PRI_10Q_6.30.2013

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, 2013
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.)
 
 
1 Primerica Parkway
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, 2013
Common Stock, $0.01 Par Value
 
54,686,787 shares



TABLE OF CONTENTS
 
 
Page
 
 
 
 



i

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
June 30,
2013
 
December 31,
2012
 
(unaudited)
 
 
(In thousands)
Assets
 
 
 
Investments:
 
 
 
Fixed-maturity securities available for sale, at fair value (amortized cost: $1,575,997 in 2013 and $1,711,582 in 2012)
$
1,682,121

 
$
1,887,014

Equity securities available for sale, at fair value (cost: $31,079 in 2013 and $29,955 in 2012)
37,725

 
37,147

Trading securities, at fair value (cost: $12,365 in 2013 and $7,740 in 2012)
12,359

 
7,762

Policy loans
25,784

 
24,613

Total investments
1,757,989

 
1,956,536

Cash and cash equivalents
118,087

 
112,216

Accrued investment income
18,256

 
19,540

Due from reinsurers
3,993,258

 
4,005,194

Deferred policy acquisition costs, net
1,133,542

 
1,066,422

Premiums and other receivables
181,317

 
170,656

Intangible assets, net (accumulated amortization: $63,323 in 2013 and $61,621 in 2012)
69,654

 
69,816

Income taxes
26,047

 
17,256

Other assets
271,535

 
302,126

Separate account assets
2,435,740

 
2,618,115

Total assets
$
10,005,425

 
$
10,337,877

Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Future policy benefits
$
4,943,743

 
$
4,850,488

Unearned premiums
7,689

 
6,056

Policy claims and other benefits payable
238,967

 
254,533

Other policyholders’ funds
337,931

 
345,721

Notes payable
374,457

 
374,433

Income taxes
89,713

 
114,611

Other liabilities
344,649

 
358,577

Payable under securities lending
86,272

 
139,927

Separate account liabilities
2,435,740

 
2,618,115

Commitments and contingent liabilities (see Commitments and Contingent Liabilities note)
 
 
 
Total liabilities
8,859,161

 
9,062,461

Stockholders’ equity:
 
 
 
Common stock ($0.01 par value; authorized 500,000 in 2013 and 2012; and issued 54,504 shares in 2013 and 56,374 shares in 2012)
545

 
564

Paid-in capital
456,050

 
602,269

Retained earnings
572,714

 
503,173

Accumulated other comprehensive income (loss), net of income tax:
 
 
 
Unrealized foreign currency translation gains (losses)
43,158

 
55,487

Net unrealized investment gains (losses):
 
 
 
Net unrealized investment gains not other-than-temporarily impaired
74,844

 
114,958

Net unrealized investment losses other-than-temporarily impaired
(1,047
)
 
(1,035
)
Total stockholders’ equity
1,146,264

 
1,275,416

Total liabilities and stockholders’ equity
$
10,005,425

 
$
10,337,877

See accompanying notes to condensed consolidated financial statements.


1

Table of Contents

PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income - Unaudited
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands, except per-share amounts)
Revenues:
 
 
 
 
 
 
 
Direct premiums
$
577,208

 
$
570,073

 
$
1,148,107

 
$
1,131,110

Ceded premiums
(417,450
)
 
(415,815
)
 
(828,054
)
 
(833,978
)
Net premiums
159,758

 
154,258

 
320,053

 
297,132

Commissions and fees
116,857

 
106,759

 
228,837

 
210,656

Net investment income
21,027

 
23,605

 
44,243

 
49,702

Realized investment gains (losses), including other-than-temporary impairment losses
3,468

 
4,321

 
5,754

 
6,452

Other, net
11,197

 
11,582

 
21,865

 
23,184

Total revenues
312,307

 
300,525

 
620,752

 
587,126

Benefits and expenses:
 
 
 
 
 
 
 
Benefits and claims
69,770

 
68,925

 
144,016

 
136,858

Amortization of deferred policy acquisition costs
30,112

 
28,205

 
61,364

 
54,736

Sales commissions
57,638

 
51,475

 
112,686

 
101,192

Insurance expenses
28,094

 
24,589

 
55,236

 
47,033

Insurance commissions
5,424

 
6,458

 
11,490

 
14,954

Interest expense
8,793

 
8,506

 
17,588

 
15,416

Other operating expenses
45,030

 
40,446

 
90,694

 
81,551

Total benefits and expenses
244,861

 
228,604

 
493,074

 
451,740

Income before income taxes
67,446

 
71,921

 
127,678

 
135,386

Income taxes
23,956

 
25,741

 
45,343

 
47,450

Net income
$
43,490

 
$
46,180

 
$
82,335

 
$
87,936

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.76

 
$
0.73

 
$
1.43

 
$
1.35

Diluted
$
0.74

 
$
0.72

 
$
1.39

 
$
1.33

 
 
 
 
 
 
 
 
Weighted-average shares used in computing earnings per share:
 
 
 
 
 
 
 
Basic
56,511

 
61,531

 
56,553

 
63,332

Diluted
57,849

 
62,687

 
58,127

 
64,481

 
 
 
 
 
 
 
 
Supplemental disclosures:
 
 
 
 
 
 
 
Total impairment losses
$
(5
)
 
$
(203
)
 
$
(91
)
 
$
(904
)
Impairment losses recognized in other comprehensive income before income taxes
4

 
76

 
19

 
563

Net impairment losses recognized in earnings
(1
)
 
(127
)
 
(72
)
 
(341
)
Other net realized investment gains (losses)
3,469

 
4,448

 
5,826

 
6,793

Realized investment gains (losses), including other-than-temporary impairment losses
$
3,468

 
$
4,321

 
$
5,754

 
$
6,452

Dividends declared per share
$
0.11

 
$
0.05

 
$
0.22

 
$
0.08

See accompanying notes to condensed consolidated financial statements.


2

Table of Contents

PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income - Unaudited
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Net income
$
43,490

 
$
46,180

 
$
82,335

 
$
87,936

Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
Unrealized investment gains (losses):
 
 
 
 
 
 
 
Change in unrealized holding gains (losses) on investment securities
(55,000
)
 
3,931

 
(57,500
)
 
21,445

Reclassification adjustment for realized investment (gains) losses included in net income
(2,573
)
 
(4,640
)
 
(4,232
)
 
(6,461
)
Foreign currency translation adjustments:
 
 
 
 
 
 
 
Change in unrealized foreign currency translation gains (losses)
(8,305
)
 
(4,177
)
 
(12,493
)
 
(869
)
Total other comprehensive income (loss) before income taxes
(65,878
)
 
(4,886
)
 
(74,225
)
 
14,115

Income tax expense (benefit) related to items of other comprehensive income (loss)
(20,256
)
 
(298
)
 
(21,770
)
 
5,166

Other comprehensive income (loss), net of income taxes
(45,622
)
 
(4,588
)
 
(52,455
)
 
8,949

Total comprehensive income (loss)
$
(2,132
)
 
$
41,592

 
$
29,880

 
$
96,885

See accompanying notes to condensed consolidated financial statements.


3

Table of Contents

PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity - Unaudited
 
Six months ended June 30,
 
2013
 
2012
 
(In thousands)
Common stock:
 
 
 
Balance, beginning of period
$
564

 
$
649

Repurchases of common stock
(29
)
 
(62
)
Net issuance of common stock
10

 
12

Balance, end of period
545

 
599

Paid-in capital:
 
 
 
Balance, beginning of period
602,269

 
835,232

Share-based compensation
23,234

 
17,353

Net issuance of common stock
(10
)
 
(12
)
Repurchases of common stock
(101,044
)
 
(160,817
)
Repurchases of warrants
(68,399
)
 

Net capital contributed by Citigroup

 
1,961

Balance, end of period
456,050

 
693,717

Retained earnings:
 
 
 
Balance, beginning of period
503,173

 
344,104

Net income
82,335

 
87,936

Dividends
(12,794
)
 
(5,104
)
Balance, end of period
572,714

 
426,936

Accumulated other comprehensive income (loss):
 
 
 
Balance, beginning of period
169,410

 
146,665

Change in foreign currency translation adjustment, net of income tax expense (benefit) of $(164) in 2013 and $(79) in 2012
(12,329
)
 
(790
)
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 $(21,598) in 2013 and $5,441 in 2012
(40,114
)
 
10,105

Change in net unrealized investment losses other-than-temporarily impaired, net of income tax benefit of $(8) in 2013 and ($196) in 2012
(12
)
 
(366
)
Balance, end of period
116,955

 
155,614

Total stockholders’ equity
$
1,146,264

 
$
1,276,866

See accompanying notes to condensed consolidated financial statements.


4

Table of Contents

PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows - Unaudited 
 
Six months ended June 30,
 
2013
 
2012
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
82,335

 
$
87,936

Adjustments to reconcile net income to cash provided by (used in) operating activities:
 
 
 
Change in future policy benefits and other policy liabilities
97,129

 
113,712

Deferral of policy acquisition costs
(131,042
)
 
(137,724
)
Amortization of deferred policy acquisition costs
61,364

 
54,736

Change in income taxes
(11,920
)
 
(3,726
)
Realized investment (gains) losses, including other-than-temporary impairments
(5,754
)
 
(6,452
)
Accretion and amortization of investments
(1,791
)
 
(304
)
Depreciation and amortization
5,339

 
4,911

Change in due from reinsurers
(8,697
)
 
(47,710
)
Change in premiums and other receivables
(11,214
)
 
(3,826
)
Trading securities sold, matured, or called (acquired), net
(4,613
)
 
14,639

Share-based compensation
7,952

 
9,311

Change in other operating assets and liabilities, net
(26,584
)
 
(73,824
)
Net cash provided by (used in) operating activities
52,504

 
11,679

Cash flows from investing activities:
 
 
 
Available-for-sale investments sold, matured or called:
 
 
 
Fixed-maturity securities - sold
78,755

 
213,317

Fixed-maturity securities - matured or called
141,854

 
124,320

Equity securities
2,998

 
1,246

Available-for-sale investments acquired:
 
 
 
Fixed-maturity securities
(78,054
)
 
(209,197
)
Equity securities
(93
)
 
(3,086
)
Purchases of property and equipment and other investing activities, net
(15,916
)
 
148

Cash collateral received (returned) on loaned securities, net
(53,655
)
 
(5,395
)
Sales (purchases) of short-term investments using securities lending collateral, net
53,655

 
5,395

Net cash provided by (used in) investing activities
129,544

 
126,748

Cash flows from financing activities:
 
 
 
Dividends paid
(12,794
)
 
(5,104
)
Common stock and warrants repurchased
(169,472
)
 
(160,879
)
Excess tax benefits on share-based compensation
7,179

 
4,157

Payments of deferred financing costs

 
(4,619
)
Net cash provided by (used in) financing activities
(175,087
)
 
(166,445
)
Effect of foreign exchange rate changes on cash
(1,090
)
 
2

Change in cash and cash equivalents
5,871

 
(28,016
)
Cash and cash equivalents, beginning of period
112,216

 
136,078

Cash and cash equivalents, end of period
$
118,087

 
$
108,062

See accompanying notes to condensed consolidated financial statements.


5

Table of Contents

PRIMERICA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited

(1) Description of Business, Basis of Presentation, and Summary of Significant Accounting
Policies
Description of Business. Primerica, Inc. (the "Parent Company") together with its subsidiaries (collectively, "we", "us" 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. ("PFS"), 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 PFSL Investments Canada Ltd. ("PFSL Investments Canada"); and PFS Investments, Inc. ("PFS Investments"), 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.
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 ("U.S. GAAP"). These principles are established primarily by the Financial Accounting Standards Board ("FASB"). The preparation of financial statements in conformity with U.S. 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 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, 2013 and December 31, 2012, the statements of income and comprehensive income for the three and six months ended June 30, 2013 and 2012, and the statements of stockholders' equity and cash flows for the six months ended June 30, 2013 and 2012. 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 regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. 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, 2012 ("2012 Annual Report").
Use of Estimates. 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 ("DAC"), and liabilities for future policy benefits and unpaid policy claims. Estimates for these and other items are subject to change and are reassessed by management in accordance with U.S. GAAP. Actual results could differ from those estimates.
Consolidation. 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.
Reclassifications. Certain reclassifications have been made to prior-period amounts to conform to current-period reporting classifications. These reclassifications had no impact on net income or total stockholders' equity.
Subsequent Events. The Company has evaluated subsequent events for recognition and disclosure for occurrences and transactions after the date of the condensed consolidated financial statements at June 30, 2013.


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Table of Contents

Significant Accounting Policies. All significant accounting policies remain unchanged from the 2012 Annual Report.
New Accounting Principles. In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). The amendments of ASU 2013-02 require an entity to provide additional information about the amounts reclassified out of accumulated other comprehensive income. The amendments in ASU 2013-02 were applied prospectively for our fiscal year beginning January 1, 2013. The disclosures required by this update are included in this report and had no impact on our financial position, results of operations, or cash flows.
Future Application of Accounting Standards. Recent accounting guidance not otherwise disclosed is not applicable, is immaterial to our financial statements, or did not or will not have an impact on our business.

(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. Total assets and results of operations by segment were as follows:
 
June 30,
2013
 
December 31,
2012
 
(In thousands)
Assets:
 
 
 
Term life insurance segment
$
6,547,276

 
$
6,400,126

Investment and savings products segment
2,630,595

 
2,810,137

Corporate and other distributed products segment
827,554

 
1,127,614

Total assets
$
10,005,425

 
$
10,337,877

 
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Term life insurance segment
$
169,182

 
$
162,159

 
$
337,016

 
$
312,933

Investment and savings products segment
113,361

 
102,967

 
222,083

 
203,101

Corporate and other distributed products segment
29,764

 
35,399

 
61,653

 
71,092

Total revenues
$
312,307

 
$
300,525

 
$
620,752

 
$
587,126

Income (loss) before income taxes:
 
 
 
 
 
 
 
Term life insurance segment
$
51,897

 
$
51,151

 
$
97,023

 
$
94,404

Investment and savings products segment
27,488

 
29,444

 
53,841

 
58,314

Corporate and other distributed products segment
(11,939
)
 
(8,674
)
 
(23,186
)
 
(17,332
)
Total income before income taxes
$
67,446

 
$
71,921

 
$
127,678

 
$
135,386

The Investment and Savings Products segment includes assets held in separate accounts. Excluding separate accounts, the Investment and Savings Products segment assets were approximately $195.6 million and $192.8 million as of June 30, 2013 and December 31, 2012, respectively.
In the second quarter of 2013, Primerica changed its measurement of segment information to reclassify the deposit asset underlying the 10% reinsurance agreement with Citigroup Inc. ("Citigroup"), as well as the related mark-to-market adjustments included in the calculation of its effective yield, to the Corporate and Other Distributed Products segment instead of the Term Life Insurance segment. The deposit asset reflects a unique corporate financing-related asset, changes in the market value of which are no longer viewed by management for purposes of making decisions about allocating resources to the Term Life Insurance segment and assessing its performance. All prior period information has been adjusted to consistently reflect this change in segment measurement. The change does not impact the Company's consolidated financial statements.
The change in measurement of segment information increased total assets in the Corporate and Other Distributed Products segment and decreased total assets in the Term Life Insurance segment by approximately $109.2 million and $91.5 million as of June 30, 2013 and December 31, 2012, respectively. The amount of segment revenues and


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Table of Contents

segment income (loss) before income taxes reclassified from the Term Life Insurance segment to the Corporate and Other Distributed Products segment were approximately $(1.1) million and $0.6 million for the three months ended June 30, 2013 and 2012, respectively, and approximately $(0.5) million and $1.6 million for the six months ended June 30, 2013 and 2012, respectively.
Long-lived assets and results of operations by country were as follows:
 
June 30,
2013
 
December 31,
2012
 
(In thousands)
Long-lived assets by country:
 
 
 
United States
$
83,740

 
$
82,724

Canada
603

 
450

Total long-lived assets
$
84,343

 
$
83,174

 
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Revenues by country:
 
 
 
 
 
 
 
United States
$
255,467

 
$
246,703

 
$
504,835

 
$
477,460

Canada
56,840

 
53,822

 
115,917

 
109,666

Total revenues
$
312,307

 
$
300,525

 
$
620,752

 
$
587,126

Income before income taxes by country:
 
 
 
 
 
 
 
United States
$
50,061

 
$
54,265

 
$
94,192

 
$
102,038

Canada
17,385

 
17,656

 
33,486

 
33,348

Total income before income taxes
$
67,446

 
$
71,921

 
$
127,678

 
$
135,386


(3) Investments
The period-end cost or amortized cost, gross unrealized gains and losses, and fair value of fixed-maturity and equity securities follow:
 
June 30, 2013
 
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
$
7,405

 
$
612

 
$
(84
)
 
$
7,933

Foreign government
111,641

 
8,621

 
(2,264
)
 
117,998

States and political subdivisions
31,151

 
2,421

 
(231
)
 
33,341

Corporates
1,167,945

 
93,099

 
(11,781
)
 
1,249,263

Mortgage- and asset-backed securities
257,855

 
16,609

 
(878
)
 
273,586

Total fixed-maturity securities(1)
1,575,997

 
121,362

 
(15,238
)
 
1,682,121

Equity securities
31,079

 
7,080

 
(434
)
 
37,725

Total fixed-maturity and equity securities
$
1,607,076

 
$
128,442

 
$
(15,672
)
 
$
1,719,846

____________________
(1) 
Includes approximately $1.6 million of other-than-temporary impairment losses related to corporates and mortgage- and asset-backed securities recognized in accumulated other comprehensive income.


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Table of Contents

 
December 31, 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
$
6,722

 
$
812

 
$

 
$
7,534

Foreign government
101,171

 
16,238

 
(17
)
 
117,392

States and political subdivisions
31,176

 
3,596

 
(19
)
 
34,753

Corporates
1,265,179

 
134,710

 
(2,763
)
 
1,397,126

Mortgage- and asset-backed securities
307,334

 
23,999

 
(1,124
)
 
330,209

Total fixed-maturity securities(1)
1,711,582

 
179,355

 
(3,923
)
 
1,887,014

Equity securities
29,955

 
7,529

 
(337
)
 
37,147

Total fixed-maturity and equity securities
$
1,741,537

 
$
186,884

 
$
(4,260
)
 
$
1,924,161

____________________
(1) 
Includes approximately $1.6 million of other-than-temporary impairment losses related to corporates and mortgage- and asset-backed securities recognized in accumulated other comprehensive income.
The net effect on stockholders’ equity of unrealized gains and losses on available-for-sale securities was as follows:
 
June 30,
2013
 
December 31,
2012
 
(In thousands)
Net unrealized investment gains (losses) including foreign currency translation adjustment and other-than-temporary impairments:
 
 
 
Fixed-maturity and equity securities
$
112,770

 
$
182,624

Currency swaps
85

 
97

Foreign currency translation adjustment
678

 
(7,456
)
Other-than-temporary impairments
1,612

 
1,592

Net unrealized investment gains excluding foreign currency translation adjustment and other-than-temporary impairments
115,145

 
176,857

Deferred income taxes
(40,301
)
 
(61,899
)
Net unrealized investment gains excluding foreign currency translation adjustment and other-than-temporary impairments, net of tax
$
74,844

 
$
114,958

We also maintain a portfolio of fixed-maturity securities that are classified as trading securities. The carrying value of the fixed-maturity securities classified as trading securities were approximately $12.4 million and $7.8 million as of June 30, 2013 and December 31, 2012, respectively.
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, we have investments on deposit with governmental authorities and banks for the protection of policyholders. The fair values of investments on deposit were approximately $19.8 million and $20.5 million as of June 30, 2013 and December 31, 2012, respectively.
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 loaned securities 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 approximately $86.3 million and $139.9 million as of June 30, 2013 and December 31, 2012, respectively.


9

Table of Contents

The scheduled contractual maturity distribution of the available-for-sale fixed-maturity portfolio at June 30, 2013 follows:
 
June 30, 2013
 
Amortized cost
 
Fair value
 
(In thousands)
Due in one year or less
$
164,309

 
$
168,837

Due after one year through five years
485,498

 
521,599

Due after five years through 10 years
634,810

 
680,791

Due after 10 years
33,525

 
37,308

 
1,318,142

 
1,408,535

Mortgage- and asset-backed securities
257,855

 
273,586

Total fixed-maturity securities
$
1,575,997

 
$
1,682,121

Actual 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,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Fixed-maturity securities
$
22,648

 
$
23,797

 
$
45,858

 
$
49,559

Equity securities
292

 
244

 
564

 
467

Policy loans and other invested assets
327

 
261

 
647

 
611

Cash and cash equivalents
73

 
111

 
161

 
246

Market return on deposit asset underlying 10% reinsurance agreement
(1,061
)
 
574

 
(498
)
 
1,604

Gross investment income
22,279

 
24,987

 
46,732

 
52,487

Investment expenses
(1,252
)
 
(1,382
)
 
(2,489
)
 
(2,785
)
Net investment income
$
21,027

 
$
23,605

 
$
44,243

 
$
49,702

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,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Net realized investment gains (losses):
 
 
 
 
 
 
 
Gross gains from sales
$
3,022

 
$
4,506

 
$
4,755

 
$
6,542

Gross losses from sales
(448
)
 
(56
)
 
(451
)
 
(57
)
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
(1
)
 
(127
)
 
(72
)
 
(341
)
Gains (losses) from bifurcated options
895

 
(319
)
 
1,522

 
(9
)
Net realized investment gains (losses)
$
3,468

 
$
4,321

 
$
5,754

 
$
6,452

Supplemental information:
 
 
 
 
 
 
 
Gross realized investment gains (losses) reclassified from accumulated other comprehensive income into earnings
$
2,573

 
$
4,640

 
$
4,232

 
$
6,461

Tax expense (benefit) associated with realized investment gains (losses) reclassified from accumulated other comprehensive income into earnings
$
901

 
$
1,624

 
$
1,481

 
$
2,261

Proceeds from sales or other redemptions
$
145,014

 
$
196,096

 
$
223,607

 
$
338,883



10

Table of Contents

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 (Investments) to the consolidated and combined financial statements in our 2012 Annual Report.
Investments in fixed-maturity and equity securities with a cost basis in excess of their fair values were approximately $348.4 million and $111.9 million as of June 30, 2013 and December 31, 2012, respectively.
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, 2013
 
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:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
$
3,368

 
$
(84
)
 
4

 
$

 
$

 

Foreign government
40,325

 
(2,219
)
 
56

 
477

 
(45
)
 
1

States and political subdivisions
6,760

 
(231
)
 
9

 

 

 

Corporates
227,604

 
(9,348
)
 
262

 
10,623

 
(2,433
)
 
15

Mortgage- and asset-backed securities
30,771

 
(449
)
 
40

 
7,913

 
(429
)
 
8

Total fixed-maturity securities
308,828

 
(12,331
)
 


 
19,013

 
(2,907
)
 


Equity securities
4,871

 
(434
)
 
8

 

 

 

Total fixed-maturity and equity securities
$
313,699

 
$
(12,765
)
 


 
$
19,013

 
$
(2,907
)
 


 
December 31, 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
$
5,146

 
$
(17
)
 
12
 
$

 
$

 

States and political subdivisions
1,498

 
(19
)
 
3
 

 

 

Corporates
70,176

 
(1,189
)
 
58
 
7,055

 
(1,574
)
 
11

Mortgage- and asset-backed securities
15,367

 
(22
)
 
18
 
6,409

 
(1,102
)
 
10

Total fixed-maturity securities
92,187

 
(1,247
)
 

 
13,464

 
(2,676
)
 


Equity securities
1,461

 
(147
)
 
6
 
522

 
(190
)
 
1

Total fixed-maturity and equity securities
$
93,648

 
$
(1,394
)
 

 
$
13,986

 
$
(2,866
)
 




11

Table of Contents

The amortized cost and fair value of available-for-sale fixed-maturity securities in default were as follows:
 
June 30,
2013
 
December 31,
2012
 
Amortized cost
 
Fair value
 
Amortized cost
 
Fair value
 
(In thousands)
Fixed-maturity securities in default
$
75

 
$
373

 
$
165

 
$
712


Impairment charges recognized in earnings on available-for-sale securities were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Impairments on fixed-maturity securities not in default
$
1

 
$
126

 
$
72

 
$
340

Impairments on equity securities

 
1

 

 
1

Total impairment charges
$
1

 
$
127

 
$
72

 
$
341

The 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, 2013, the unrealized losses on our invested asset portfolio were largely caused by interest rate sensitivity and, to a lesser extent, changes in credit spreads. We believe that fluctuations caused by interest rate movement have little bearing on the recoverability of our investments. The sharp increase in interest rates during the second quarter of 2013 contributed to the declines in fair value of our invested asset portfolio. Because we have the ability to hold these investments until a market price recovery or maturity and we have 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,
 
2013
 
2012
 
2013
 
2012
 
(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
$
5

 
$
161

 
$
20

 
$
861

Less portion of OTTI loss recognized in accumulated other comprehensive income (loss)
(4
)
 
(76
)
 
(19
)
 
(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
1

 
85

 
1

 
298

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

 
71

 
43

Net impairment losses recognized in earnings
$
1

 
$
127

 
$
72

 
$
341



12

Table of Contents

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,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Cumulative OTTI credit losses recognized for securities still held, beginning of period
$
14,242

 
$
15,544

 
$
14,171

 
$
17,403

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

 
10

 
71

 
10

Additions for OTTI securities where credit losses have been recognized prior to the beginning of the period
1

 
116

 
1

 
330

Reductions due to sales, maturities or calls of credit impaired securities

 
(911
)
 

 
(2,984
)
Cumulative OTTI credit losses recognized for securities still held, end of period
$
14,243

 
$
14,759

 
$
14,243

 
$
14,759

Derivatives. We use foreign currency swaps to reduce our foreign exchange risk attributable to investments held by our subsidiaries in debt securities that are denominated in a currency other than its functional currency. The aggregate notional balance and fair value of these currency swaps follow:
 
June 30,
2013
 
December 31,
2012
 
(In thousands)
Aggregate notional balance of currency swaps
$
5,878

 
$
5,878

Aggregate fair value of currency swaps
(1,754
)
 
(2,048
)
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. The change in fair value of these bifurcated conversion options is reflected in realized investment gains (losses), including OTTI losses. As of June 30, 2013 and December 31, 2012, the fair value of these bifurcated options was approximately $12.4 million and $10.2 million, respectively.
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 approximately $26.4 million as of June 30, 2013 and December 31, 2012. 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 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


13

Table of Contents

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 corporate, mortgage-backed, and asset-backed fixed-maturity 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) that is significant to the fair value measurement. 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, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Fair value assets:
 
 
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
 
 
U.S. government and agencies
$

 
$
7,933

 
$

 
$
7,933

Foreign government

 
117,998

 

 
117,998

States and political subdivisions

 
33,341

 

 
33,341

Corporates
1,248

 
1,243,800

 
4,215

 
1,249,263

Mortgage- and asset-backed securities

 
269,416

 
4,170

 
273,586

Total fixed-maturity securities
1,248

 
1,672,488

 
8,385

 
1,682,121

Equity securities
25,048

 
12,629

 
48

 
37,725

Trading securities

 
12,359

 

 
12,359

Separate accounts

 
2,435,740

 

 
2,435,740

Total fair value assets
$
26,296

 
$
4,133,216

 
$
8,433

 
$
4,167,945

Fair value liabilities:
 
 
 
 
 
 
 
Currency swaps
$

 
$
1,754

 
$

 
$
1,754

Separate accounts

 
2,435,740

 

 
2,435,740

Total fair value liabilities
$

 
$
2,437,494

 
$

 
$
2,437,494



14

Table of Contents

 
December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Fair value assets:
 
 
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
 
 
     U.S. government and agencies
$

 
$
7,534

 
$

 
$
7,534

     Foreign government

 
117,392

 

 
117,392

     States and political subdivisions

 
34,753

 

 
34,753

     Corporates
1,301

 
1,392,446

 
3,379

 
1,397,126

     Mortgage- and asset-backed securities

 
328,415

 
1,794

 
330,209

          Total fixed-maturity securities
1,301

 
1,880,540

 
5,173

 
1,887,014

Equity securities
26,608

 
10,491

 
48

 
37,147

Trading securities

 
7,762

 

 
7,762

Separate accounts

 
2,618,115

 

 
2,618,115

          Total fair value assets
$
27,909

 
$
4,516,908

 
$
5,221

 
$
4,550,038

Fair value liabilities:
 
 
 
 
 
 
 
Currency swaps
$

 
$
2,048

 
$

 
$
2,048

Separate accounts

 
2,618,115

 

 
2,618,115

           Total fair value liabilities
$

 
$
2,620,163

 
$

 
$
2,620,163

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 quarter and at quarter-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 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


15

Table of Contents

time to maturity, if warranted. Remaining unpriced 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,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Level 3 assets, beginning of period
$
4,256

 
$
10,916

 
$
5,221

 
$
6,937

Net unrealized gains (losses) included in other comprehensive income
(189
)
 
(504
)
 
(166
)
 
(336
)
Net realized gains (losses) included in realized investment gains (losses), including other-than-temporary impairment losses
69

 
45

 
130

 
(40
)
Purchases
3,906

 
1,117

 
4,383

 
2,416

Sales
(5
)
 

 
(15
)
 

Settlements
(174
)
 
(384
)
 
(699
)
 
(738
)
Transfers into Level 3
986

 

 
986

 
2,951

Transfers out of Level 3
(416
)
 
(1,059
)
 
(1,407
)
 
(1,059
)
Level 3 assets, end of period
$
8,433

 
$
10,131

 
$
8,433

 
$
10,131

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 three and six months ended June 30, 2013 and 2012. In addition, there were no transfers between Level 1 and Level 3 during the three and six months ended June 30, 2013 and 2012.
Invested assets included in the transfer from Level 3 to Level 2 during the three and six months ended June 30, 2013 and 2012 primarily were fixed-maturity investments for which we were able to obtain independent pricing quotes based on observable inputs. Invested assets included in the transfer from Level 2 to Level 3 during the three and six months ended June 30, 2013 and 2012 primarily were fixed-maturity investments for which we were unable to corroborate independent broker quotes with observable market data.
The table below is a summary of the estimated fair value for financial instruments.
 
June 30, 2013
 
December 31, 2012
 
Carrying
value
 
Estimated
fair value
 
Carrying
value
 
Estimated
fair value
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Fixed-maturity securities
$
1,682,121

 
$
1,682,121

 
$
1,887,014

 
$
1,887,014

Equity securities
37,725

 
37,725

 
37,147

 
37,147

Trading securities
12,359

 
12,359

 
7,762

 
7,762

Policy loans
25,784

 
25,784

 
24,613

 
24,613

Deposit asset underlying 10% reinsurance agreement
109,218

 
109,218

 
91,524

 
91,524

Separate accounts
2,435,740

 
2,435,740

 
2,618,115

 
2,618,115

Liabilities:
 
 
 
 
 
 
 
Notes payable
$
374,457

 
$
396,777

 
$
374,433

 
$
418,777

Currency swaps
1,754

 
1,754

 
2,048

 
2,048

Separate accounts
2,435,740

 
2,435,740

 
2,618,115

 
2,618,115

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.


16

Table of Contents

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, which are categorized as Level 3 fair value measurements, are carried at the unpaid principal balances. The fair value of policy loans approximate the unpaid principal balances as the timing of repayment is uncertain and the loans are collateralized by the amount of the policy. The deposit asset underlying the 10% reinsurance agreement represents the value of the assets necessary to back the economic reserves held in support of the reinsurance agreement. The carrying value of this deposit asset approximates fair value, which is categorized as Level 3 in the fair value hierarchy. Notes payable represent our publicly-traded senior notes and are valued as a Level 2 fair value measurement using the quoted market price for our notes.
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.

(5)
Reinsurance
On March 31, 2010, we entered into certain reinsurance transactions with affiliates of Citigroup 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.
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,
2013
 
December 31,
2012
 
(Dollars in thousands)
Direct life insurance in force
$
679,002,725

 
$
675,164,992

Amounts ceded to other companies
(601,755,831
)
 
(599,133,626
)
Net life insurance in force
$
77,246,894

 
$
76,031,366

Percentage of reinsured life insurance in force
89
%
 
89
%


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Due from reinsurers includes ceded reserve balances and ceded claim liabilities. Reinsurance receivable and financial strength ratings by reinsurer were as follows:
 
June 30, 2013
 
December 31, 2012
Reinsurance
receivable
 
A.M. Best
rating
 
Reinsurance
receivable
 
A.M. Best
rating
(In thousands)
Prime Reinsurance Company(1)
$
2,535,448

 
NR
 
$
2,505,157

 
NR
Financial Reassurance Company 2010, Ltd.(1)
336,592

 
NR
 
352,073

 
NR
American Health and Life Insurance Company(1)
173,763

 
A-
 
174,905

 
A-
Swiss Re Life & Health America Inc.(2)
253,333

 
A+
 
266,841

 
A+
SCOR Global Life Reinsurance Companies
150,481

 
A
 
161,876

 
A
Generali USA Life Reassurance Company
117,566

 
A-
 
117,284

 
A-
Transamerica Reinsurance Companies
103,728

 
A+
 
108,237

 
A+
Munich American Reassurance Company
100,191

 
A+
 
101,349

 
A+
Korean Reinsurance Company
85,722

 
A
 
86,287

 
A
RGA Reinsurance Company
74,005

 
A+
 
72,230

 
A+
All other reinsurers
62,429

 
-
 
58,955

 
-
Due from reinsurers
$
3,993,258

 
 
 
$
4,005,194

 
 
____________________ 
NR – not rated
(1) 
Reinsurers are affiliates of Citigroup. Amounts shown are net of their share of the reinsurance receivable 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
Notes payable consisted of the following:
 
June 30, 2013
 
December 31, 2012
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Senior notes payable, due July 15, 2022
$
375,000

 
4.75
%
 
$
375,000

 
4.75
%
Original issuance discount remaining on notes payable
(543
)
 
 
 
(567
)
 
 
Total notes payable
$
374,457

 
 
 
$
374,433

 
 
On July 16, 2012, we issued $375.0 million in principal amount of senior unsecured notes in a public offering (the "Senior Notes"), and used a portion of the net cash proceeds to repay a $300.0 million note to Citigroup in whole at a redemption price equal to 100% of the outstanding principal amount. We were in compliance with the covenants of the Senior Notes at June 30, 2013. No events of default occurred on the Senior Notes during the six months ended June 30, 2013.
Further discussion on the Company’s notes payable is included in Note 9 (Notes Payable) to our consolidated and combined financial statements within our 2012 Annual Report.

(7)
Stockholders’ Equity
A reconciliation of the number of shares of our common stock follows.
 
Six months ended June 30,
 
2013
 
2012
 
(In thousands)
Common stock, beginning of period
56,374

 
64,883

Shares of restricted common stock issued, net
289

 
438

Shares of common stock issued upon lapse of restricted stock units ("RSUs")
783

 
712

Common stock retired
(2,942
)
 
(6,165
)
Common stock, end of period
54,504

 
59,868



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The above reconciliation excludes RSUs issued to our sales force, our Canadian subsidiaries' employees, and our non-employee directors, which do not have voting rights. As the restrictions on the RSUs lapse, we issue common shares with voting rights. As of June 30, 2013, we had a total of approximately 1.2 million RSUs outstanding.
On June 3, 2013, we repurchased 2,488,621 shares of our common stock and warrants to purchase 4,103,110 shares of our common stock beneficially owned by certain private equity funds managed by Warburg Pincus LLC ("Warburg Pincus") at a purchase price of $34.67 per outstanding share and at a purchase price for the warrants equal to $16.67 per underlying share. The per-share purchase price was determined based on the closing price of our common stock on May 28, 2013, which was the execution date of the agreement to repurchase the shares, and the purchase price per warrant was equal to the per-share purchase price less the warrant exercise price of $18.00 per underlying share. The aggregate purchase price for the shares and warrants was approximately $154.7 million. Warburg Pincus no longer owns an equity interest in the Company. Proceeds from the ordinary dividend of $150.0 million paid on May 7, 2013 from Primerica Life to the Parent Company were used to fund the repurchase transaction.

(8)
Earnings Per Share
The Company has outstanding common stock and equity awards that consist of restricted stock, RSUs and stock options. In addition, warrants to purchase 4,103,110 shares of our common stock at an exercise price of $18.00 per underlying share were outstanding until we repurchased and retired these warrants on June 3, 2013. The restricted stock and outstanding RSUs maintain non-forfeitable dividend rights that result in dividend payment obligations on a one-to-one ratio with common shares for any future dividend declarations. These restricted stock and outstanding RSUs are deemed participating securities for purposes of calculating earnings per share ("EPS").
As a result of issuing restricted stock and outstanding RSUs that are deemed participating securities, we calculate EPS using the two-class method. Under the two-class method, we allocate earnings to common shares (excluding unvested restricted stock) and vested RSUs outstanding for the period. Earnings attributable to unvested participating securities, along with the corresponding share counts, are excluded from EPS as reflected in our condensed consolidated statements of income.
In calculating basic EPS, we deduct any dividends and undistributed earnings allocated to unvested restricted stock and unvested RSUs from net income and then divide the result by the weighted-average number of common shares, fully vested restricted stock, and fully vested RSUs outstanding for the period.
We determine the potential dilutive effect of warrants and stock options outstanding on EPS using the treasury-stock method. Under this method, we determine the proceeds that would be received from the exercise of the warrants and stock options outstanding, which includes cash received for the exercise price, the remaining unrecognized stock option compensation expense and the resulting effect on the income tax deduction from the exercise of stock options. We then use the average market price of our common shares during the period the warrants and stock options were outstanding to determine how many shares we could repurchase with the proceeds raised from the exercise of the warrants and stock options outstanding. The net incremental share count issued represents the potential dilutive securities. We then reallocate earnings to common shares, fully vested restricted stock and fully vested RSUs outstanding by incorporating the increased fully diluted share count to determine diluted EPS.


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The calculation of basic and diluted EPS follows.
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands, except per-share amounts)
Basic EPS
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
43,490

 
$
46,180

 
$
82,335

 
$
87,936

Income attributable to unvested participating securities
(552
)
 
(1,111
)
 
(1,602
)
 
(2,498
)
Net income used in calculating basic EPS
$
42,938

 
$
45,069

 
$
80,733

 
$
85,438

Denominator:
 
 
 
 
 
 
 
Weighted-average vested shares
56,511

 
61,531

 
56,553

 
63,332

Basic EPS
$
0.76

 
$
0.73

 
$
1.43

 
$
1.35

 
 
 
 
 
 
 
 
Diluted EPS
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
43,490

 
$
46,180

 
$
82,335

 
$
87,936