Fitch Affirms Primerica Life at ‘A+’; Outlook Stable [Health & Beauty Close – Up]

Fitch Ratings has affirmed the Insurer Financial Strength (IFS) rating of Primerica Life Insurance Company (Primerica Life) at 'A+'.

The Rating Outlook is Stable.

Primerica Life's rating is supported by the company's good risk adjusted capitalization, strong competitive position in the individual term insurance market, efficient captive distribution force, conservative asset profile, and good operating performance. Partially offsetting these positives are the company's narrow product profile and the size of its in-force block of term life insurance, which was materially reduced through a series of reinsurance treaties the company entered into prior to its initial public offering on March 31, 2010.

On March 31, Primerica completed a reserve financing transaction covering Regulation XXX reserves on its individual term life insurance block. The transaction was executed through the use of a recently formed special purpose Vermont-domiciled captive reinsurance subsidiary of Primerica Life named Peach Re, Inc. As part of the transaction, Peach Re entered into a 14-year letter of credit (LOC) facility with Deutsche Bank for the benefit of Primerica Life. The initial amount of the LOC facility is $450 million, but the company expects it to be increased to a maximum of $510 million by 2014. The LOC facility is for the benefit of Primerica Life in support of the reserves related to level premium term life policies reinsured by Peach Re. The facility is non- recourse to Primerica Life and Primerica.

Following the reserve financing transaction, Primerica Life received regulatory approval for the payment of an extraordinary dividend to Primerica in the amount of $150 million. The company announced on April 18, its intention to use the dividend to fund the repurchase of 5.7 million of the company's shares held by Warburg Pincus. In Fitch's view, the reinsurance transaction and subsequent dividend reduces the conservatism of Primerica Life's statutory reserves and weakens the quality of the company's statutory capitalization. However, the transaction is in line with Fitch's rating expectations and is consistent with industry practice.

Fitch views Primerica Life's consolidated profitability to be good in the quarters following its separation from Citigroup. The company's earnings continue to reflect its conservative new business pricing which supports its strong margins. For the 12 months ended Dec. 31, 2011, the company reported pretax operating income of $270 million, which results in a return on equity of 12.5 percent. Fitch anticipates that operating earnings will improve gradually over the intermediate-term as the company rebuilds its in-force block.

Primerica Life's risk-based capitalization declined significantly to 426 percent of company action level at Dec. 31, 2011, from 619 percent at the previous yearend. The decline was driven by the payment of a statutory dividend of $200 million to its parent company in Nov. 2011, and was used to fund the execution of an agreement to purchase approximately 9 million shares of its common stock from its former parent, Citigroup.

Fitch views Primerica Life's unique distribution force as a competitive advantage which has been an important factor in the company's strong record of profitability. Fitch believes that a material weakening of this channel could adversely affect the company's operating performance and its rating.Primerica Life remains one of the nation's largest individual term life insurance writers, with nearly $1.8 billion in direct statutory life insurance premiums written in 2011.

The key rating triggers that could result in an upgrade include:- -sustained improvement in statutory net operating gain over the next 12 to 18 months.

The key rating triggers that could result in a downgrade include:- -a sustained decline in RBC below 400 percent;--a sustained increase in parent leverage as measured by debt-to-total capital above 25 percent or TFC ratio above 1.2x;--a material decline in the effectiveness of the company's distribution channel.

Fitch affirms the following rating with a Stable Rating Outlook:

Primerica Life Insurance Company--IFS at 'A+'.

Additional information is available at fitchratings.com. ((Comments on this story may be sent to [email protected]))