Edgar Filing: Primerica, Inc.

PRI_10Q_3.31.2013

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 March 31, 2013

¨ 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 April 30, 2013
Common Stock, $.01 Par Value		56,987,377 shares

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	Page
PART I – FINANCIAL INFORMATION	1
Item 1. Financial Statements (unaudited).	1
Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012	1
Condensed Consolidated Statements of Income for the three months ended March 31, 2013 and 2012	2
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012	3
Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2013 and 2012	4
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	22
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	37
Item 4. Controls and Procedures.	37

PART II – OTHER INFORMATION	38
Item 1. Legal Proceedings.	38
Item 1A. Risk Factors.	38
Item 6. Exhibits.	38

Signatures	40

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

PRIMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets



	March 31, 2013			December 31, 2012
	(unaudited)
	(In thousands)
Assets
Investments:
Fixed-maturity securities available for sale, at fair value (amortized cost: $1,671,700 in 2013 and $1,711,582 in 2012)	$	1,837,929		$	1,887,014
Equity securities available for sale, at fair value (cost: $31,066 in 2013 and $29,955 in 2012)	40,277			37,147
Trading securities, at fair value (cost: $9,394 in 2013 and $7,740 in 2012)	9,417			7,762
Policy loans	25,009			24,613
Total investments	1,912,632			1,956,536
Cash and cash equivalents	202,512			112,216
Accrued investment income	21,391			19,540
Due from reinsurers	4,005,539			4,005,194
Deferred policy acquisition costs, net	1,098,124			1,066,422
Premiums and other receivables	180,347			170,656
Intangible assets, net (accumulated amortization: $62,472 in 2013 and $61,621 in 2012)	69,502			69,816
Income taxes	21,359			17,256
Other assets	307,241			302,126
Separate account assets	2,614,669			2,618,115
Total assets	$	10,433,316		$	10,337,877
Liabilities and Stockholders’ Equity
Liabilities:
Future policy benefits	$	4,898,538		$	4,850,488
Unearned premiums	10,214			6,056
Policy claims and other benefits payable	254,333			254,533
Other policyholders’ funds	350,345			345,721
Notes payable	374,445			374,433
Income taxes	122,925			114,611
Other liabilities	366,669			358,577
Payable under securities lending	133,325			139,927
Separate account liabilities	2,614,669			2,618,115
Commitments and contingent liabilities (see Commitments and Contingent Liabilities note)
Total liabilities	9,125,463			9,062,461
Stockholders’ equity:
Common stock ($.01 par value; authorized 500,000 in 2013 and 2012; and issued 56,682 shares in 2013 and 56,374 shares in 2012)	567			564
Paid-in capital	609,100			602,269
Retained earnings	535,609			503,173
Accumulated other comprehensive income (loss), net of income tax:
Unrealized foreign currency translation gains (losses)	51,358			55,487
Net unrealized investment gains (losses):
Net unrealized investment gains not other-than-temporarily impaired	112,264			114,958
Net unrealized investment losses other-than-temporarily impaired	(1,045		)	(1,035		)
Total stockholders’ equity	1,307,853			1,275,416
Total liabilities and stockholders’ equity	$	10,433,316		$	10,337,877

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 March 31,
	2013			2012
	(In thousands, except per-share amounts)
Revenues:
Direct premiums	$	570,899		$	561,037
Ceded premiums	(410,604		)	(418,163		)
Net premiums	160,295			142,874
Commissions and fees	111,988			103,905
Net investment income	23,216			26,097
Realized investment gains (losses), including other-than-temporary impairment losses	2,286			2,131
Other, net	10,660			11,594
Total revenues	308,445			286,601
Benefits and expenses:
Benefits and claims	74,246			67,933
Amortization of deferred policy acquisition costs	31,252			26,531
Sales commissions	55,048			49,717
Insurance expenses	27,052			22,444
Insurance commissions	6,066			8,496
Interest expense	8,795			6,910
Other operating expenses	45,754			41,105
Total benefits and expenses	248,213			223,136
Income before income taxes	60,232			63,465
Income taxes	21,387			21,709
Net income	$	38,845		$	41,756

Earnings per share:
Basic	$	0.67		$	0.62
Diluted	$	0.65		$	0.61

Weighted-average shares used in computing earnings per share:
Basic	56,598			65,133
Diluted	58,407			66,275

Supplemental disclosures:
Total impairment losses	$	(86	)	$	(701	)
Impairment losses recognized in other comprehensive income before income taxes	15			487
Net impairment losses recognized in earnings	(71		)	(214		)
Other net realized investment gains (losses)	2,357			2,345
Realized investment gains (losses), including other-than-temporary impairment losses	$	2,286		$	2,131
Dividends declared per share	$	0.11		$	0.03

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 March 31,
	2013			2012
	(In thousands)
Net income	$	38,845		$	41,756
Other comprehensive income (loss) before income taxes:
Unrealized investment gains (losses):
Change in unrealized holding gains (losses) on investment securities	(2,500		)	17,514
Reclassification adjustment for realized investment (gains) losses included in net income	(1,659		)	(1,821		)
Foreign currency translation adjustments:
Change in unrealized foreign currency translation gains (losses)	(4,188		)	3,308
Total other comprehensive income (loss) before income taxes	(8,347		)	19,001
Income tax expense (benefit) related to items of other comprehensive income (loss)	(1,514		)	5,464
Other comprehensive income (loss), net of income taxes	(6,833		)	13,537
Total comprehensive income	$	32,012		$	55,293

See accompanying notes to condensed consolidated financial statements.

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PRIMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity - Unaudited



	Three months ended March 31,
	2013			2012
	(In thousands)
Common stock:
Balance, beginning of period	$	564		$	649
Repurchases of common stock	(1		)	(1		)
Net issuance of common stock	4			5
Balance, end of period	567			653
Paid-in capital:
Balance, beginning of period	602,269			835,232
Share-based compensation	9,912			7,058
Net issuance of common stock	(4		)	(5		)
Repurchases of common stock	(3,077		)	(1,633		)
Net capital contributed by Citigroup	—			1,961
Balance, end of period	609,100			842,613
Retained earnings:
Balance, beginning of period	503,173			344,104
Net income	38,845			41,756
Dividends	(6,409		)	(2,013		)
Balance, end of period	535,609			383,847
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 $(59) in 2013 and $(29) in 2012	(4,129		)	3,337
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 $(1,450) in 2013 and $5,664 in 2012	(2,694		)	10,516
Change in net unrealized investment losses other-than-temporarily impaired, net of income tax benefit of ($5) in 2013 and ($171) in 2012	(10		)	(316		)
Balance, end of period	162,577			160,202
Total stockholders’ equity	$	1,307,853		$	1,387,315

See accompanying notes to condensed consolidated financial statements.

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PRIMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows - Unaudited



	Three months ended March 31,
	2013			2012
	(In thousands)
Cash flows from operating activities:
Net income	$	38,845		$	41,756
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Change in future policy benefits and other policy liabilities	65,701			70,976
Deferral of policy acquisition costs	(62,874		)	(65,346		)
Amortization of deferred policy acquisition costs	31,252			26,531
Change in income taxes	5,725			1,723
Realized investment (gains) losses, including other-than-temporary impairments	(2,286		)	(2,131		)
Accretion and amortization of investments	(526		)	(278		)
Depreciation and amortization	2,424			2,491
Change in due from reinsurers	(345		)	(39,844		)
Change in premiums and other receivables	(10,245		)	4,785
Trading securities sold, matured, or called (acquired), net	(1,654		)	3,807
Share-based compensation	5,196			4,448
Change in other operating assets and liabilities, net	(6,841		)	(53,688		)
Net cash provided by (used in) operating activities	64,372			(4,770		)
Cash flows from investing activities:
Available-for-sale investments sold, matured or called:
Fixed-maturity securities - sold	15,878			67,354
Fixed-maturity securities - matured or called	62,567			75,433
Equity securities	148			—
Available-for-sale investments acquired:
Fixed-maturity securities	(34,958		)	(107,467		)
Equity securities	(46		)	(3,040		)
Purchases of property and equipment and other investing activities, net	(8,688		)	(322		)
Cash collateral received (returned) on loaned securities, net	(6,602		)	(6,851		)
Sales (purchases) of short-term investments using securities lending collateral, net	6,602			6,851
Net cash provided by (used in) investing activities	34,901			31,958
Cash flows from financing activities:
Dividends paid	(6,409		)	(2,013		)
Common stock repurchased	(3,078		)	(1,634		)
Excess tax benefits on share-based compensation	925			396
Payments of deferred financing costs	—			(4,683		)
Net cash provided by (used in) financing activities	(8,562		)	(7,934		)
Effect of foreign exchange rate changes on cash	(415		)	204
Change in cash and cash equivalents	90,296			19,458
Cash and cash equivalents, beginning of period	112,216			136,078
Cash and cash equivalents, end of period	$	202,512		$	155,536

See accompanying notes to condensed consolidated financial statements.

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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 March 31, 2013 and December 31, 2012, the statements of income, comprehensive income, stockholders' equity, and cash flows for the three months ended March 31, 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.

Significant Accounting Policies. All significant accounting policies remain unchanged from the 2012 Annual Report.

New Accounting Principles. In July 2012, the FASB issued Accounting Standards Update ("ASU") No. 2012-02, Intangibles - Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment (“ASU

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2012-02”), which allows an entity the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset is impaired. The Company assesses its indefinite-lived intangible asset for impairment annually on October 1, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The amendments in the update were applied prospectively in our fiscal year beginning January 1, 2013 and had no impact on our financial statements. The Company also does not expect the amendments in the update to have an impact on our financial statements when its indefinite-lived intangible asset is assessed for impairment on the annual assessment date.

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). The amendments of ASU 2011-11 provide for enhanced disclosures about offsetting assets and liabilities. In January 2013, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210) - Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”), which clarifies the scope of ASU 2011-11. We adopted the provisions of ASU 2013-01, which include the provisions of ASU 2011-11, for our fiscal year beginning January 1, 2013. This update did not have an impact on our financial statements.

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 discussed above 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:



	March 31, 2013			December 31, 2012
	(In thousands)
Assets:
Term life insurance segment	$	6,594,616		$	6,491,650
Investment and savings products segment	2,809,071			2,810,137
Corporate and other distributed products segment	1,029,629			1,036,090
Total assets	$	10,433,316		$	10,337,877

	Three months ended March 31,
	2013			2012
	(In thousands)
Revenues:
Term life insurance segment	$	168,397		$	151,804
Investment and savings products segment	108,722			100,134
Corporate and other distributed products segment	31,326			34,663
Total revenues	$	308,445		$	286,601
Income (loss) before income taxes:
Term life insurance segment	$	45,779		$	44,283
Investment and savings products segment	26,371			28,870
Corporate and other distributed products segment	(11,918		)	(9,688		)
Total income before income taxes	$	60,232		$	63,465

The Investment and Savings Products segment includes assets held in separate accounts. Excluding separate accounts, the Investment and Savings Products segment assets were approximately $195.2 million and $192.8 million as of March 31, 2013 and December 31, 2012, respectively.

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Long-lived assets and results of operations by country were as follows:



	March 31, 2013		December 31, 2012
	(In thousands)
Long-lived assets by country:
United States	$	83,059	$	82,724
Canada	556		450
Total long-lived assets	$	83,615	$	83,174

	Three months ended March 31,
	2013		2012
	(In thousands)
Revenues by country:
United States	$	249,368	$	230,757
Canada	59,077		55,844
Total revenues	$	308,445	$	286,601
Income before income taxes by country:
United States	$	44,131	$	47,773
Canada	16,101		15,692
Total income before income taxes	$	60,232	$	63,465

(3) Investments

The period-end cost or amortized cost, gross unrealized gains and losses, and fair value of fixed-maturity and equity securities follow:



	March 31, 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	$	7,438	$	770	$	(11	)	$	8,197
Foreign government	108,978		14,644		(280		)	123,342
States and political subdivisions	31,372		3,616		(11		)	34,977
Corporates⁽¹⁾	1,244,380		129,639		(3,018		)	1,371,001
Mortgage- and asset-backed securities	279,532		21,651		(771		)	300,412
Total fixed-maturity securities	1,671,700		170,320		(4,091		)	1,837,929
Equity securities	31,066		9,359		(148		)	40,277
Total fixed-maturity and equity securities	$	1,702,766	$	179,679	$	(4,239	)	$	1,878,206

____________________


⁽¹⁾	Includes approximately $1.6 million of other-than-temporary impairment losses recognized in accumulated other comprehensive income.

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	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⁾	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	1,711,582		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 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:



	March 31, 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	$	175,440		$	182,624
Currency swaps	98			97
Foreign currency translation adjustment	(4,432		)	(7,456		)
Other-than-temporary impairments	1,607			1,592
Net unrealized investment gains excluding foreign currency translation adjustment and other-than-temporary impairments	172,713			176,857
Deferred income taxes	(60,449		)	(61,899		)
Net unrealized investment gains excluding foreign currency translation adjustment and other-than-temporary impairments, net of tax	$	112,264		$	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 $9.4 million and $7.8 million as of March 31, 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 $20.3 million and $20.5 million as of March 31, 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 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 approximately $133.3 million and $139.9 million as of March 31, 2013 and December 31, 2012, respectively.

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The scheduled contractual maturity distribution of the available-for-sale fixed-maturity portfolio at March 31, 2013 follows:



	March 31, 2013
	Amortized cost		Fair value
	(In thousands)
Due in one year or less	$	184,489	$	190,619
Due after one year through five years	527,635		575,545
Due after five years through 10 years	639,913		724,329
Due after 10 years	40,131		47,024
	1,392,168		1,537,517
Mortgage- and asset-backed securities	279,532		300,412
Total fixed-maturity securities	$	1,671,700	$	1,837,929

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 March 31,
	2013			2012
	(In thousands)
Fixed-maturity securities	$	23,210		$	25,762
Equity securities	272			223
Policy loans and other invested assets	320			350
Cash and cash equivalents	88			135
Market return on deposit asset underlying 10% reinsurance agreement	563			1,030
Gross investment income	24,453			27,500
Investment expenses	(1,237		)	(1,403		)
Net investment income	$	23,216		$	26,097

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 March 31,
	2013			2012
	(In thousands)
Net realized investment gains (losses):
Gross gains from sales	$	1,733		$	2,036
Gross losses from sales	(3		)	(1		)
Other-than-temporary impairment losses	(71		)	(214		)
Gains (losses) from bifurcated options	627			310
Net realized investment gains (losses)	$	2,286		$	2,131
Supplemental information:
Gross realized investment gains (losses) reclassified from accumulated other comprehensive income into earnings	$	1,659		$	1,821
Tax expense (benefit) associated with realized investment gains (losses) reclassified from accumulated other comprehensive income into earnings	$	581		$	637
Proceeds from sales or other redemptions	$	78,593		$	142,787

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

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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 $115.4 million and $111.9 million as of March 31, 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:



	March 31, 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	$	940	$	(11	)	2	$	—	$	—		—
Foreign government	13,648		(255		)	32	497		(25		)	2
States and political subdivisions	1,206		(11		)	3	—		—			—
Corporates	66,243		(1,428		)	162	5,909		(1,590		)	41
Mortgage- and asset-backed securities	14,921		(43		)	24	6,550		(728		)	14
Total fixed-maturity securities	96,958		(1,748		)		12,956		(2,343		)
Equity securities	1,200		(148		)	7	—		—			—
Total fixed-maturity and equity securities	$	98,158	$	(1,896	)		$	12,956	$	(2,343	)



	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	)	13	$	—	$	—		—
States and political subdivisions	1,498		(19		)	3	—		—			—
Corporates	70,176		(1,189		)	134	7,055		(1,574		)	33
Mortgage- and asset-backed securities	15,367		(22		)	21	6,409		(1,102		)	14
Total fixed-maturity securities	92,187		(1,247		)		13,464		(2,676		)
Equity securities	1,461		(147		)	20	522		(190		)	2
Total fixed-maturity and equity securities	$	93,648	$	(1,394	)		$	13,986	$	(2,866	)

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



	March 31, 2013				December 31, 2012
	Amortized cost		Fair value		Amortized cost		Fair value
	(In thousands)
Fixed-maturity securities in default	$	167	$	678	$	165	$	712

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



	Three months ended March 31,
	2013		2012
	(In thousands)
Impairments on fixed-maturity securities not in default	$	71	$	214

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 March 31, 2013, the unrealized losses on our invested asset portfolio were largely caused by interest rate sensitivity and changes in credit spreads. 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 March 31,
	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	$	15		$	700
Less portion of OTTI loss recognized in accumulated other comprehensive income (loss)	(15		)	(487		)
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	—			213
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	71			1
Net impairment losses recognized in earnings	$	71		$	214

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



	Three months ended March 31,
	2013		2012
	(In thousands)
Cumulative OTTI credit losses recognized for securities still held, beginning of period	$	14,171	$	17,403
Additions for OTTI securities where no credit losses were recognized prior to the beginning of the period	71		—
Additions for OTTI securities where credit losses have been recognized prior to the beginning of the period	—		214
Reductions due to sales, maturities or calls of credit impaired securities	—		(2,073		)
Cumulative OTTI credit losses recognized for securities still held, end of period	$	14,242	$	15,544

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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:



	March 31, 2013			December 31, 2012
	(In thousands)
Aggregate notional balance of currency swaps	$	5,878		$	5,878
Aggregate fair value of currency swaps	(1,848		)	(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 March 31, 2013 and December 31, 2012, the fair value of these bifurcated options was approximately $11.4 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 March 31, 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 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) 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.

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



	March 31, 2013
	Level 1		Level 2		Level 3		Total
	(In thousands)
Fair value assets:
Fixed-maturity securities:
U.S. government and agencies	$	—	$	8,197	$	—	$	8,197
Foreign government	—		123,342		—		123,342
States and political subdivisions	—		34,977		—		34,977
Corporates	1,307		1,367,226		2,468		1,371,001
Mortgage- and asset-backed securities	—		298,672		1,740		300,412
Total fixed-maturity securities	1,307		1,832,414		4,208		1,837,929
Equity securities	25,640		14,589		48		40,277
Trading securities	—		9,417		—		9,417
Separate accounts	—		2,614,669		—		2,614,669
Total fair value assets	$	26,947	$	4,471,089	$	4,256	$	4,502,292
Fair value liabilities:
Currency swaps	$	—	$	1,848	$	—	$	1,848
Separate accounts	—		2,614,669		—		2,614,669
Total fair value liabilities	$	—	$	2,616,517	$	—	$	2,616,517



	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

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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 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 March 31,
	2013			2012
	(In thousands)
Level 3 assets, beginning of period	$	5,221		$	6,937
Net unrealized gains (losses) included in other comprehensive income	23			168
Net realized gains (losses) included in realized investment gains (losses), including other-than-temporary impairment losses	61			(85		)
Purchases	477			1,299
Sales	(10		)	—
Settlements	(525		)	(354		)
Transfers into Level 3	—			2,951
Transfers out of Level 3	(991		)	—
Level 3 assets, end of period	$	4,256		$	10,916

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 months ended March 31, 2013 and 2012. In addition, there were no transfers between Level 1 and Level 3 during the three months ended March 31, 2013 and 2012.

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Invested assets included in the transfer from Level 3 to Level 2 during the three months ended March 31, 2013 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 months ended March 31, 2012 primarily were fixed-maturity securities for which we were unable to corroborate independent pricing quotes with observable market data.

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



	March 31, 2013				December 31, 2012
	Carrying value		Estimated fair value		Carrying value		Estimated fair value
	(In thousands)
Assets:
Fixed-maturity securities	$	1,837,929	$	1,837,929	$	1,887,014	$	1,887,014
Equity securities	40,277		40,277		37,147		37,147
Trading securities	9,417		9,417		7,762		7,762
Policy loans	25,009		25,009		24,613		24,613
Deposit asset underlying 10% reinsurance agreement	100,900		100,900		91,524		91,524
Separate accounts	2,614,669		2,614,669		2,618,115		2,618,115
Liabilities:
Notes payable	$	374,445	$	419,733	$	374,433	$	418,777
Currency swaps	1,848		1,848		2,048		2,048
Separate accounts	2,614,669		2,614,669		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.

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. As of March 31, 2013 and December 31, 2012, notes payable were comprised of our publicly-traded senior notes and 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 Inc. ("Citigroup") (collectively, the "Citigroup reinsurers") and ceded between 80% and 90% of the risks and rewards of our term life insurance policies that were in force at year-end 2009.

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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:



	March 31, 2013			December 31, 2012
	(Dollars in thousands)
Direct life insurance in force	$	675,149,710		$	675,164,992
Amounts ceded to other companies	(598,422,548		)	(599,133,626		)
Net life insurance in force	$	76,727,162		$	76,031,366
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:



	March 31, 2013			December 31, 2012
	Reinsurance receivable		A.M. Best rating	Reinsurance receivable		A.M. Best rating
	(In thousands)
Prime Reinsurance Company⁽¹⁾	$	2,520,093	NR	$	2,505,157	NR
Financial Reassurance Company 2010, Ltd.⁽¹⁾	354,181		NR	352,073		NR
American Health and Life Insurance Company⁽¹⁾	173,556		A-	174,905		A-
Swiss Re Life & Health America Inc.⁽²⁾	261,381		A+	266,841		A+
SCOR Global Life Reinsurance Companies	150,585		A	161,876		A
Generali USA Life Reassurance Company	118,612		A-	117,284		A-
Transamerica Reinsurance Companies	104,726		A+	108,237		A+
Munich American Reassurance Company	100,549		A+	101,349		A+
Korean Reinsurance Company	85,507		A	86,287		A
RGA Reinsurance Company	75,060		A+	72,230		A+
All other reinsurers	61,289		-	58,955		-
Due from reinsurers	$	4,005,539		$	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:



	March 31, 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	(555		)			(567		)
Total notes payable	$	374,445				$	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 March 31, 2013. No events of default occurred on the Senior Notes during the three months ended March 31, 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.

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(7)	Stockholders’ Equity

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



	Three months ended March 31,
	2013		2012
	(In thousands)
Common stock, beginning of period	56,374		64,883
Shares of restricted common stock issued, net	289		422
Shares of common stock issued upon lapse of restricted stock units ("RSUs")	115		68
Common stock retired	(96	)	(69	)
Common stock, end of period	56,682		65,304

The above reconciliation excludes RSUs issued to our sales force and to our Canadian subsidiaries' employees, which do not have voting rights. As the restrictions on the RSUs lapse during the three years following their grant, we issue common shares with voting rights. As of March 31, 2013, we had a total of approximately 1.7 million RSUs outstanding.


(8)	Earnings Per Share

The Company has outstanding common stock, warrants, and equity awards. The restricted stock awards 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 awards and outstanding RSUs are deemed participating securities for purposes of calculating earnings per share ("EPS").

As a result of issuing restricted stock awards 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 awards) 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 awards from net income and then divide the result by the weighted-average number of common shares, fully vested restricted stock awards, and 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 reporting period 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 awards and 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 March 31,
	2013			2012
	(In thousands, except per-share amounts)
Basic EPS
Numerator:
Net income	$	38,845		$	41,756
Income attributable to unvested participating securities	(1,017		)	(1,357		)
Net income used in calculating basic EPS	$	37,828		$	40,399
Denominator:
Weighted-average vested shares	56,598			65,133
Basic EPS	$	0.67		$	0.62

Diluted EPS
Numerator:
Net income	$	38,845		$	41,756
Income attributable to unvested participating securities	(991		)	(1,335		)
Net income used in calculating diluted EPS	$	37,854		$	40,421
Denominator:
Weighted-average vested shares	56,598			65,133
Dilutive effect of incremental shares to be issued for warrants outstanding	1,809			1,142
Weighted-average shares used in calculating diluted EPS ⁽¹⁾	58,407			66,275
Diluted EPS	$	0.65		$	0.61

____________________

⁽¹⁾

Stock options granted to employees on February 20, 2013 to purchase 134,222 shares of common stock were outstanding as of March 31, 2013 but were not included in the computation of diluted EPS, because the impact from the exercise would be anti-dilutive. There were no outstanding stock options as of March 31, 2012. See Note 9 (Share-Based Transactions) for more information regarding stock options.


(9)	Share-Based Transactions

The Company has outstanding equity awards under its Omnibus Incentive Plan ("OIP"). The OIP provides for the issuance of equity awards, including stock options, stock appreciation rights, restricted stock, deferred stock, RSUs, unrestricted stock, as well as cash-based awards. In addition to time-based vesting requirements, awards granted under the OIP also may be subject to specified performance criteria. Since 2010, the Company has issued restricted stock awards to our management (officers and other key employees), directors, and sales force leaders under the OIP. As of March 31, 2013, we had approximately 3.1 million shares available for future grants under this plan.

Employee Share-Based Transactions

Restricted Stock and RSUs. The Company has granted shares of restricted stock to management of its U.S. based subsidiaries and members of the Board of Directors and restricted stock units to management of its Canadian subsidiaries (collectively, "management restricted stock awards"). All of our outstanding management restricted stock awards have time-based vesting requirements, with equal and annual graded vesting over three years. All of our outstanding management restricted stock awards are eligible for dividends or dividend equivalents regardless of vesting status. On February 20, 2013, we granted annual equity compensation of approximately 304,000 management restricted stock awards under the OIP with a grant date fair value of $32.63 per share.

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In connection with our granting of management restricted stock awards, we recognized expense and tax benefit offsets as follows:



	Three months ended March 31,
	2013		2012
	(In thousands)
Expense for management restricted stock awards granted in 2010	$	3,025	$	3,075
Expense for management restricted stock awards granted in 2011	766		799
Expense for management restricted stock awards granted in 2012	962		574
Expense for management restricted stock awards granted in 2013	402		—
Total management restricted stock awards expense	$	5,155	$	4,448
Tax benefit associated with total management restricted stock awards expense	$	1,272	$	1,519

As of March 31, 2013, total compensation cost not yet recognized in our financial statements related to management restricted stock awards with time-based vesting conditions yet to be reached was approximately $19.5 million, and the weighted-average period over which cost will be recognized was approximately two years.

Stock Options. On February 20, 2013, the Company granted stock options under the OIP to certain of its executive officers with a fair market value equal to approximately one-third of the executive officer's total annual equity compensation. The remaining two-thirds of annual equity compensation for these executive officers were granted in the form of management restricted stock awards discussed above. A total of 134,222 stock options were granted with an exercise price of $32.63, which was equal to the fair market value of our common stock on that date, and they expire 10 years from the date of grant. These options have time-based restrictions with equal and annual graded vesting over a three-year period. The fair market value of the options on the grant date and the compensation expense that will be recognized over the vesting period is approximately $1.1 million. For the three months ended March 31, 2013, compensation expense and related tax benefits recognized for these stock option awards were approximately $41,000 and $14,000, respectively.

The fair value of each option was estimated on the date of grant using the Black-Scholes model. We derived expected volatility after considering our own historical volatility, as well as other public peer companies’ historical and implied volatilities over terms comparable to the expected life of the options. The Company's per share dividend yield as of the grant date was used as the input for the expected dividend payout on the underlying shares. The risk-free interest rate was based on the U.S. Treasury yield for a term equal to the expected life of the options at the time of grant. The Company used the simplified method to determine the expected life of options, as there is no historical exercise activity for the Company's stock option awards. All inputs into the Black-Scholes model were estimates made at the time of grant. The actual realized value of each option grant could materially differ from these estimates, which would have no impact to future reported compensation expense.

The following assumptions were used to estimate the fair value of stock options granted on February 20, 2013:



	Three months ended March 31, 2013
Expected volatility	30.00		%
Expected per share dividend yield	1.35		%
Risk-free interest rate	1.06		%
Expected term of options using simplified method	6 years
Fair value per option	$	8.44

No options were exercised during the three months ended March 31, 2013, and no options are expected to be exercised earlier than the first scheduled vesting date of March 1, 2014.

Non-Employee Share-Based Transactions

Quarterly incentive awards to our sales force leaders have performance-based vesting requirements for which the grant and the service period occur within the same calendar quarter. These awards are granted in the form of RSUs that vest upon the conclusion of short-term quarterly contests and are subject to sale restrictions expiring over the three years subsequent to vesting. Because the awards are subject to sale restrictions following their vesting, their fair value is discounted to reflect a corresponding illiquidity discount. These awards are an incremental direct cost of

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successful acquisitions or renewals of life insurance policies that result directly from and are essential to the policy acquisition(s) and would not have been incurred had the policy acquisition(s) not occurred, and therefore are deferred and amortized in the same manner as other deferred policy acquisition costs.

In connection with these awards, we recognized and deferred expense as follows:



	Three months ended March 31,
	2013		2012
	(In thousands)
Quarterly incentive awards expense recognized currently	$	—	$	—
Quarterly incentive awards expense deferred	3,805		1,773
Concurrent tax benefit of deferred expense	1,234		560

As of March 31, 2013, all non-employee equity awards were fully vested with the exception of quarterly incentive awards granted during the first quarter of 2013 that vested on April 1, 2013. As such, any related compensation cost not recognized as either expense or deferred acquisition costs in our financial statements as of and through March 31, 2013 is immaterial.

(10) Commitments and Contingent Liabilities

The Company is involved from time to time in legal disputes, regulatory inquiries and arbitration proceedings in the normal course of business. These disputes are subject to uncertainties, including the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation. As such, the Company is unable to estimate the possible loss or range of loss that may result from these matters.

Effective March 31, 2012, Peach Re entered into a Credit Facility Agreement with Deutsche Bank (the "Credit Facility Agreement") to support certain obligations for a portion of the statutory accounting-based reserves (commonly referred to as Regulation XXX reserves) related to level premium term life insurance policies ceded to Peach Re from Primerica Life under the Peach Re Coinsurance Agreement.

Under the Credit Facility Agreement, Deutsche Bank issued a letter of credit in the initial amount of $450.0 million with a term of approximately fourteen years (the "LOC") for the benefit of Primerica Life, the direct parent of Peach Re. Subject to certain conditions, the amount of the LOC will be periodically increased up to a maximum amount of $510.0 million in 2014. Pursuant to the terms of the Credit Facility Agreement, in the event amounts are drawn under the LOC by Primerica Life, Peach Re will be obligated, subject to certain limited conditions, to reimburse Deutsche Bank for the amount of any draws and interest thereon. Peach Re has collateralized its obligations to Deutsche Bank by granting it a security interest in all of its assets with the exception of amounts held in a special account established to meet minimum asset thresholds required by state regulatory authorities.

Further discussion on the Company’s letter of credit is included Note 15 (Commitments and Contingent Liabilities) to our consolidated and combined financial statements within our 2012 Annual Report.

Beginning in late 2011, numerous arbitration claims were filed with the Financial Industry Regulatory Association ("FINRA") against our subsidiary, PFS Investments, and certain of its registered representatives seeking unspecified damages arising from the allegation that the representatives improperly recommended that the claimants transfer their retirement benefits from the Florida Retirement System's defined benefit plan to its defined contribution plan. Currently, there are 22 pending arbitrations. We have completed the first arbitration, and it resulted in no monetary award to the Claimant. Of the arbitrations currently pending, 16 are scheduled for final hearings in 2013, including one arbitration in which the final hearing began in the first quarter of 2013. In addition, seven lawsuits alleging the same claims against PFS Investments and certain of its registered representatives are pending in Miami-Dade County Circuit Court, and one lawsuit is pending in Federal Court for the Middle District of Florida. The total number of claimants in the pending arbitrations and the lawsuits, some of which have multiple claimants, is 94. In August 2012, a Palm Beach County Circuit Court case was dismissed on statute of limitations grounds. An appeal of that decision is pending. The law firm representing the claimants in these matters has engaged in solicitation activities directed to Florida state employees to generate interest in the matters and has informed us that it has a list of approximately 150 additional state employees who have responded to its solicitations. It is unclear how many additional claims will be filed. The law firm has demanded a substantial settlement for the claims it has already brought. We believe we have meritorious defenses to the claims, and we intend to vigorously defend against them. Most of the claims arose between 2002 and 2008, and may be

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susceptible to statute of limitations defenses. Despite our defenses, we will incur significant costs, and possibly liabilities, defending and/or resolving these claims. At this time, we are unable to reasonably estimate a range of possible losses.

The treasury departments of 23 U.S. states and the District of Columbia have each engaged one of two common third party firms to conduct audits of the Company and its subsidiaries for compliance with unclaimed property laws. The insurance departments of four of those states and two additional states have each engaged a common third party firm to examine the claims settlement and policy administration practices of Primerica Life and NBLIC, which includes examinations for compliance with unclaimed property laws. If instances of noncompliance are identified during the audits, the Company could be required to make additional payments. Additionally, the State of West Virginia Treasurer has sued Primerica Life and many other insurance companies, alleging violations of the West Virginia unclaimed property act. Other jurisdictions may pursue similar inquiries, audits, examinations and litigation. The audits and examinations are expected to take significant time to complete, and the Company cannot reasonably estimate the impact of additional costs or liabilities that could result from the resolution of these audits and litigation.

(11) Subsequent Event

On April 18, 2013, Primerica Life declared an ordinary dividend of $150.0 million to the Parent Company, which was paid in cash on May 7, 2013. Following the dividend payment, Primerica Life had ordinary dividend capacity of approximately $81.3 million for the remainder of 2013 and maintained statutory capital and surplus in excess of the minimum amount required to trigger a regulatory action event.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to inform the reader about matters affecting the financial condition and results of operations of Primerica, Inc. (the “Parent Company”) and its subsidiaries (collectively, "we", "us" or the “Company”) for the three months ended March 31, 2013. As a result, the following discussion should be read in conjunction with MD&A and the consolidated and combined financial statements and notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2012, ("2012 Annual Report"). This discussion contains forward-looking statements that constitute our plans, estimates and beliefs. These forward-looking statements involve numerous risks and uncertainties, including, but not limited to those discussed under the heading “Risk Factors” in the 2012 Annual Report. Actual results may differ materially from those contained in any forward-looking statements.

This MD&A is divided into the following sections:


•	Business Overview


•	Critical Accounting Estimates


•	Factors Affecting Our Results


•	Results of Operations


•	Financial Condition


•	Liquidity and Capital Resources

Business Overview

We are 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. We have two primary operating segments, Term Life Insurance and Investment and Savings Products, and a third segment, Corporate and Other Distributed Products.

Term Life Insurance. We distribute the term life insurance products that we originate through our three issuing life insurance company subsidiaries: Primerica Life Insurance Company (“Primerica Life”); National Benefit Life

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Insurance Company (“NBLIC”); and Primerica Life Insurance Company of Canada (“Primerica Life Canada”). Our in force term insurance policies have level premiums for the stated term period. As such, the policyholder pays the same amount each year. Initial policy term periods are between 10 and 35 years. While premiums are guaranteed to remain level during the initial term period (up to a maximum of 20 years in the United States), our claim obligations generally increase as our policyholders age. In addition, we incur significant upfront costs in acquiring new insurance business. Our deferral and amortization of policy acquisition costs and reserving methodology are designed to match the recognition of premium revenues with the timing of policy lapses and the payment of expected claims obligations.

Our Term Life Insurance segment results are primarily driven by sales and policies in force, accuracy of our pricing assumptions, terms and use of reinsurance, investment income, and expenses. On March 31, 2010, we entered into certain reinsurance transactions with affiliates of Citigroup Inc. ("Citigroup") (collectively, the "Citigroup reinsurers") and ceded between 80% and 90% of the risks and rewards of our term life insurance policies that were in force at year-end 2009 (the "Citigroup reinsurance transactions"). We continue to administer all policies subject to these coinsurance agreements. Subsequent to the Citigroup reinsurance transactions, the revenues and earnings of our Term Life Insurance segment initially declined in proportion to the amount of revenues and earnings historically associated with the book of term life insurance policies that we ceded to the Citigroup reinsurers. As we have added new in force business, our revenues and earnings have grown from these initial levels. With each successive period, we expect revenue and earnings growth to decelerate as the size of our in force book grows and incremental sales have a reduced marginal effect on the size of the then-existing in force book.

Investment and Savings Products. We distribute mutual funds, managed accounts, annuities and segregated funds. In the United States, we distribute mutual fund and managed accounts products and variable and fixed annuity products of several third-party companies. In Canada, we offer our own Primerica-branded mutual funds, as well as mutual funds of other companies, and segregated funds, which are underwritten by Primerica Life Canada.

Results in our Investment and Savings Products segment are driven by sales of mutual funds and annuities, the value of assets in client accounts for which we earn ongoing service, distribution and advisory fees and the number of fee generating accounts for which we provide administration functions or retirement plan custodial services. While our investment and savings products all have similar long-term earnings characteristics, our results in a given fiscal period are affected by changes in the overall mix of products within these broad categories.

Corporate and Other Distributed Products. Our Corporate and Other Distributed Products segment consists primarily of revenues and expenses related to other distributed products, including various insurance products, prepaid legal services as well as credit information and debt referral services. These products are distributed pursuant to distribution arrangements with third parties, except for certain life and disability insurance products underwritten by NBLIC, our New York life insurance subsidiary, that are not distributed through our independent agent sales force. In addition, our Corporate and Other Distributed Products segment includes corporate income (including net investment income) and expenses not allocated to other segments, interest expense on our notes payable and realized gains and losses on our invested asset portfolio.

Critical Accounting Estimates

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 based on currently available information when recording transactions resulting from business operations. Our significant accounting policies are described in Note 1 (Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies) to our consolidated and combined financial statements included in our 2012 Annual Report. The most significant items on the balance sheet are based on fair value determinations, accounting estimates and actuarial determinations which are susceptible to changes in future periods and which affect our results of operations and financial position.

The estimates that we deem to be most critical to an understanding of our results of operations and financial position are those related to the valuation of investments, deferred policy acquisition costs ("DAC"), future policy benefit reserves and corresponding amounts due from reinsurers, litigation, and income taxes. The preparation and evaluation of these critical accounting estimates involve the use of various assumptions developed from management’s analyses and judgments. Subsequent experience or use of other assumptions could produce significantly different results.

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Accounting Policy Change. During the three months ended March 31, 2013, there have been no changes in the accounting methodology for items that we have identified as critical accounting estimates. For additional information regarding critical accounting estimates, see the Critical Accounting Estimates section of MD&A included in our 2012 Annual Report.

Factors Affecting Our Results

Economic Environment. The relative strength and stability of financial markets and economies in the United States and Canada affect our growth and profitability. Our business is, and we expect will continue to be, influenced by a number of industry-wide and product-specific trends and conditions.

Economic conditions, including unemployment levels and consumer confidence, influence investment and spending decisions by middle income consumers, who are generally our primary clients. These conditions and factors also impact prospective recruits’ perceptions of the business opportunity that becoming a Primerica sales representative offers, which can drive or dampen recruiting. Consumer spending and borrowing levels remain under pressure, as consumers take a more conservative financial posture, including reevaluating their savings and debt management plans. However, historically low interest rates and improved equity market returns have led to increased consumer demand for certain types of savings and investment products as compared to deposit-based savings solutions. The effects of these trends and conditions are discussed in the Results of Operations section below.

Independent Sales Force. Our ability to increase the size of our sales force is largely based on the success of our recruiting efforts and our ability to train and motivate recruits to obtain licenses to sell life insurance. We believe that recruitment and licensing levels are important advance indicators of sales force trends, and growth in recruiting and licensing is usually indicative of future growth in the overall size of the sales force. Recruiting results do not always result in commensurate changes in the size of our licensed sales force because new recruits may obtain the requisite licenses at rates above or below historical levels.

Details on new recruits and life-licensed sales representative activity were as follows:



	Three months ended March 31,
	2013	2012
New recruits	46,348	58,551
New life-licensed sales representatives	7,165	7,650

Recruiting of new representatives decreased for the three months ended March 31, 2013 compared with the same period a year ago in part due to not having an incentive competition in the first half of 2013 leading up to our biennial convention.

The size of our life-licensed insurance sales force was as follows:



	March 31, 2013	December 31, 2012
Life-licensed insurance sales representatives	90,917	92,373

The size of our life-licensed insurance sales force at March 31, 2013 decreased since December 31, 2012 primarily as a result of lower seasonal recruiting levels in the fourth quarter that caused less life-licensed insurance sales representatives to enter the sales force during the three months ended March 31, 2013. In addition, licensing extensions mandated by New York and New Jersey in response to Hurricane Sandy in the fourth quarter contributed to the decline in the sales force.

Term Life Insurance Segment. Our Term Life Insurance segment results are primarily driven by sales volumes, the accuracy of our pricing assumptions, terms and use of reinsurance, investment income and expenses.

Sales and policies in force. Sales of new term policies and the size and characteristics of our in force book of policies are vital to our results over the long term. Premium revenue is recognized as it is earned over the term of the policy and eligible acquisition expenses are deferred and amortized ratably with the level premiums of the underlying policies. However, because we incur significant cash outflows at or about the time policies are issued, including the payment of sales commissions and underwriting costs, changes in life insurance sales volume will have a more immediate effect on our cash flows.

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Historically, we have found that, while sales volume of term life insurance products between fiscal periods may vary based on a variety of factors, the productivity of our individual sales representatives remains within a relatively narrow range, and, consequently, our sales volume over the longer term generally correlates to the size of our sales force.

The average number of life-licensed sales representatives and the number of term life insurance policies issued, as well as the average monthly rate of new policies issued per life-licensed sales representative, were as follows:



	Three months ended March 31,
	2013	2012
Average number of life-licensed sales representatives	91,277	90,027
Number of new policies issued	50,356	56,145
Average monthly rate of new policies issued per life-licensed sales representative	.18x	.21x

The average monthly rate of new policies issued per life-licensed sales representative declined during the three months ended March 31, 2013 as the prior year rate includes the effect of sales opportunities associated with the higher recruiting levels during the prior year period.

Pricing assumptions. Our pricing methodology is intended to provide us with appropriate profit margins for the risks we assume. We determine pricing classifications based on the coverage sought, such as the size and term of the policy, and certain policyholder attributes, such as age and health. In addition, we utilize unisex rates for our term life insurance policies. The pricing assumptions that underlie our rates are based upon our best estimates of mortality, persistency and investment yields at the time of issuance, sales force commission rates, issue and underwriting expenses, operating expenses and the characteristics of the insureds, including sex, age, underwriting class, product and amount of coverage. Our results will be affected to the extent there is a variance between our pricing assumptions and actual experience.

•

Persistency. Persistency is a measure of how long our insurance policies stay in force. As a general matter, persistency that is lower than our pricing assumptions adversely affects our results over the long term because we lose the recurring revenue stream associated with the policies that lapse. Determining the near-term effects of changes in persistency is more complicated. When persistency is lower than our pricing assumptions, we must accelerate the amortization of DAC. The resultant increase in amortization expense is offset by a corresponding release of reserves associated with lapsed policies, which causes a reduction in benefits and claims expense. The reserves associated with any given policy will change over the term of such policy. As a general matter, reserves are lowest at the inception of a policy term and rise steadily to a peak before declining to zero at the expiration of the policy term. Accordingly, depending on when the lapse occurs in relation to the overall policy term, the reduction in benefits and claims expense may be greater or less than the increase in amortization expense and, consequently, the effects on earnings for a given period could be positive or negative. Persistency levels will impact results to the extent actual experience deviates from the persistency assumptions used to price our products.


•	Mortality. Our profitability is affected to the extent actual mortality rates differ from those used in our pricing assumptions. We mitigate a significant portion of our mortality exposure through reinsurance.

•

Investment Yields. We use investment yield rates based on yields available at the time a policy is issued. For policies issued in 2010 and after, we have been using an increasing interest rate assumption to reflect the historically low interest rate environment. Both DAC and the reserve liability increase with the assumed investment yield rate. Since DAC is higher than the reserve liability in the early years of a policy, a lower assumed investment yield generally will result in lower profits. In the later years, when the reserve liability is higher than DAC, a lower assumed investment yield generally will result in higher profits. These assumed investment yields, which like other pricing assumptions are locked in at issue, impact the timing but not the aggregate amount of DAC and reserve changes. Actual investment yields will impact net investment income allocated to the Term Life Insurance segment, but will not impact DAC or the reserve liability.

Reinsurance. We use reinsurance extensively, which has a significant effect on our results of operations. Since the mid-1990s, we have reinsured between 60% and 90% of the mortality risk on our U.S. term life insurance policies on a quota share yearly renewable term ("YRT") basis. In Canada, we previously utilized reinsurance arrangements similar to the U.S. in certain years and reinsured only face amounts above $500,000 in other years. However, in the first quarter of 2012, we entered into a YRT reinsurance arrangement in Canada similar to our U.S. program that reinsures 80% of the face amount for every policy sold. YRT reinsurance permits us to set future mortality at contractual rates by policy class. To the extent actual mortality experience is more or less favorable than the

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contractual rate, the reinsurer will earn incremental profits or bear the incremental cost, as applicable. In contrast to coinsurance, which is intended to eliminate all risks (other than counterparty risk of the reinsurer) and rewards associated with a specified percentage of the block of policies subject to the reinsurance arrangement, the YRT reinsurance arrangements we enter into are intended only to reduce volatility associated with variances between estimated and actual mortality rates.

The effect of our reinsurance arrangements on ceded premiums and benefits and expenses on our statement of income follows:

•

Ceded premiums. Ceded premiums are the premiums we pay to reinsurers. These amounts are deducted from the direct premiums we earn to calculate our net premium revenues. Similar to direct premium revenues, ceded coinsurance premiums remain level over the initial term of the insurance policy. Ceded YRT premiums increase over the period that the policy has been in force. Accordingly, ceded YRT premiums generally constitute an increasing percentage of direct premiums over the policy term.


•	Benefits and claims. Benefits and claims include incurred claim amounts and changes in future policy benefit reserves. Reinsurance reduces incurred claims in direct proportion to the percentage ceded. Coinsurance also reduces the change in future policy benefit reserves in direct proportion to the percentage ceded while YRT reinsurance does not significantly impact benefit reserves.


•	Amortization of DAC. Amortization of DAC is reduced on a pro-rata basis for the coinsured business, including the business reinsured with Citigroup. There is no impact on amortization of DAC associated with our YRT contracts.


•	Insurance expenses. Insurance expenses are reduced by the allowances received from coinsurance, including the business reinsured with Citigroup. There is no impact on insurance expenses associated with our YRT contracts.

We may alter our reinsurance practices at any time due to the unavailability of YRT reinsurance at attractive rates or the availability of alternatives to reduce our risk exposure. We presently intend to continue ceding approximately 90% of our U.S. mortality risk on new business and approximately 80% of our Canadian mortality risk on new business.

Net investment income. Term Life Insurance segment net investment income is composed of two elements: allocated net investment income and the market return associated with the deposit asset underlying the 10% reinsurance agreement with the Citigroup reinsurers. Net investment income is allocated to the Term Life segment based on the book value of the invested assets necessary to meet statutory reserve requirements and our targeted capital objectives. Net investment income is also impacted by the performance of our invested asset portfolio and the market return on the deposit asset which can be affected by interest rates, credit spreads and the mix of invested assets.

Expenses. Results are also affected by variances in client acquisition, maintenance and administration expense levels.

Investment and Savings Products Segment. Our Investment and Savings Products segment results are primarily driven by sales, the value of assets in client accounts for which we earn ongoing management, service and distribution fees and the number of fee generating accounts we administer.

Sales. We earn commissions and fees, such as dealer re-allowances, and marketing and support fees, based on sales of mutual fund and managed account products and annuities. Sales of investment and savings products are influenced by the overall demand for investment products in the United States and Canada, as well as by the size and productivity of our sales force. We generally experience seasonality in our Investment and Savings Products segment results due to our high concentration of sales of retirement account products. These accounts are typically funded in February through April, coincident with our clients' tax return preparation season. While we believe the size of our sales force is a factor in driving sales volume in this segment, there are a number of other variables, such as economic and market conditions, which may have a significantly greater effect on sales volume in any given fiscal period.

Asset values in client accounts. We earn marketing and distribution fees (trail commissions or, with respect to U.S. mutual funds, 12b-1 fees) on mutual fund and annuity assets in the United States and Canada. In the United States, we also earn investment advisory fees on assets in the managed accounts program. In Canada, we earn management fees on certain mutual fund assets and on the segregated funds for which we serve as investment manager. Asset values are influenced by new product sales, ongoing contributions to existing accounts,

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redemptions and the change in market values in existing accounts. While we offer a wide variety of asset classes and investment styles, our clients' accounts are primarily invested in equity funds.

Accounts. We earn recordkeeping fees for administrative functions we perform on behalf of several of our retail and managed mutual fund providers and custodial fees for services as a non-bank custodian for certain of our clients’ retirement plan accounts.

Sales mix. While our investment and savings products all have similar long-term earnings characteristics, our results in a given fiscal period will be affected by changes in the overall mix of products within these broad categories. Examples of changes in the sales mix that influence our results include the following:


•	sales of a higher proportion of mutual fund products of the several mutual fund families for which we act as recordkeeper will generally increase our earnings because we are entitled to recordkeeping fees on these accounts;


•	sales of annuity products in the United States will generate higher revenues in the period such sales occur than sales of other investment products that either generate lower upfront revenues or, in the case of managed accounts and segregated funds, no upfront revenues;


•	sales and administration of a higher proportion of mutual funds that enable us to earn marketing and support fees will increase our revenues and profitability;


•	sales of a higher proportion of retirement products of several mutual fund families will tend to result in higher revenue generation due to our ability to earn custodial fees on these accounts; and


•	sales of a higher proportion of managed accounts and segregated funds products will generally extend the time over which revenues can be earned because we are entitled to higher revenues based on assets under management for these accounts in lieu of upfront revenues.

Corporate and Other Distributed Products Segment. We earn revenues and pay commissions and referral fees for various other insurance products, prepaid legal services and other financial products, all of which are originated by third parties. NBLIC also underwrites a mail-order student life policy and a short-term disability benefit policy, neither of which is distributed by our sales force, and has in force policies from several discontinued lines of insurance.

The Corporate and Other Distributed Products segment is affected by corporate income and expenses not allocated to our other segments, net investment income (other than net investment income allocated to our Term Life Insurance segment), general and administrative expenses (other than expenses that are allocated to our Term Life Insurance or Investment and Savings Products segments), equity awards granted to management and our sales force leaders at the time of our initial public offering, interest expense on notes payable and realized gains and losses on our invested asset portfolio.

Capital Structure. Our financial results have also been affected by changes in our capital structure, including the issuance of $375.0 million in principal amount of senior unsecured notes issued in 2012 (the "Senior Notes"), repayment of a $300.0 million note payable issued to Citigroup, share repurchases, and other financing arrangements. For additional information regarding factors affecting our results, see Factors Affecting Our Results in our 2012 Annual Report.

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Results of Operations

Primerica, Inc. and Subsidiaries Results. Our results of operations were as follows:



	Three months ended March 31,						Change
	2013			2012			$			%
	(Dollars in thousands)
Revenues:
Direct premiums	$	570,899		$	561,037		$	9,862		2	%
Ceded premiums	(410,604		)	(418,163		)	(7,559		)	(2	)%
Net premiums	160,295			142,874			17,421			12	%
Commissions and fees	111,988			103,905			8,083			8	%
Net investment income	23,216			26,097			(2,881		)	(11	)%
Realized investment gains (losses), including other-than-temporary impairment losses	2,286			2,131			155			7	%
Other, net	10,660			11,594			(934		)	(8	)%
Total revenues	308,445			286,601			21,844			8	%
Benefits and expenses:
Benefits and claims	74,246			67,933			6,313			9	%
Amortization of DAC	31,252			26,531			4,721			18	%
Sales commissions	55,048			49,717			5,331			11	%
Insurance expenses	27,052			22,444			4,608			21	%
Insurance commissions	6,066			8,496			(2,430		)	(29	)%
Interest expense	8,795			6,910			1,885			27	%
Other operating expenses	45,754			41,105			4,649			11	%
Total benefits and expenses	248,213			223,136			25,077			11	%
Income before income taxes	60,232			63,465			(3,233		)	(5	)%
Income taxes	21,387			21,709			(322		)	(1	)%
Net income	$	38,845		$	41,756		$	(2,911	)	(7	)%

Results for the Three Months Ended March 31, 2013 and 2012

Total revenues. The increase in revenues for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 was primarily attributable to performance in our Term Life Insurance and Investment and Savings Product operating segments. The increase in the Term Life Insurance segment largely reflects incremental premiums on new term life insurance policies issued subsequent to the Citigroup reinsurance transactions ("New Term"). We also experienced an increase in commissions and fees revenue largely driven by higher sales and higher client asset values in our Investment and Savings Product segment. The reduced average size of our invested asset portfolio coupled with lower yield on our invested assets contributed to the decrease in net investment income for the first quarter of 2013 compared to the prior year period.

Total benefits and expenses. Total benefits and expenses increased year-over-year primarily as a result of the growth in revenue-related costs, which include benefits and claims, sales commissions, amortization of DAC, and insurance expenses. The rise in other operating expenses was mainly attributable to legal fees and other miscellaneous costs. Additionally, higher interest expense was driven mostly by the redundant reserve financing executed in March 2012 and, to a lesser extent, the refinancing of our note payable in July 2012. These higher expenses were partially offset by declines in insurance commissions reflecting a higher portion of commissions being deferred for our agent incentive programs.

Income taxes. Our effective income tax rate of 35.5% during the three months ended March 31, 2013 was higher than our effective income tax rate of 34.2% during the three months ended March 31, 2012 primarily driven by tax benefits recorded in 2012 related to Canadian tax reserves, which did not reoccur during the current quarter.

For additional information, see the Segment Results discussions below.

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Segment Results

Term Life Insurance Segment Results. Our results for the Term Life Insurance segment were as follows:



	Three months ended March 31,						Change
	2013			2012			$			%
	(Dollars in thousands)
Revenues:
Direct premiums	$	552,034		$	542,157		$	9,877		2	%
Ceded premiums	(407,854		)	(414,559		)	(6,705		)	(2	)%
Net premiums	144,180			127,598			16,582			13	%
Allocated net investment income	17,233