Edgar Filing: Primerica, Inc.

PRI_10Q_6.30.2012

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-34680

Primerica, Inc.

(Exact name of registrant as specified in its charter)



Delaware	27-1204330
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3120 Breckinridge Boulevard Duluth, Georgia	30099
(Address of principal executive offices)	(ZIP Code)

(770) 381-1000

(Registrant’s telephone number, including area code)

Not applicable.

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes ý No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class		As of July 31, 2012
Common Stock, $.01 Par Value		60,028,946 shares

TABLE OF CONTENTS



	Page
PART I – FINANCIAL INFORMATION	1
Item 1. Financial Statements (unaudited).	1
Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011	1
Condensed Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011	2
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011	3
Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2012 and 2011	4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	25
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	43
Item 4. Controls and Procedures.	44

PART II – OTHER INFORMATION	45
Item 1. Legal Proceedings.	45
Item 1A. Risk Factors.	45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	45
Item 3. Defaults Upon Senior Securities.	45
Item 4. Mine Safety Disclosures.	45
Item 5. Other Information.	45
Item 6. Exhibits.	45

Signatures	47

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

PRIMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets



	June 30, 2012			December 31, 2011
	(unaudited)
	(In thousands, except per-share amounts)
Assets
Investments:
Fixed-maturity securities available for sale, at fair value (amortized cost: $1,663,776 in 2012 and $1,811,359 in 2011)	$	1,823,729		$	1,959,156
Equity securities available for sale, at fair value (cost: $25,033 in 2012 and $21,329 in 2011)	31,811			26,712
Trading securities, at fair value (cost: $29,262 in 2012 and $9,793 in 2011)	29,038			9,640
Policy loans	24,187			25,982
Other invested assets	14			14
Total investments	1,908,779			2,021,504
Cash and cash equivalents	108,062			136,078
Accrued investment income	20,220			21,579
Due from reinsurers	3,903,028			3,855,318
Deferred policy acquisition costs, net	990,558			904,485
Premiums and other receivables	167,746			163,845
Intangible assets, net (accumulated amortization: $59,920 in 2012 and $58,218 in 2011)	70,226			71,928
Other assets	281,818			268,485
Separate account assets	2,500,640			2,408,598
Total assets	$	9,951,077		$	9,851,820
Liabilities and Stockholders’ Equity
Liabilities:
Future policy benefits	$	4,723,359		$	4,614,860
Unearned premiums	9,476			7,022
Policy claims and other benefits payable	236,717			241,754
Other policyholders’ funds	347,763			340,766
Note payable	300,000			300,000
Income taxes	82,755			81,316
Other liabilities	329,538			381,496
Payable under securities lending	143,963			149,358
Separate account liabilities	2,500,640			2,408,598
Total liabilities	8,674,211			8,525,170
Stockholders’ equity:
Common stock of ($.01 par value. Authorized 500,000 in 2012 and 2011 and issued 59,868 shares in 2012 and 64,883 shares in 2011)	599			649
Paid-in capital	693,717			835,232
Retained earnings	426,936			344,104
Accumulated other comprehensive income, net of income tax:
Unrealized foreign currency translation gains	50,458			51,248
Net unrealized investment gains (losses):
Net unrealized investment gains not other-than-temporarily impaired	107,187			97,082
Net unrealized investment losses other-than-temporarily impaired	(2,031		)	(1,665		)
Total stockholders’ equity	1,276,866			1,326,650
Total liabilities and stockholders’ equity	$	9,951,077		$	9,851,820

See accompanying notes to condensed consolidated financial statements.

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PRIMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income - Unaudited



	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(In thousands, except per-share amounts)
Revenues:
Direct premiums	$	570,073		$	560,881		$	1,131,110		$	1,112,950
Ceded premiums	(415,815		)	(435,564		)	(833,978		)	(857,802		)
Net premiums	154,258			125,317			297,132			255,148
Commissions and fees	106,761			108,698			210,666			214,814
Net investment income	23,605			27,229			49,702			55,855
Realized investment gains, including other-than-temporary impairment losses	4,321			2,035			6,452			2,362
Other, net	11,580			11,816			23,174			23,268
Total revenues	300,525			275,095			587,126			551,447
Benefits and expenses:
Benefits and claims	68,925			57,272			136,858			114,907
Amortization of deferred policy acquisition costs, net	28,205			23,975			54,736			47,204
Sales commissions	51,475			50,273			101,192			100,711
Insurance expenses	24,589			26,988			47,033			42,786
Insurance commissions	6,458			9,534			14,954			18,532
Interest expense	8,506			6,998			15,416			13,995
Other operating expenses	40,446			41,590			81,551			81,591
Total benefits and expenses	228,604			216,630			451,740			419,726
Income before income taxes	71,921			58,465			135,386			131,721
Income taxes	25,741			20,845			47,450			46,830
Net income	$	46,180		$	37,620		$	87,936		$	84,891

Earnings per share:
Basic	$	0.73		$	0.50		$	1.35		$	1.12
Diluted	$	0.72		$	0.49		$	1.33		$	1.11

Weighted-average shares used in computing earnings per share:
Basic	61,531			73,457			63,332			73,067
Diluted	62,687			74,201			64,481			74,028

Supplemental disclosures:
Total impairment losses	$	(203	)	$	(66	)	$	(904	)	$	(333	)
Impairment losses recognized in other comprehensive income before income taxes	76			—			563			—
Net impairment losses recognized in earnings	(127		)	(66		)	(341		)	(333		)
Other net realized investment gains	4,448			2,101			6,793			2,695
Realized investment gains, including other-than-temporary impairment losses	$	4,321		$	2,035		$	6,452		$	2,362

See accompanying notes to condensed consolidated financial statements.

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PRIMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income - Unaudited



	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(In thousands)
Net income	$	46,180		$	37,620		$	87,936		$	84,891
Other comprehensive income (loss) before income taxes:
Unrealized investment gains (losses):
Change in unrealized holding gains (losses) on investment securities	3,931			16,081			21,445			12,443
Reclassification adjustment for realized investment (gains) losses included in net income	(4,640		)	(2,073		)	(6,461		)	(2,293		)
Foreign currency translation adjustments:
Change in unrealized foreign currency translation gains (losses)	(4,177		)	1,041			(869		)	3,647
Total other comprehensive income (loss) before income taxes	(4,886		)	15,049			14,115			13,797
Income tax expense (benefit) related to items of other comprehensive income (loss)	(298		)	4,903			5,166			2,825
Other comprehensive income (loss), net of income taxes	(4,588		)	10,146			8,949			10,972
Total comprehensive income	$	41,592		$	47,766		$	96,885		$	95,863

See accompanying notes to condensed consolidated financial statements.

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PRIMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity - Unaudited



	Six months ended June 30,
	2012			2011
	(In thousands, except per-share amounts)
Common stock:
Balance, beginning of period	$	649		$	728
Repurchases of common stock	(62		)	(2		)
Net issuance of common stock	12			10
Balance, end of period	599			736
Paid-in capital:
Balance, beginning of period	835,232			1,010,635
Share-based compensation	17,353			16,246
Net issuance of common stock	(12		)	(10		)
Repurchases of common stock	(160,817		)	(4,108		)
Net capital contributed by (to) Citi	1,961			(1,424		)
Balance, end of period	693,717			1,021,339
Retained earnings:
Balance, beginning of period	344,104			194,225
Net income	87,936			84,891
Dividends ($0.08 per share in 2012 and $0.04 per share in 2011)	(5,104		)	(3,027		)
Balance, end of period	426,936			276,089
Accumulated other comprehensive income:
Balance, beginning of period	146,665			150,940
Change in foreign currency translation adjustment, net of income tax expense (benefit) of $(79) in 2012 and $0 in 2011	(790		)	3,647
Change in net unrealized investment gains (losses) during the period, net of income taxes:
Change in net unrealized investment gains (losses) not-other-than temporarily impaired, net of income tax expense (benefit) of $5,441 in 2012 and $2,825 in 2011	10,105			7,325
Change in net unrealized investment gains (losses) other-than-temporarily impaired, net of income tax expense (benefit) of $(196) in 2012 and $0 in 2011	(366		)	—
Balance, end of period	155,614			161,912
Total stockholders’ equity	$	1,276,866		$	1,460,076

See accompanying notes to condensed consolidated financial statements.

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PRIMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows - Unaudited



	Six months ended June 30,
	2012			2011
	(In thousands)
Cash flows from operating activities:
Net income	$	87,936		$	84,891
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Change in future policy benefits and other policy liabilities	113,712			35,579
Deferral of policy acquisition costs	(141,151		)	(134,704		)
Amortization of deferred policy acquisition costs, net	54,736			47,204
Change in income taxes	431			(13,074		)
Realized investment gains, including other-than-temporary impairments	(6,452		)	(2,362		)
Accretion and amortization of investments	(304		)	(1,910		)
Depreciation and amortization	4,911			5,265
Change in due from reinsurers	(47,710		)	18,515
Change in premiums and other receivables	(3,826		)	(11,575		)
Trading securities sold (acquired), net	14,639			(13,505		)
Share-based compensation	13,196			12,061
Other, net	(77,309		)	(32,585		)
Net cash provided by (used in) operating activities	12,809			(6,200		)
Cash flows from investing activities:
Available-for-sale investments sold, matured or called:
Fixed-maturity securities - sold	213,317			36,635
Fixed-maturity securities - matured or called	124,320			230,947
Equity securities	1,246			3,026
Available-for-sale investments acquired:
Fixed-maturity securities	(209,197		)	(267,793		)
Equity securities	(3,086		)	(73		)
Other, net	148			(82		)
Cash collateral received (returned) on loaned securities, net	(5,395		)	(18,384		)
Sales (purchases) of short-term investments using securities lending collateral, net	5,395			18,384
Net cash provided by (used in) investing activities	126,748			2,660
Cash flows from financing activities:
Dividends	(5,104		)	(3,027		)
Common stock repurchased	(160,879		)	(4,110		)
Net cash provided by (used in) financing activities	(165,983		)	(7,137		)
Effect of foreign exchange rate changes on cash	(1,590		)	(1,310		)
Change in cash and cash equivalents	(28,016		)	(11,987		)
Cash and cash equivalents, beginning of period	136,078			126,038
Cash and cash equivalents, end of period	$	108,062		$	114,051

See accompanying notes to condensed consolidated financial statements.

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PRIMERICA, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - Unaudited


(1)	Summary of Significant Accounting Policies

Description of Business. Primerica, Inc. (the "Parent Company") together with its subsidiaries (collectively, "we" or the "Company") is a leading distributor of financial products to middle income households in the United States and Canada. We assist our clients in meeting their needs for term life insurance, which we underwrite, and mutual funds, annuities and other financial products, which we distribute primarily on behalf of third parties. Our primary subsidiaries include the following entities: Primerica Financial Services, Inc., a general agency and marketing company; Primerica Life Insurance Company ("Primerica Life"), our principal life insurance company; Primerica Financial Services (Canada) Ltd., a holding company for our Canadian operations, which includes Primerica Life Insurance Company of Canada ("Primerica Life Canada"); and PFS Investments, Inc., an investment products company and broker-dealer. Primerica Life, domiciled in Massachusetts, owns National Benefit Life Insurance Company ("NBLIC"), a New York life insurance company. Each of these entities was indirectly wholly owned by Citigroup Inc. (together with its non-Primerica affiliates, "Citi") through March 31, 2010.

We capitalized Peach Re, Inc. ("Peach Re"), a special purpose financial captive insurance company and wholly owned subsidiary of Primerica Life, and Primerica Life ceded to Peach Re certain level premium term life insurance policies pursuant to a coinsurance agreement (the "Peach Re Coinsurance Agreement"), effective March 31, 2012.

Basis of Presentation. We prepare our financial statements in accordance with U.S. generally accepted accounting principles ("GAAP"). These principles are established primarily by the Financial Accounting Standards Board ("FASB"). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect financial statement balances, revenues and expenses and cash flows as well as the disclosure of contingent assets and liabilities. Management considers available facts and knowledge of existing circumstances when establishing the estimates included in our financial statements.

The most significant items that involve a greater degree of accounting estimates and actuarial determinations subject to change in the future are the valuation of investments, deferred policy acquisition costs assets ("DAC"), future policy benefit reserves and income taxes. Estimates for these and other items are subject to change and are reassessed by management in accordance with GAAP. Actual results could differ from those estimates.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and those entities required to be consolidated under applicable accounting standards. All material intercompany profits, transactions, and balances among the consolidated entities have been eliminated.

The accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, which are necessary to fairly present the balance sheets as of June 30, 2012 and December 31, 2011, the statements of income and comprehensive income for the three and six months ended June 30, 2012 and 2011, and the statements of stockholders' equity and cash flows for the six months ended June 30, 2012 and 2011. Results of operations for interim periods are not necessarily indicative of results for the entire year or of the results to be expected in future periods.

These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and the regulations of the Securities and Exchange Commission (the "SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated and combined financial statements and notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2011, as modified and updated by our Current Report on Form 8-K filed with the SEC on May 8, 2012 (together, the "2011 Annual Report").

Reclassifications. Certain reclassifications have been made to prior-period amounts to conform to current-period reporting classifications. Concurrent with our January 1, 2012 adoption of ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts ("ASU 2010-26"), certain expenses were reclassified among sales commission, insurance expenses, insurance commissions and other operating expenses. These reclassifications had no impact on net income, total stockholders’ equity or income before income taxes by segment.

Significant Accounting Policies. All significant accounting policies remain unchanged from the 2011 Annual Report.

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New Accounting Principles.

We retrospectively adopted ASU 2010-26 in our fiscal year beginning January 1, 2012. The impact of adoption was as follows:



	(In thousands, except per-share amounts)
Reduction as of January 1, 2011:
Deferred policy acquisition costs, net	$	114,265
Stockholders' equity	74,964

Reduction as of December 31, 2011:
Deferred policy acquisition costs, net	$	146,152
Stockholders' equity	95,991

Reduction for the three months ended June 30, 2011:
Income before income taxes	$	9,696
Net income	6,403
Basic earnings per share	0.08
Diluted earnings per share	0.09

Reduction for the six months ended June 30, 2011:
Income before income taxes	$	17,585
Net income	11,599
Basic earnings per share	0.16
Diluted earnings per share	0.15

The adoption of ASU 2010-26 had no impact on our cash flows or required capital.

In accordance with ASU 2010-26, we only defer the costs of acquiring new business to the extent that they result directly from and are essential to the contract transaction(s) and would not have been incurred had the contract transaction(s) not occurred. These deferred policy acquisition costs mainly include commissions and policy issuance expenses. The recovery of such costs is dependent on the future profitability of the related policies, which, in turn, is dependent principally upon mortality, persistency, investment returns, and the expense of administering the business, as well as upon certain economic variables, such as inflation. DAC is subject to recoverability testing annually and when impairment indicators exist. We make certain assumptions regarding persistency, expenses, interest rates and claims. These assumptions may not be modified, or unlocked, unless recoverability testing deems them to be inadequate. We update assumptions for new business to reflect the most recent experience. DAC is amortized over the premium-paying period of the related policies in proportion to annual premium income. Due to the inherent uncertainties in making assumptions about future events, materially different experience from expected results in persistency could result in a material increase or decrease of DAC amortization in a particular period. All other acquisition-related costs, including unsuccessful acquisition and renewal efforts, are charged to expense as incurred. Administrative costs, rent, depreciation, occupancy, equipment, and all other general overhead costs are considered indirect costs and are charged to expense as incurred.

Deferrable acquisitions costs for Canadian segregated funds are amortized over the life of the policies in relation to historical and future estimated gross profits before amortization. The gross profits and resulting DAC amortization will vary with actual fund returns, redemptions and expenses. The adoption of ASU 2010-26 did not impact the accounting for acquisition costs related to Canadian segregated funds.

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The balances of and activity in DAC, which reflects the retrospective adoption of ASU 2010-26 for all periods presented, were as follows:



	Six months ended June 30,
	2012			2011
	(In thousands)
DAC balance, beginning of period	$	904,485		$	738,946
Capitalization	141,151			134,704
Amortization	(54,736		)	(47,204		)
Foreign exchange and other	(342		)	7,338
DAC balance, end of period	$	990,558		$	833,784

Fair Value Measurement Amendments. In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement ("ASU 2011-04"). The primary provisions of ASU 2011-04 result in common fair value measurement and disclosure requirements for U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes the wording used to describe the requirements for measuring fair value and for disclosing information about fair value measurement, including requiring quantitative disclosures about the unobservable inputs used in fair value measurements. The amendments in the update were applied prospectively for our fiscal year beginning January 1, 2012. This update did not result in a significant impact on our financial position or results of operations.

(2) Segment Information

We have two primary operating segments – Term Life Insurance and Investment and Savings Products. We also have a Corporate and Other Distributed Products segment. Assets by segment were as follows:



	June 30, 2012		December 31, 2011
	(In thousands)
Assets:
Term life insurance segment	$	6,241,977	$	6,009,162
Investment and savings products segment	2,692,115		2,591,137
Corporate and other distributed products segment	1,016,985		1,251,521
Total assets	$	9,951,077	$	9,851,820

The Investment and Savings Products segment includes assets held in separate accounts. Excluding separate accounts, Investment and Savings Products segment assets were as follows:



	June 30, 2012		December 31, 2011
	(In thousands)
Investment and savings products segment assets, excluding separate accounts	$	192,462	$	183,622

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Results of operations by segment were as follows:



	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(In thousands)
Revenues:
Term life insurance segment	$	162,732		$	131,641		$	314,536		$	268,603
Investment and savings products segment	102,967			104,586			203,101			205,432
Corporate and other distributed products segment	34,826			38,868			69,489			77,412
Total revenues	$	300,525		$	275,095		$	587,126		$	551,447

Income (loss) before income taxes:
Term life insurance segment	$	51,724		$	36,026		$	96,007		$	85,742
Investment and savings products segment	29,444			30,470			58,314			61,509
Corporate and other distributed products segment	(9,247		)	(8,031		)	(18,935		)	(15,530		)
Total income before income taxes	$	71,921		$	58,465		$	135,386		$	131,721

Results of operations by country were as follows:



	Three months ended June 30,				Six months ended June 30,
	2012		2011		2012		2011
	(In thousands)
Revenues by country:
United States	$	246,703	$	222,909	$	477,460	$	445,312
Canada	53,822		52,186		109,666		106,135
Total revenues	$	300,525	$	275,095	$	587,126	$	551,447

Income before income taxes by country:
United States	$	54,265	$	42,652	$	102,038	$	99,658
Canada	17,656		15,813		33,348		32,063
Total income before income taxes	$	71,921	$	58,465	$	135,386	$	131,721

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(3) Investments

The period-end cost or amortized cost, gross unrealized gains and losses, and fair value of fixed-maturity and equity securities in our available-for-sale portfolio follow:



	June 30, 2012
	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In thousands)
Securities available for sale, carried at fair value:
Fixed-maturity securities:
U.S. government and agencies	$	8,981	$	888	$	—		$	9,869
Foreign government	97,414		14,118		(148		)	111,384
States and political subdivisions	27,839		3,524		(2		)	31,361
Corporates (1)	1,181,368		120,760		(3,906		)	1,298,222
Mortgage- and asset-backed securities	348,174		26,695		(1,976		)	372,893
Total fixed-maturity securities	1,663,776		165,985		(6,032		)	1,823,729
Equity securities	25,033		7,154		(376		)	31,811
Total fixed-maturity and equity securities	$	1,688,809	$	173,139	$	(6,408	)	$	1,855,540

____________________


(1)	Includes $3.1 million of other-than-temporary impairment losses recognized in accumulated other comprehensive income.



	December 31, 2011
	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In thousands)
Securities available for sale, carried at fair value:
Fixed-maturity securities:
U.S. government and agencies	$	10,050	$	935	$	—		$	10,985
Foreign government	97,206		14,818		(179		)	111,845
States and political subdivisions	28,264		2,671		—			30,935
Corporates (1)	1,250,702		111,346		(7,847		)	1,354,201
Mortgage- and asset-backed securities	425,137		29,398		(3,345		)	451,190
Total fixed-maturity securities	1,811,359		159,168		(11,371		)	1,959,156
Equity securities	21,329		5,689		(306		)	26,712
Total fixed-maturity and equity securities	$	1,832,688	$	164,857	$	(11,677	)	$	1,985,868

____________________


(1)	Includes $2.6 million of other-than-temporary impairment losses recognized in accumulated other comprehensive income.

Certain available-for-sale securities were sold during the three months ended June 30, 2012 to finance the repurchase of shares in April 2012 (see Note 7 for additional information).

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The net effect on stockholders’ equity of unrealized gains and losses on available-for-sale securities was as follows:



	June 30, 2012			December 31, 2011
	(In thousands)
Net unrealized investment gains (losses) including foreign currency translation adjustment and other-than-temporary impairments:
Fixed-maturity and equity securities	$	166,731		$	153,180
Currency swaps	(23		)	96
Foreign currency translation adjustment	(4,929		)	(6,481		)
Other-than-temporary impairments	3,124			2,562
Net unrealized investment gains excluding foreign currency translation adjustment and other-than-temporary impairments	164,903			149,357
Deferred income taxes	(57,716		)	(52,275		)
Net unrealized investment gains excluding foreign currency translation adjustment and other-than-temporary impairments, net of tax	$	107,187		$	97,082

We also maintain a portfolio of fixed-maturity securities that are classified as trading securities. The carrying value of these securities was as follows:



	June 30, 2012		December 31, 2011
	(In thousands)
Fixed-maturity securities classified as trading, carried at fair value	$	29,038	$	9,640

All of our available-for-sale mortgage- and asset-backed securities represent variable interests in variable interest entities ("VIEs"). We are not the primary beneficiary of these VIEs because we do not have the power to direct the activities that most significantly impact the entities’ economic performance. The maximum exposure to loss as a result of our involvement in these VIEs equals the carrying value of the securities.

As required by law, the Company has investments on deposit with governmental authorities and banks for the protection of policyholders. The fair value of investments on deposit was as follows:



	June 30, 2012		December 31, 2011
	(In thousands)
Fair value of investments on deposit with governmental authorities	$	19,309	$	19,100

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



	June 30, 2012		December 31, 2011
	(In thousands)
Securities lending collateral	$	143,963	$	149,358

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The scheduled contractual maturity distribution of the available-for-sale fixed-maturity portfolio at June 30, 2012 follows.



	Amortized cost		Fair value
	(In thousands)
Due in one year or less	$	112,493	$	116,017
Due after one year through five years	551,201		594,914
Due after five years through 10 years	603,657		684,617
Due after 10 years	48,251		55,288
	1,315,602		1,450,836
Mortgage- and asset-backed securities	348,174		372,893
Total fixed-maturity securities	$	1,663,776	$	1,823,729

Expected maturities may differ from scheduled contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.

Investment Income. The components of net investment income were as follows:



	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(In thousands)
Fixed-maturity securities	$	23,797		$	27,462		$	49,559		$	56,474
Equity securities	244			165			467			353
Policy loans and other invested assets	261			320			611			648
Cash and cash equivalents	111			65			246			135
Market return on deposit asset underlying 10% reinsurance agreement	574			650			1,604			1,159
Gross investment income	24,987			28,662			52,487			58,769
Investment expenses	(1,382		)	(1,433		)	(2,785		)	(2,914		)
Net investment income	$	23,605		$	27,229		$	49,702		$	55,855

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The components of net realized investment gains (losses) as well as details on gross realized investment gains and losses and proceeds from sales or other redemptions were as follows:



	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(In thousands)
Net realized investment gains (losses):
Gross gains from sales	$	4,506		$	2,145		$	6,542		$	2,957
Gross losses from sales	(56		)	(6		)	(57		)	(331		)
Gross gains from securities transferred from available-for-sale to trading	323			—			323			—
Gross losses from securities transferred from available-for-sale to trading	(6		)	—			(6		)	—
Other-than-temporary impairment losses	(127		)	(66		)	(341		)	(333		)
Gains (losses) from bifurcated options	(319		)	(38		)	(9		)	69
Net realized investment gains (losses)	$	4,321		$	2,035		$	6,452		$	2,362
Gross realized investment gains (losses) reclassified from accumulated other comprehensive income	$	4,640		$	2,073		$	6,461		$	2,293
Proceeds from sales or other redemptions	$	196,096		$	106,848		$	338,883		$	270,608

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

Investments in fixed-maturity and equity securities with a cost basis in excess of fair value were as follows:



	June 30, 2012		December 31, 2011
	(In thousands)
Fixed-maturity and equity securities with cost basis in excess of fair value	$	126,930	$	286,718

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The following tables summarize, for all securities in an unrealized loss position, the aggregate fair value and the gross unrealized loss by length of time such securities have continuously been in an unrealized loss position:



	June 30, 2012
	Less than 12 months						12 months or longer
	Fair value		Unrealized losses			Number of securities	Fair value		Unrealized losses			Number of securities
	(Dollars in thousands)
Fixed-maturity securities:
Foreign government	$	6,945	$	(148	)	12	$	—	$	—		0
States and political subdivisions	1,750		(2		)	3	—		—			0
Corporates	75,791		(2,282		)	125	13,030		(1,624		)	23
Mortgage- and asset-backed securities	9,878		(114		)	14	11,101		(1,862		)	22
Total fixed-maturity securities	94,364		(2,546		)		24,131		(3,486		)
Equity securities	1,314		(75		)	13	713		(301		)	12
Total fixed-maturity and equity securities	$	95,678	$	(2,621	)		$	24,844	$	(3,787	)



	December 31, 2011
	Less than 12 months						12 months or longer
	Fair value		Unrealized losses			Number of securities	Fair value		Unrealized losses			Number of securities
	(Dollars in thousands)
Fixed-maturity securities:
Foreign government	$	7,150	$	(179	)	10	$	—	$	—		0
States and political subdivisions	—		—			0	—		—			0
Corporates	188,643		(6,979		)	185	4,092		(868		)	11
Mortgage- and asset-backed securities	49,026		(478		)	60	25,280		(2,867		)	30
Total fixed-maturity securities	244,819		(7,636		)		29,372		(3,735		)
Equity securities	850		(306		)	78	—		—			0
Total fixed-maturity and equity securities	$	245,669	$	(7,942	)		$	29,372	$	(3,735	)

The amortized cost and fair value of available-for-sale fixed-maturity securities in default were as follows:



	June 30, 2012				December 31, 2011
	Amortized cost		Fair value		Amortized cost		Fair value
	(In thousands)
Fixed-maturity securities in default	$	3,704	$	4,695	$	3,983	$	5,168

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Impairment charges recognized in earnings on available-for-sale securities were as follows:



	Three months ended June 30,				Six months ended June 30,
	2012		2011		2012		2011
	(In thousands)
Impairments on fixed-maturity securities not in default	$	126	$	63	$	340	$	324
Impairments on fixed-maturity securities in default	—		—		—		4
Impairments on equity securities	1		3		1		5
Total impairment charges	$	127	$	66	$	341	$	333

The fixed-maturity and equity securities noted above were considered to be other-than-temporarily impaired due to adverse credit events, such as news of an impending filing for bankruptcy; analyses of the issuer’s most recent financial statements or other information in which liquidity deficiencies, significant losses and large declines in capitalization were evident; or analyses of rating agency information for issuances with severe ratings downgrades that indicated a significant increase in the possibility of default.

As of June 30, 2012, the unrealized losses on our invested asset portfolio were largely caused by interest rate sensitivity and changes in credit spreads. We believe that fluctuations caused by interest rate movement have little bearing on the recoverability of our investments. Because the declines in fair value were mostly attributable to changes in interest rates and not credit quality, and because we have the ability to hold these investments until a market price recovery or maturity as well as no present intention to dispose of them, we do not consider these investments to be other-than-temporarily impaired.

Net impairment losses recognized in earnings were as follows:



	Three months ended June 30,				Six months ended June 30,
	2012		2011		2012		2011
	(In thousands)
Impairment losses related to securities which the Company does not intend to sell or more-likely-than-not will not be required to sell:
Total OTTI losses recognized	$	161	$	2	$	861	$	2
Less portion of OTTI loss recognized in accumulated other comprehensive income (loss)	76		—		563		—
Net impairment losses recognized in earnings for securities which the Company does not intend to sell or more-likely-than-not will not be required to sell before recovery	85		2		298		2
OTTI losses recognized in earnings for securities which the Company intends to sell or more-likely-than-not will be required to sell before recovery	42		64		43		331
Net impairment losses recognized in earnings	$	127	$	66	$	341	$	333

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The roll-forward of the credit-related losses recognized in income for all fixed-maturity securities still held follows.



	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(In thousands)
Cumulative OTTI credit losses recognized for securities still held, beginning of period	$	32,213		$	40,634		$	34,072		$	41,129
Additions for OTTI securities where no credit losses were recognized prior to the beginning of the period	10			—			10			4
Additions for OTTI securities where credit losses have been recognized prior to the beginning of the period	116			63			330			324
Reductions due to sales, maturities or calls of credit impaired securities	(911		)	(807		)	(2,984		)	(1,567		)
Cumulative OTTI credit losses recognized for securities still held, end of period	$	31,428		$	39,890		$	31,428		$	39,890

Derivatives. We use foreign currency swaps to reduce our foreign exchange risk due to direct investment in foreign currency-denominated debt securities. The aggregate notional balance and fair value of these currency swaps follow.



	June 30, 2012			December 31, 2011
	(In thousands)
Aggregate notional balance of currency swaps	$	5,878		$	5,878
Aggregate fair value of currency swaps	(1,987		)	(2,032		)

The change in fair value of these currency swaps is reflected in other comprehensive income as they effectively hedge the variability in cash flows from these foreign currency-denominated debt securities.

The embedded conversion options associated with fixed-maturity securities are bifurcated from the fixed-maturity security host contracts and separately recognized as equity securities. We recognize the change in fair value of these bifurcated conversion options in realized investment gains, including other-than-temporary impairment losses. The fair value of these bifurcated options follows.



	June 30, 2012		December 31, 2011
	(In thousands)
Aggregate fair value of embedded conversion options bifurcated from host contract	$	7,227	$	8,583

We have a deferred loss related to closed forward contracts that were used to mitigate our exposure to foreign currency exchange rates that resulted from the net investment in our Canadian operations. The amount of deferred loss included in accumulated other comprehensive income was as follows:



	June 30, 2012		December 31, 2011
	(In thousands)
Deferred loss related to closed forward contracts	$	26,385	$	26,385

While we have no current intention to do so, these deferred losses will not be recognized until such time as we sell or substantially liquidate our Canadian operations.


(4)	Fair Value of Financial Instruments

Fair value is the price that would be received upon the sale of an asset in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect

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our view of market assumptions in the absence of observable market information. We classify and disclose all invested assets carried at fair value in one of the following three categories:


•	Level 1. Quoted prices for identical instruments in active markets. Level 1 primarily consists of financial instruments whose value is based on quoted market prices in active markets, such as exchange-traded common stocks and actively traded mutual fund investments;

•

Level 2. Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 includes those financial instruments that are valued using industry-standard pricing methodologies, models or other valuation methodologies. Various inputs are considered in deriving the fair value of the underlying financial instrument, including interest rate, credit spread, and foreign exchange rates. All significant inputs are observable, or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include: certain public and private corporate fixed-maturity and equity securities; government or agency securities; certain mortgage- and asset-backed securities and certain non-exchange-traded derivatives, such as currency swaps and forwards; and

•

Level 3. Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Level 3 consists of financial instruments whose fair value is estimated based on industry-standard pricing methodologies and models using significant inputs not based on, nor corroborated by, readily available market information. Valuations for this category primarily consist of non-binding broker quotes. Financial instruments in this category primarily include less liquid fixed-maturity corporate securities.

As of each reporting period, all assets and liabilities recorded at fair value are classified in their entirety based on the lowest level of input (Level 3 being the lowest). Significant levels of estimation and judgment are required to determine the fair value of certain of our investments. The factors influencing these estimations and judgments are subject to change in subsequent reporting periods.

The estimated fair value and hierarchy classifications for assets and liabilities that are measured at fair value on a recurring basis were as follows:



	June 30, 2012
	Level 1		Level 2		Level 3		Total
	(In thousands)
Fair value assets:
Fixed-maturity securities:
U.S. government and agencies	$	—	$	9,869	$	—	$	9,869
Foreign government	—		111,384		—		111,384
States and political subdivisions	—		31,361		—		31,361
Corporates	249		1,290,884		7,089		1,298,222
Mortgage- and asset-backed securities	—		369,899		2,994		372,893
Total fixed-maturity securities	249		1,813,397		10,083		1,823,729
Equity securities	24,525		7,238		48		31,811
Trading securities	—		29,038		—		29,038
Separate accounts	—		2,500,640		—		2,500,640
Total fair value assets	$	24,774	$	4,350,313	$	10,131	$	4,385,218
Fair value liabilities:
Currency swaps	$	—	$	1,987	$	—	$	1,987
Separate accounts	—		2,500,640		—		2,500,640
Total fair value liabilities	$	—	$	2,502,627	$	—	$	2,502,627

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	December 31, 2011
	Level 1		Level 2		Level 3		Total
	(In thousands)
Fair value assets:
Fixed-maturity securities:
U.S. government and agencies	$	—	$	10,985	$	—	$	10,985
Foreign government	—		111,845		—		111,845
States and political subdivisions	—		30,935		—		30,935
Corporates	256		1,349,021		4,924		1,354,201
Mortgage- and asset-backed securities	—		449,228		1,962		451,190
Total fixed-maturity securities	256		1,952,014		6,886		1,959,156
Equity securities	18,069		8,592		51		26,712
Trading securities	—		9,640		—		9,640
Separate accounts	—		2,408,598		—		2,408,598
Total fair value assets	$	18,325	$	4,378,844	$	6,937	$	4,404,106
Fair value liabilities:
Currency swaps	$	—	$	2,032	$	—	$	2,032
Separate accounts	—		2,408,598		—		2,408,598
Total fair value liabilities	$	—	$	2,410,630	$	—	$	2,410,630

In assessing fair value of our investments, we use a third-party pricing service for approximately 94% of our securities. The remaining securities are primarily thinly traded securities valued using models based on observable inputs on public corporate spreads having similar tenors (e.g., sector, average life and quality rating) and liquidity and yield based on quality rating, average life and treasury yields. All observable data inputs are corroborated by independent third-party data. In the absence of sufficient observable inputs, we utilize non-binding broker quotes, which are reflected in our Level 3 classification as we are unable to evaluate the valuation technique(s) or significant inputs used to develop the quotes. Therefore, we do not internally develop the quantitative unobservable inputs used in measuring the fair value of Level 3 investments. However, we do corroborate pricing information provided by our third-party pricing servicing by performing a review of selected securities. Our review activities include obtaining detailed information about the assumptions, inputs and methodologies used in pricing the security; documenting this information; and corroborating it by comparison to independently obtained prices and or independently developed pricing methodologies.

Furthermore, we perform internal reasonableness assessments on fair value determinations within our portfolio throughout the month and at month-end, including pricing variance analyses and comparisons to alternative pricing sources and benchmark returns. If a fair value appears unusual relative to these assessments, we will re-examine the inputs and may challenge a fair value assessment made by the pricing service. If there is a known pricing error, we will request a reassessment by the pricing service. If the pricing service is unable to perform the reassessment on a timely basis, we will determine the appropriate price by requesting a reassessment from an alternative pricing service or other qualified source as necessary. We do not adjust quotes or prices except in a rare circumstance to resolve a known error.

Because many fixed-maturity securities do not trade on a daily basis, fair value is determined using industry-standard methodologies by applying available market information through processes such as U.S. Treasury curves, benchmarking of similar securities, sector groupings, quotes from market participants and matrix pricing. Observable information is compiled and integrates relevant credit information, perceived market movements and sector news. Additionally, security prices are periodically back-tested to validate and/or refine models as conditions warrant. Market indicators and industry and economic events are also monitored as triggers to obtain additional data. For certain structured securities with limited trading activity, industry-standard pricing methodologies use adjusted market information, such as index prices or discounting expected future cash flows, to estimate fair value. If these measures are not deemed observable for a particular security, the security will be classified as Level 3 in the fair value hierarchy.

Where specific market information is unavailable for certain securities, pricing models produce estimates of fair value primarily using Level 2 inputs along with certain Level 3 inputs. These models include matrix pricing. The

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pricing matrix uses current treasury rates and credit spreads received from third-party sources to estimate fair value. The credit spreads incorporate the issuer’s industry- or issuer-specific credit characteristics and the security’s time to maturity, if warranted. Remaining un-priced securities are valued using an estimate of fair value based on indicative market prices that include significant unobservable inputs not based on, nor corroborated by, market information, including the utilization of non-binding broker quotes.

The roll-forward of the Level 3 assets measured at fair value on a recurring basis was as follows:



	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(In thousands)
Level 3 assets, beginning of period	$	10,916		$	30,162		$	6,937		$	24,998
Net unrealized gains (losses) included in other comprehensive income	(504		)	(232		)	(336		)	(281		)
Net realized gains (losses) included in realized investment gains, including other-than-temporary impairment losses	45			871			(40		)	1,466
Purchases	1,117			—			2,416			4,000
Sales	—			(902		)	—			(3,823		)
Settlements	(384		)	(1,238		)	(738		)	(1,462		)
Transfers into Level 3	—			2			2,951			4,503
Transfers out of Level 3	(1,059		)	(16,398		)	(1,059		)	(17,136		)
Level 3 assets, end of period	$	10,131		$	12,265		$	10,131		$	12,265

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

Invested assets included in the transfer from Level 2 to Level 3 during the three months ended June 30, 2011 and the six months ended June 30, 2012 and 2011 primarily were fixed-maturity investments for which we were unable to corroborate independent broker quotes with observable market data. Invested assets included in the transfer from Level 3 to Level 2 during the three and six months ended June 30, 2012 and 2011 primarily were fixed-maturity securities and fixed-maturity securities with embedded conversion options for which we were able to obtain independent pricing quotes based on observable inputs.

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The table below is a summary of the estimated fair value for financial instruments.



	June 30, 2012				December 31, 2011
	Carrying value		Estimated fair value		Carrying value		Estimated fair value
	(In thousands)
Assets:
Fixed-maturity securities	$	1,823,729	$	1,823,729	$	1,959,156	$	1,959,156
Equity securities	31,811		31,811		26,712		26,712
Trading securities	29,038		29,038		9,640		9,640
Policy loans	24,187		24,187		25,982		25,982
Other invested assets	14		14		14		14
Deposit asset underlying 10% reinsurance agreement	75,436		75,436		59,975		59,975
Separate accounts	2,500,640		2,500,640		2,408,598		2,408,598
Liabilities:
Note payable	$	300,000	$	334,782	$	300,000	$	329,779
Currency swaps	1,987		1,987		2,032		2,032
Separate accounts	2,500,640		2,500,640		2,408,598		2,408,598

The fair values of financial instruments presented above are estimates of the fair values at a specific point in time using various sources and methods, including market quotations and a complex matrix system that takes into account issuer sector, quality, and spreads in the current marketplace.

Recurring fair value measurements. Estimated fair values of investments in fixed-maturity securities are principally a function of current spreads and interest rates that are corroborated by independent third-party data. Therefore, the fair values presented are indicative of amounts we could realize or settle at the respective balance sheet date. We do not necessarily intend to dispose of or liquidate such instruments prior to maturity. Trading securities, which primarily consist of fixed-maturity securities, are carried at fair value. Equity securities, including common and non-redeemable preferred stocks, are carried at fair value. Currency swaps are stated at fair value. Segregated funds in separate accounts are carried at the underlying value of the variable insurance contracts, which is fair value.

Nonrecurring fair value measurements. Policy loans are carried at unpaid principal balances, which approximate fair value and are categorized as Level 3 fair value measurements. The deposit asset underlying the 10% reinsurance agreement represents the value of the assets backing the economic reserves held in support of a reinsurance agreement. The carrying value of this deposit asset approximates fair value, which is categorized as Level 3 in the fair value hierarchy. Other invested assets have a carrying value that approximates fair value and are categorized as Level 3 in the fair value hierarchy. The fair value of our note payable is a Level 2 fair value measurement and is based on observable inputs including prevailing interest rates and an estimated spread based on notes of comparable issuers and maturity.

The carrying amounts for cash and cash equivalents, receivables, accrued investment income, accounts payable, cash collateral and payables for security transactions approximate their fair values due to the short-term nature of these instruments. Consequently, such financial instruments are not included in the above table.

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(5)	Reinsurance

Reinsurance ceded arrangements do not relieve the Company of its primary obligation to the policyholder. We monitor the concentration of credit risk we have with any reinsurer, as well as the financial condition of the reinsurers. Details on in-force life insurance follow.



	June 30, 2012			December 31, 2011
	(Dollars in thousands)
Direct life insurance in force	$	672,899,761		$	669,938,841
Amounts ceded to other companies	(598,719,363		)	(596,975,143		)
Net life insurance in force	$	74,180,398		$	72,963,698
Percentage of reinsured life insurance in force	89		%	89		%

Due from reinsurers includes ceded reserve balances and ceded claim liabilities. Reinsurance receivable and financial strength ratings by reinsurer were as follows:



	June 30, 2012			December 31, 2011
	Reinsurance receivable		A.M. Best rating	Reinsurance receivable		A.M. Best rating
	(In thousands)
Prime Reinsurance Company (1)	$	2,471,318	NR	$	2,438,723	NR
Financial Reassurance Company 2010, Ltd. (1)	338,645		NR	335,396		NR
American Health and Life Insurance Company (1)	166,687		A-	164,387		A-
Due from Citi affiliate reinsurers	2,976,650			2,938,506
Swiss Re Life & Health America Inc. (2)	254,414		A+	252,912		A+
SCOR Global Life Reinsurance Companies	148,874		A	143,409		A
Generali USA Life Reassurance Company	113,820		A-	114,774		A-
Transamerica Reinsurance Companies	101,709		A+	103,873		A+
Munich American Reassurance Company	97,543		A+	99,240		A+
Korean Reinsurance Company	82,655		A	82,755		A
RGA Reinsurance Company	69,338		A+	67,740		A+
All other reinsurers	58,025		—	52,109		—
Due from reinsurers	$	3,903,028		$	3,855,318

____________________

NR – not rated


(1)	Amounts shown are net of their share of the reinsurance recoverable from other reinsurers.


(2)	Includes amounts ceded to Lincoln National Life Insurance and 100% retroceded to Swiss Re Life & Health America Inc.


(6)	Notes Payable

In April 2010, we issued to Citi a $300.0 million note (the "Citi note") as part of our corporate reorganization. The Citi note bore interest at an annual rate of 5.5%, payable semi-annually in arrears on January 15 and July 15. It was scheduled to mature on March 31, 2015. The Citi note required us to use our commercially reasonable efforts to repay the note in full at certain mutually agreeable dates, based on certain conditions. We were in compliance with the covenants of the Citi note at June 30, 2012. No events of default or defaults occurred during the six months ended June 30, 2012.

On July 16, 2012, we issued $375.0 million in principal amount of senior notes (the "Senior Notes") and used $300.0 million of the net cash proceeds to repay the Citi note in whole at a redemption price equal to 100% of the outstanding principal amount. We issued the Senior Notes at a price of 99.843% of the principal amount with an annual interest rate of 4.750%, payable semi-annually in arrears on January 15 and July 15, commencing on January 15, 2013. The Senior Notes mature on July 15, 2022.

As unsecured senior obligations, the Senior Notes rank equally in right of payment with all existing and future unsubordinated indebtedness. They will rank senior in right of payment to all existing and future subordinated indebtedness and are structurally subordinated in right of payment to all existing and future liabilities of our

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subsidiaries. In addition, the Senior Notes contain covenants that restrict our ability to, among other things, create or incur any indebtedness that is secured by a lien on the capital stock of certain of our subsidiaries, and merge, consolidate or sell all or substantially all of our properties and assets.


(7)	Stockholders’ Equity

A reconciliation of the number of shares of our common stock follows.



	Six months ended June 30,
	2012		2011
	(In thousands)
Common stock, beginning of period	64,883		72,843
Shares of restricted common stock issued, net	438		345
Shares of common stock issued upon lapse of restricted stock units ("RSUs")	712		584
Common stock retired	(6,165	)	(169	)
Common stock, end of period	59,868		73,603

The above reconciliation excludes RSUs which do not have voting rights and are subject to sale restrictions. As the restrictions lapse during the three years following the issuance of the RSUs, we will issue common shares with voting rights. As of June 30, 2012, we had a total of approximately 1.7 million RSUs outstanding. Approximately 178,000 RSUs were granted during the six months ended June 30, 2012 and approximately 246,000 RSUs were granted during the six months ended June 30, 2011.

On April 26, 2012, we repurchased 5,736,137 shares of our common stock beneficially owned by certain private equity funds managed by Warburg Pincus LLC ("Warburg Pincus") at $26.15 per share, for a total purchase price of approximately $150.0 million. The per-share purchase price was determined based on the closing price of our common stock on April 17, 2012, which was the date the agreement to repurchase the shares was executed. As of June 30, 2012, Warburg Pincus owned approximately 18% of the Company's outstanding common stock. At June 30, 2012, Warburg Pincus also owned warrants to purchase 4,103,110 additional shares of our common stock at an exercise price of $18.00 per share. These warrants expire in April 2017.

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(8)	Earnings Per Share ("EPS")

The Company has outstanding common stock, warrants, and equity awards. Both the vested and unvested equity awards 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 equity awards are deemed participating securities for purposes of calculating EPS.

As a result of issuing equity awards that are deemed participating securities, we calculate EPS using the two-class method. Under the two-class method, we allocate earnings to common shares and to fully vested equity awards. Earnings attributable to unvested equity awards, along with the corresponding share counts, are excluded from EPS as reflected in our consolidated statements of income.

In calculating basic EPS, we deduct any dividends and undistributed earnings allocated to unvested equity awards from net income and then divide the result by the weighted-average number of common shares and fully vested equity awards outstanding for the period.

We determine the potential dilutive effect of warrants on EPS using the treasury-stock method. Under this method, we utilize the exercise price to determine the amount of cash that would be available to repurchase shares if the warrants were exercised. We then use the average market price of our common shares during the reporting period to determine how many shares we could repurchase with the cash raised from the exercise. The net incremental share count issued represents the potential dilutive securities. We then reallocate earnings to common shares and fully vested equity awards incorporating the increased, fully diluted share count to determine diluted EPS.

The calculation of basic and diluted EPS follows.



	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(In thousands, except per-share amounts)
Basic EPS
Numerator:
Net income	$	46,180		$	37,620		$	87,936		$	84,891
Income attributable to unvested participating securities	(1,111		)	(1,097		)	(2,498		)	(2,837		)
Net income used in calculating basic EPS	$	45,069		$	36,523		$	85,438		$	82,054
Denominator:
Weighted-average vested shares	61,531			73,457