains were higher during 2012 as we sold invested assets to provide a portion of the funds used for theApril 2012 share repurchase. Total benefits and expenses. Total benefits and expenses increased in 2012 primarily as a result of the growth in premium-related expenses. This increase was partially offset by declines in insurance commissions and expenses reflecting higher deferrals of commissions consistent with incentive program changes as well as prior-year new product launch and convention-related expenses. Income taxes. Our effective income tax rate of 35.8% during the three months endedJune 30, 2012 was consistent with our effective income tax rate of 35.7% during the three months endedJune 30, 2011 . For the six months endedJune 30, 2012 , our effective income tax rate was 35.1%, compared with 35.6% for the six months endedJune 30, 2011 . The decrease in our effective income tax rate during the six months endedJune 30, 2012 versus the comparable period in 2011 is primarily due to a lower effective Canadian tax rate in the first quarter of 2012. For additional information, see the Segment Results discussions below. 32
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Segment Results Term Life Insurance Segment Results. Our results for theTerm Life Insurance segment were as follows: Three months ended June 30, Change Six months ended June 30, Change 2012 2011 $ % 2012 2011 $ % (Dollars in thousands) Revenues: Direct premiums $ 550,330 $ 540,283 $ 10,047 2 % $ 1,092,487 $ 1,072,450 $ 20,037 2 % Ceded premiums (412,038 ) (431,891 ) (19,853 ) (5 )% (826,597 ) (850,544 ) (23,947 ) (3 )% Net premiums 138,292 108,392 29,900 28
% 265,890 221,906 43,984 20 % Allocated net investment income 16,685
15,669 1,016 6
% 33,345 31,463 1,882 6 % Other, net
7,755 7,580 175 2 % 15,301 15,234 67 * Total revenues 162,732 131,641 31,091 24 % 314,536 268,603 45,933 17 % Benefits and expenses: Benefits and claims 59,984 43,921 16,063 37
% 117,493 91,272 26,221 29 % Amortization of DAC
22,547 19,894 2,653 13
% 46,480 40,021 6,459 16 % Insurance commissions
2,314 5,320 (3,006 ) (57 )% 5,891 9,383 (3,492 ) (37 )%
Insurance
expenses 21,782 23,607 (1,825 ) (8
)% 41,499 36,440 5,059 14 % Interest expense 4,381
2,873 1,508 52 % 7,166 5,745 1,421 25 % Total benefits and expenses 111,008 95,615 15,393 16
% 218,529 182,861 35,668 20 % Income before income taxes $ 51,724 $ 36,026
____________________ * Less than 1% Results for the Three Months EndedJune 30, 2012 and 2011 Net premiums. The increase in net premiums is primarily the result of growth in New Term and the corresponding impact of ceded premiums. While ceded premiums supporting YRT reinsurance programs for New Term are less than 20% of direct premiums, ceded premiums for the block of business coinsured by Citi are more than 80% of direct premiums. As a result, as we continue to build New Term and the block coinsured by Citi continues to run-off, net premiums will grow much faster than direct premiums. The remaining increase in net premiums was largely attributable to reprocessed reinsurance transactions. Over the normal course of business, we reprocess a small portion of our reinsurance transactions that are either misprocessed or intentionally not processed on an automated basis due to system constraints. During the three months endedJune 30, 2012 , the reprocessing of certain transactions resulted in an increase in net premiums that was substantially offset by a corresponding increase in benefits and claims. Persistency was consistent with the prior-year period. Benefits and claims. Benefits and claims increased primarily due to the growth in net premiums and the reprocessing of certain transactions noted above. Incurred claims experience was consistent with the prior-year period. Amortization of DAC. The continued growth in New Term combined with the impact of seasonally strong persistency resulted in DAC amortization increasing at a lower rate than net premiums. Insurance commissions. The decrease in insurance commissions was largely driven by changes to our agent incentive programs that resulted in a higher portion of commissions being deferred in 2012. Insurance expenses. Insurance expenses were lower primarily as a result of initiatives associated with the biennial sales force convention that occurred inJune 2011 . Results during the three months endedJune 30, 2011 included expenses from new product launches and recruiting-related initiatives. Interest expense. Interest expense increased primarily due to the redundant reserve financing executed inMarch 2012 . 33
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Results for the Six Months EndedJune 30, 2012 and 2011 Net premiums. Net premium growth was primarily driven by the factors impacting net premiums as discussed above in the three-month comparison. The increase was partially offset by the impact of approximately$8.7 million of ceded premium recoveries for post-issue underwriting class upgrades recognized in the first quarter of 2011. Benefits and claims. The increase in benefits and claims was mainly attributable to the factors discussed above in the three-month comparison. Amortization of DAC. The increase in amortization of DAC was consistent with the increase discussed above in the three-month comparison. Insurance expenses. Insurance expenses increased in 2012 as higher premium-related taxes, licenses and fees and the run-off of expense allowances received under the Citi reinsurance agreements combined with prior-year favorable expense items including the release of management incentive compensation accruals. The impact of these factors were partially offset by the 2011 convention-related expenses discussed above. Insurance commissions. The decrease in insurance commissions was primarily driven by changes to our agent incentive program discussed above in the three-month comparison. Interest expense. The increase in interest expense was largely attributable to the redundant reserve financing as noted in the three-month comparison above. Product Sales and Face Amount In Force New policy sales activity was as follows: Three months ended June 30, Six months ended June 30, 2012 2011 2012 2011 New policies issued 60,583 59,826 116,728 111,107 Higher sales of our term life insurance products primarily reflect an increase in the percentage of applications successfully issued. This increase is largely attributable to TermNow, our new rapid-issue term life insurance product, which was introduced in the third quarter of 2011. The average face amount of policies issued during the second quarter of 2012 was approximately$244,200 , compared with approximately$257,800 in the second quarter of 2011. The decrease in average face amount was largely driven by higher sales of TermNow policies, which are issued at face amounts of$250,000 and below. 34
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The changes in the face amount of our in-force book of term life insurance policies were as follows:
Three months ended June 30, Change Six months ended June 30, Change 2012 2011 $ % 2012 2011 $ % (Dollars in millions) Face amount in force, beginning of period $ 664,423 $ 658,523 $ 5,900 * $ 664,955 $ 656,791 $ 8,164 1 % Issued face amount 18,307 18,974 (667 ) (4 )% 35,290 35,709 (419 ) (1 )% Terminations (14,322 ) (14,724 ) (402 ) (3 )% (30,629 ) (31,971 ) (1,342 ) (4 )% Foreign currency (384 ) 843 (1,227 ) * (1,592 ) 3,087 (4,679 ) * Face amount in force, end of period $ 668,024 $ 663,616 $ 4,408 * $ 668,024 $ 663,616 $ 4,408 *
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* Less than 1% or not meaningful Issued face amount decreased during 2012 as the lower average size of policies issued was partially offset by higher policy sales of TermNow. Terminations decreased in 2012 as a result of higher persistency. Investment and Savings Product Segment Results. Investment and Savings Products segment results were as follows: Three months ended June 30, Change Six months ended June 30, Change 2012 2011 $ % 2012 2011 $ % (Dollars in thousands) Revenues: Commissions and fees: Sales-based revenues $ 47,269 $ 44,904 $ 2,365 5 % $ 91,736 $ 88,032 $ 3,704 4 % Asset-based revenues 43,750 45,348 (1,598 ) (4 )% 87,472 90,173 (2,701 ) (3 )% Account-based revenues 9,494 11,811 (2,317 ) (20 )% 18,867 22,243 (3,376 ) (15 )% Other, net 2,454 2,523 (69 ) (3 )% 5,026 4,984 42 1 %
Total revenues 102,967 104,586 (1,619 ) (2 )%
203,101 205,432 (2,331 ) (1 )% Expenses: Amortization of DAC 2,880 3,751 (871 ) (23 )% 6,103 6,536 (433 ) (7 )% Insurance commissions 2,252 2,344 (92 ) (4 )% 4,401 4,484 (83 ) (2 )% Sales commissions: Sales-based 33,285 31,390 1,895 6 % 64,885 61,943 2,942 5 % Asset-based 15,032 15,111 (79 ) (1 )% 29,777 30,562 (785 ) (3 )% Other operating expenses 20,074 21,520 (1,446 ) (7 )% 39,621 40,398 (777 ) (2 )% Total expenses 73,523 74,116 (593 ) (1 )% 144,787 143,923 864 1 % Income before income taxes $ 29,444 $ 30,470 $ (1,026 ) (3 )% $ 58,314 $ 61,509 $ (3,195 ) (5 )% 35
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Supplemental information on the underlying metrics that drove results follows.
Three months ended June 30, Change Six months ended June 30, Change 2012 2011 $ % 2012 2011 $ % (Dollars in millions and accounts in thousands) Product sales: Retail mutual funds $ 590 $ 604 $ (14 ) (2 )% $ 1,202 $ 1,249 $ (47 ) (4 )% Annuities and 42 other 500 458 9 % 929 803 126 16 % Total sales-based revenue generating product sales 1,090 1,062 28 3 %
2,131 2,052 79 4 % Managed accounts 40 - 40 * 63 - 63 * Segregated funds and other 64 74 (10 ) (14 )% 188 197 (9 ) (5 )% Total product sales $ 1,194 $ 1,136 $ 58 5 % $ 2,382 $ 2,249 $ 133 6 % Average client asset values: Retail mutual funds $ 23,724 $ 25,330 $ (1,606 ) (6 )% $ 23,709 $ 25,106 $ (1,397 ) (6 )% Annuities and 384 other 8,972 8,588 4 % 8,845 8,415 430 5 % Managed accounts 326 - 326 * 269 - 269 *
Segregated funds 2,527 2,545 (18 ) (1 )%
2,513 2,511 2 * Total average client asset values $ 35,549 $ 36,463 $ (914 ) (3 )% $ 35,336 $ 36,032 $ (696 ) (2 )% Average number of fee-generating accounts: Recordkeeping accounts 2,583 2,611 (28 ) (1 )% 2,585 2,638 (53 ) (2 )% Custodial accounts 1,948 1,940 8 * 1,947 1,953 (6 ) *
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* Not meaningful or less than 1% Results for the Three Months EndedJune 30, 2012 and 2011 Total revenues. The decrease in commissions and fees in 2012 was largely driven by lower average client asset values as well as a recordkeeping fee structure change that had a corresponding decrease to other operating expenses. These factors were partially offset by higher sales of annuity products. Lower asset-based revenues from the decline in average client asset values primarily reflected market conditions while the higher product sales were driven by new offerings of fixed-indexed annuities. While the distribution of managed accounts does not generate upfront sales-based revenues, it will contribute ongoing asset-based revenues in future periods. Amortization of DAC. The decrease in DAC amortization on our Canadian Segregated Funds products in 2012 resulted from market returns in the invested assets underlying Canadian Segregated Funds that showed some improvement from the market losses experienced in the prior-year period. Sales commissions. The increase in sales-based commissions in 2012 was consistent with the increase in sales-based revenue and primarily resulted from the increase in annuity sales. Other operating expenses. Other operating expenses decreased primarily due to the impact of the recordkeeping fee structure change, which was offset by a corresponding revenue decrease with no net impact on income before income taxes. Results for the Six Months EndedJune 30, 2012 and 2011 Total revenues. The decline in commissions and fees was primarily driven by the factors discussed in the three-month comparison above. Partially offsetting the decline for the six-month period was an increase in sales from internal exchanges of variable annuities in the first quarter of 2012 versus the same period in 2011. Amortization of DAC. The decrease in DAC amortization was primarily due to the impact from market returns in the invested assets underlying Canadian Segregated Funds in the second quarter of 2012 as noted above in the three- 36
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month comparison. Sales commissions. Sales-based commissions increased mainly due to the increases in annuity sales noted above. Other operating expenses. The decline in operating expenses during the six months endedJune 30, 2012 was largely attributable to the impact of the recordkeeping fee structure change noted above. This impact was partially offset by higher new product offering expenses in 2012 combined with the impact of the prior-year release of management incentive compensation accruals. Asset Values in Client Accounts Changes in asset values in client accounts were as follows: Three months ended June 30, Change Six months ended June 30, Change 2012 2011 $ % 2012 2011 $ % (Dollars in millions) Asset values, beginning of period $ 36,279 $ 36,187 $ 92 * $ 33,664 $ 34,869 $ (1,205 ) (3 )% Inflows 1,194 1,136 58 5 % 2,382 2,249 133 6 % Redemptions (1,144 ) (1,118 ) 26 2 % (2,377 ) (2,201 ) 176 8 % Change in market value, net and other (1,043 ) (185 ) 858 * 1,617 1,102 515 47 % Asset values, end of period $ 35,286 $ 36,020 $ (734 ) (2 )% $ 35,286 $ 36,019 $ (733 ) (2 )%
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* Less than 1% or not meaningful The growth in inflows was consistent with the increase in sales volume for both the quarter-to-date and year-to-date periods. However, internal exchanges for variable annuities are also included in redemptions. As a result, redemptions were also higher during the six months endedJune 30, 2012 . For the three months endedJune 30, 2012 , redemptions did not increase at the same rate as the six-month period as internal exchanges were consistent in the second quarters of 2012 and 2011. 37
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Corporate and Other Distributed Products Segment Results. Corporate and Other Distributed Products segment results were as follows:
Three months ended June 30, Change Six months ended June 30, Change 2012 2011 $ % 2012 2011 $ % (Dollars in thousands) Revenues: Direct premiums $ 19,743 $ 20,597 $ (854 ) (4 )% $ 38,623 $ 40,499 $ (1,876 ) (5 )% Ceded premiums (3,777 ) (3,674 ) 103 3 % (7,381 ) (7,259 ) 122 2 % Net premiums 15,966 16,923 (957 ) (6 )% 31,242 33,240 (1,998 ) (6 )% Commissions and fees 6,248 6,635 (387 ) (6 )% 12,591 14,366 (1,775 ) (12 )% Allocated net investment income 6,920 11,560 (4,640 ) (40 )% 16,357 24,392 (8,035 ) (33 )% Realized investment gains, including OTTI losses 4,321 2,035 2,286 * 6,452 2,362 4,090 * Other, net 1,371 1,715 (344 ) (20 )% 2,847 3,052 (205 ) (7 )% Total revenues 34,826 38,868 (4,042 ) (10 )% 69,489 77,412 (7,923 ) (10 )% Benefits and expenses: Benefits and claims 8,941 13,352 (4,411 ) (33 )% 19,365 23,636 (4,271 ) (18 )% Amortization of DAC 2,778 330 2,448 * 2,153 647 1,506 * Insurance commissions 1,892 1,870 22 1 % 4,662 4,664 (2 ) * Insurance expenses 2,807 3,381 (574 ) (17 )% 5,534 6,346 (812 ) (13 )% Sales commissions 3,158 3,772 (614 ) (16 )% 6,530 8,206 (1,676 ) (20 )% Interest expense 4,125 4,125 - * 8,250 8,250 - * Other operating expenses 20,372 20,069 303 2 % 41,930 41,193 737 2 % Total benefits and expenses 44,073 46,899 (2,826 ) (6 )% 88,424 92,942 (4,518 ) (5 )% Loss before income taxes $ (9,247 ) $ (8,031 ) $ 1,216 15 % $ (18,935 ) $ (15,530 ) $ 3,405 22 %
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* Less than 1% or not meaningful Results for the Three Months EndedJune 30, 2012 and 2011 Total revenues. Total revenues decreased in 2012 primarily due to lower net investment income from a lower base of invested assets subsequent to share repurchases inNovember 2011 andApril 2012 . The decline also resulted from the termination of our loan business and a decline in our short-term disability product line primarily due to an increase in terminations concurrent with a premium rate increase in the beginning of 2012. These decreases were partially offset by realized investment gains from the invested assets sold in conjunction with theApril 2012 share repurchase. Total benefits and expenses. The decline in benefits and claims was largely attributable to lower claims on short-term disability products and refinements in our policy estimates for student life insurance products underwritten by NBLIC. Partially offsetting this decrease was higher DAC amortization associated with the refinements in policy estimates for the student life products. Results for the Six Months EndedJune 30, 2012 and 2011 Total revenues. The decrease in total revenues was largely attributable to the factors discussed in the three-month comparison above. Total benefits and expenses. The decline in total benefits and expenses was primarily driven by the items noted in the three-month comparison above. 38
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Financial Condition Investments. We have an investment committee composed of members of our senior management team that is responsible for establishing and maintaining our investment guidelines and supervising our investment activity. We follow a conservative investment strategy designed to emphasize the preservation of our invested assets and provide adequate liquidity for the prompt payment of claims. To meet business needs and mitigate risks, our investment guidelines provide restrictions on our portfolio's composition, including limits on asset type, sector limits, credit quality limits, portfolio duration, limits on the amount of investments in approved countries and permissible security types. Additionally, to ensure adequate liquidity for payment of claims, we take into account the maturity and duration of our invested asset portfolio and our general liability profile. Our invested asset portfolio is subject to a variety of risks, including risks related to general economic conditions, market volatility, interest rate fluctuations, liquidity risk and credit and default risk. Investment guideline restrictions have been established to minimize the effect of these risks but may not always be effective due to factors beyond our control. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. A significant increase in interest rates could result in significant losses, realized or unrealized, in the value of our invested asset portfolio. The composition and duration of our portfolio will vary depending on several factors, including the yield curve and our opinion of the relative value among various asset classes. The average rating and average approximate duration of our fixed-maturity portfolio were as follows:June 30, 2012
Average rating of our fixed-maturity portfolio A
A
Average duration of our fixed-maturity portfolio 3.6 years 3.5 years Average book yield of our fixed-maturity portfolio 5.48%
5.52%
The distribution of our investments in fixed-maturity securities by rating follows. June 30, 2012 December 31, 2011 Amortized cost % Amortized cost % (Dollars in thousands) AAA $ 358,513 21% $ 428,748 24% AA 128,994 8% 150,894 8% A 396,068 23% 431,175 24% BBB 699,906 41% 683,818 38% Below investment grade 108,448 6% 125,594 7% Not rated 885 * 770 * Total (1) $ 1,692,814 100% $ 1,820,999 100% ____________________ * Less than 1% (1) Totals may not add due to rounding. 39
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The ten largest holdings within our invested asset portfolio were as follows: June 30, 2012 Cost or amortized Fair Unrealized Credit Issuer cost value gain rating (Dollars in thousands) Government of Canada $ 29,976 $ 32,700 $ 2,724 AAA General Electric Co 12,762 14,295 1,533 AA+ Verizon Communications Inc 11,498 13,003 1,505 A- Bank of America Corp 11,678 12,511 833 A- Province of Ontario Canada 9,177 11,246 2,069 AA- Iberdrola SA 9,441 10,572 1,131 BBB+ National Rural Utilities Cooperative 7,185 10,369 3,184 A+ ProLogis Inc 9,413 10,309 896 BBB- Time Warner Cable Inc 9,120 9,417 297 BBB Altria Group Inc 7,417 9,282 1,865 BBB Total - ten largest holdings $ 117,667 $ 133,704 $ 16,037 Total - fixed-maturity and equity securities $ 1,717,847 $ 1,884,578 Percent of total fixed-maturity and equity securities 7 % 7 % Sales of invested assets to fund ourApril 2012 repurchase of$150.0 million of our common stock did not result in meaningful changes to asset mix, duration or overall credit quality of our invested asset portfolio. However, it did reduce our consolidated cash and invested assets and, as a result, net investment income. Our average book yield atJune 30, 2012 decreased modestly fromDecember 31, 2012 , reflecting the replacement of higher-yield invested asset maturities with lower-yield invested asset acquisitions available in the current interest rate environment. The decrease in the average book yield was partially offset as the investments sold to fund the repurchase generally had yields that were lower than the average book yield on the invested assets portfolio before the repurchase. For additional information on our invested asset portfolio, see Note 3 to our condensed consolidated financial statements. Liquidity and Capital Resources Dividends and other payments to us from our subsidiaries are our principal sources of cash. Our primary uses of funds by the Parent Company include the payment of general operating expenses, the payment of dividends and the payment of interest to noteholders. AtJune 30, 2012 , the Parent Company had cash and invested assets of approximately$63.9 million . The liquidity requirements of our subsidiaries principally relate to the liabilities associated with their distribution and underwriting of insurance products (including the payment of claims), distribution of investment and savings products, operating expenses, income taxes and the payment of dividends. Historically, our insurance subsidiaries have used cash flow from operations associated with our in-force book of term life insurance to fund their liquidity requirements. Our insurance subsidiaries' principal cash inflows from operating activities are derived from policyholder premiums and investment income earned on invested assets that support our statutory capital and reserves. We also derive cash inflows from the distribution of investment and savings products and other products. Our principal outflows relate to payments for ceded premiums and benefits and claims. The principal cash inflows from investment activities result from repayments of principal and investment income, while the principal outflows relate to purchases of fixed-maturity securities. We typically hold cash sufficient to fund operating flows, and invest any excess cash. Our distribution and underwriting of term life insurance place significant demands on our liquidity, particularly when we experience growth. We pay a substantial majority of the sales commission during the first year following the sale of a policy. Our underwriting activities also require significant cash outflows at the inception of a policy's term. However, we anticipate that cash flows from our businesses, including our existing block of term life policies and our investment and savings products, will continue to provide us with sufficient liquidity to meet our operating requirements. InApril 2012 , we completed the repurchase of approximately 5.7 million shares of our common stock beneficially 40
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owned by Warburg Pincus for a total purchase price of approximately$150.0 million . For additional information, see Note 7 to our condensed consolidated financial statements. We may seek to enhance our liquidity position or capital structure through borrowings from third-party sources, sales of debt or equity securities, reserve financings or some combination of these sources. Cash Flows. Cash flows from operating activities are affected primarily by the timing of premiums received, commissions and fees received, benefits paid, commissions paid to sales representatives, administrative and selling expenses, investment income, and cash taxes. Our principal source of cash historically has been premiums received on term life insurance policies in force. We typically generate positive cash flows from operating activities, as premiums, net investment income, commissions and fees collected from our insurance and investment and savings products exceed benefits, commissions and operating expenses paid, and we invest the excess. The components of the change in cash and cash equivalents were as follows: Six months ended June 30, Change 2012 2011 $ (In thousands) Net cash provided by (used in) operating activities $ 12,809 $ (6,200 ) $ 19,009 Net cash provided by (used in) investing activities 126,748 2,660 124,088 Net cash provided by (used in) financing activities (165,983 ) (7,137 ) (158,846 ) Effect of foreign exchange rate changes on cash (1,590 )
(1,310 ) (280 ) Change in cash and cash equivalents $ (28,016 ) $ (11,987 ) $ (16,029 )
Operating Activities. The change in operating cash flows compared with the prior-year period was primarily driven by the increase in reserves for future policy benefits and other policy liabilities partially offset by the timing of payments due to reinsurers in our Term Life business. Investing Activities. The increase in investing cash flows as compared to the same period a year ago was primarily driven by proceeds from the sale of invested assets to fund the share repurchase from Warburg Pincus inApril 2012 . Financing Activities. The increase in net cash used in financing activities was due to the share repurchase from Warburg Pincus and higher quarterly cash dividends in 2012. Notes Payable. InApril 2010 , we issued a$300.0 million note to Citi as part of our corporate reorganization. We were in compliance with the covenants of the Citi note atJune 30, 2012 . No events of default or defaults occurred during the six months endedJune 30, 2012 . OnJuly 16, 2012 , we issued$375.0 million in principal amount of the Senior Notes and used a portion of the net cash proceeds to repay the Citi note in whole at a redemption price equal to 100% of the outstanding principal amount plus accrued and unpaid interest as of that date. We intend to use the remainder of the net cash proceeds for general corporate purposes, including share repurchases. We issued the Senior Notes at a price of 99.843% and an annual rate of 4.750% and interest of approximately$8.9 million is paid semi-annually onJanuary 15 andJuly 15 , commencing onJanuary 15, 2013 . The term of the Senior Notes ends onJuly 15, 2022 with a principal payment of$375.0 million due upon maturity. For additional information, see Note 6 to our condensed consolidated financial statements. We calculate our debt-to-capital ratio by dividing total long-term debt by the sum of stockholders' equity and total long-term debt. As ofJune 30, 2012 , our debt-to-capital ratio was 19.0%. If the issuance of the Senior Notes and the repayment of the Citi note had both been completed as ofJune 30, 2012 , our debt-to-capital ratio would have been 22.7%. Rating Agencies. There have been no changes toPrimerica, Inc.'s senior debt ratings or Primerica Life's financial strength ratings sinceDecember 31, 2011 .Risk-Based Capital . The NAIC has established risk-based capital ("RBC") standards for U.S. life insurers, as well 41
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as a risk-based capital model act (the "RBC Model Act") that has been adopted by the insurance regulatory authorities. The RBC Model Act requires that life insurers annually submit a report to state regulators regarding their RBC based upon four categories of risk: asset risk; insurance risk; interest rate risk and business risk. The capital requirement for each is determined by applying factors that vary based upon the degree of risk to various asset, premiums and reserve items. The formula is an early warning tool to identify possible weakly capitalized companies for purposes of initiating further regulatory action. As ofJune 30, 2012 , our U.S. life insurance subsidiaries had statutory capital substantially in excess of the applicable statutory requirements to support existing operations and to fund future growth. In Canada, an insurer's minimum capital requirement is overseen by the Office of the Superintendentof Financial Institutions Canada ("OSFI") and determined as the sum of the capital requirements for five categories of risk: asset default risk; mortality/morbidity/lapse risks; changes in interest rate environment risk; segregated funds risk and foreign exchange risk.Primerica Life Canada is in compliance with Canada's minimum capital requirements as ofJune 30, 2012 , as determined by OSFI. Short-term Borrowings. We had no short-term borrowings as of or during the six months endedJune 30, 2012 . Off-Balance Sheet Arrangements. EffectiveMarch 31, 2012 , Peach Re entered into the Credit Facility Agreement withDeutsche Bank . Under the Credit Facility Agreement, a letter of credit ("LOC") was issued to support certain obligations of Peach Re for a portion of reserves (commonly referred to as Regulation XXX reserves) related to level premium term life insurance policies ceded to Peach Re from Primerica Life under a coinsurance agreement, effective as ofMarch 31, 2012 . The LOC has a term of approximately 14 years and was issued in an initial amount of$450.0 million . Subject to certain conditions, the amount of the LOC will be periodically increased to a maximum amount of$510.0 million in 2014. The annual pretax expense of the LOC is expected to range from approximately$4.8 million to $6.9 million in 2012 through 2018,$1.5 million to $4.3 million in 2019 through 2023, and to be less than$0.8 million in 2024 and 2025. Pursuant to the terms of the Credit Facility Agreement, in the event amounts are drawn under the LOC by Primerica Life, Peach Re will be obligated, subject to certain limited conditions, to reimburseDeutsche Bank for the amount of any draw and interest thereon. The Credit Facility Agreement is non-recourse to the Parent Company and Primerica Life, meaning that neither is liable for repayingDeutsche Bank for any draws or interest thereon. Pursuant to the terms of a letter agreement withDeutsche Bank , the Parent Company has agreed to guarantee the payment of fees toDeutsche Bank under the Credit Facility Agreement. Pursuant to the Credit Facility Agreement, Peach Re has collateralized its obligations toDeutsche Bank by granting it a security interest in all of its assets with the exception of amounts held in a special account established to meet minimum asset thresholds required by state regulatory authorities. Contractual Obligations Update. The material changes in contractual obligations from those disclosed in the 2011 Annual Report include the Credit Facility Agreement discussed above in the Off-balance Sheet Arrangements section, the issuance of the Senior Notes discussed above in the Notes Payable section, and a long-term contract entered into by the Company inJune 2012 for the acquisition, licensing, and maintenance of enterprise software. The software contract, which required us to make a payment of approximately$5.7 million inJune 2012 , extends throughDecember 31, 2015 . The remaining payments stipulated over the term of the contract are approximately$1.4 million in 2012,$5.2 million in 2013,$5.3 million in 2014, and$4.4 million in 2015. InMay 2011 , we entered into an eight-year agreement with a third party to receive advisory services for our managed accounts product platform. In connection with this agreement, we are obligated to make asset-based fee payments (including minimum monthly payments) based on assets under management (AUM). We have made the minimum monthly payments and recognized expense accordingly of approximately$624,000 during the six months endedJune 30, 2012 . The minimum fee is approximately$2.5 million per year in 2013 through 2018 and approximately$1.0 million in 2019. We will continue to recognize these fees as the corresponding advisory services are received. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS Investors are cautioned that certain statements contained in this report as well as some statements in periodic press releases and some oral statements made by our officials during our presentations are "forward-looking" statements. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain the words "expect," "intend," "plan," "anticipate," "estimate," "believe," "will be," "will continue," "will likely result," and similar expressions, or future 42
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conditional verbs such as "may," "will," "should," "would," and "could." In addition, any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by us or our subsidiaries are also forward-looking statements. These forward-looking statements involve external risks and uncertainties, including, but not limited to, those described under the section entitled "Risk Factors" included herein. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond the control of our management team. All forward-looking statements in this report and subsequent written and oral forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by these risks and uncertainties. These risks and uncertainties include, among others: • our failure to continue to attract and license new recruits, retain sales
representatives, or license or maintain the licensing of our sales
representatives;
• changes to the independent contractor status of our sales representatives;
• our or our sales representatives' violation of, or non-compliance with, laws and regulations;
• our or our sales representatives' failure to protect the confidentiality
of client information;
• differences between our actual experience and our expectations regarding
mortality, persistency, expenses and investment yields as reflected in the
pricing for our insurance policies; • the occurrence of a catastrophic event that causes a large number of premature deaths of our insureds;
• changes in federal and state legislation and regulation, including other
legislation or regulation that affects our insurance, investment product
businesses;
• our failure to meet risk-based capital standards or other minimum capital
or surplus requirements; • a downgrade or potential downgrade in our insurance subsidiaries' financial strength ratings or in the investment grade credit ratings for our senior unsecured debt;
• the effects of credit deterioration and interest rate fluctuations on our
invested asset portfolio;
• incorrectly valuing our investments;
• inadequate or unaffordable reinsurance or the failure of our reinsurers to
perform their obligations;
• the failure of, or legal challenges to, the support tools we provide to
our sales force;
• heightened standards of conduct or more stringent licensing requirements
for our sales representatives;
• inadequate policies and procedures regarding suitability review of client
transactions;
• the inability of our subsidiaries to pay dividends or make distributions;
• our ability to generate and maintain a sufficient amount of working capital;
• our non-compliance with the covenants of our senior unsecured debt;
• legal and regulatory investigations and actions concerning us or our sales
representatives;
• the loss of key personnel;
• the failure of our information technology systems, breach of our information security or failure of our business continuity plan; and
• fluctuations in Canadian currency exchange rates.
Developments in any of these areas could cause actual results to differ materially from those anticipated or projected or cause a significant reduction in the market price of our common stock and debt securities. The foregoing list of risks and uncertainties may not contain all of the risks and uncertainties that could affect us. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this document may not in fact occur. Accordingly, undue reliance should not be placed on these statements. We undertake no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, except as otherwise required by law.
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UNIVERSAL INSURANCE HOLDINGS, INC. – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations
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