PRI_10Q_3.31.2014

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, 2014
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-34680
 

Primerica, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
27-1204330
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1 Primerica Parkway
Duluth, Georgia
30099
(Address of principal executive offices)
(ZIP Code)
(770) 381-1000
(Registrant’s telephone number, including area code)
Not applicable.
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨   No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
As of April 30, 2014
Common Stock, $0.01 Par Value
 
54,415,612 shares


TABLE OF CONTENTS
 
 
Page
 
 
 
 



i
Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
March 31,
2014
 
December 31,
2013
 
(Unaudited)
 
 
 
(In thousands)
Assets
 
 
 
Investments:
 
 
 
Fixed-maturity securities available for sale, at fair value (amortized cost: $1,667,585 in 2014 and $1,663,022 in 2013)
$
1,771,572

 
$
1,755,712

Equity securities available for sale, at fair value (cost: $37,875 in 2014 and $32,592 in 2013)
47,086

 
39,894

Trading securities, at fair value (cost: $10,981 in 2014 and $13,025 in 2013)
10,934

 
12,991

Policy loans
26,580

 
26,806

Total investments
1,856,172

 
1,835,403

Cash and cash equivalents
158,438

 
149,189

Accrued investment income
19,689

 
18,127

Due from reinsurers
4,074,527

 
4,055,054

Deferred policy acquisition costs, net
1,242,983

 
1,208,466

Premiums and other receivables
170,577

 
175,789

Intangible assets, net (accumulated amortization: $66,303 in 2014 and $65,131 in 2013)
67,692

 
68,863

Income taxes
35,548

 
32,450

Other assets
303,759

 
282,780

Separate account assets
2,458,739

 
2,503,829

Total assets
$
10,388,124

 
$
10,329,950

Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Future policy benefits
$
5,103,278

 
$
5,063,103

Unearned premiums
1,465

 
1,802

Policy claims and other benefits payable
243,576

 
253,304

Other policyholders’ funds
340,175

 
337,977

Notes payable
374,494

 
374,481

Income taxes
127,906

 
105,885

Other liabilities
375,864

 
377,690

Payable under securities lending
109,094

 
89,852

Separate account liabilities
2,458,739

 
2,503,829

Commitments and contingent liabilities (see Commitments and Contingent Liabilities note)
 
 
 
Total liabilities
9,134,591

 
9,107,923

Stockholders’ equity:
 
 
 
Common stock ($0.01 par value; authorized 500,000 in 2014 and 2013; and issued 54,569 shares in 2014 and 54,834 shares in 2013)
546

 
548

Paid-in capital
462,838

 
472,633

Retained earnings
679,182

 
640,840

Accumulated other comprehensive income (loss), net of income tax:
 
 
 
Unrealized foreign currency translation gains (losses)
33,403

 
41,974

Net unrealized investment gains (losses):
 
 
 
Net unrealized investment gains not other-than-temporarily impaired
78,911

 
67,379

Net unrealized investment losses other-than-temporarily impaired
(1,347
)
 
(1,347
)
Total stockholders’ equity
1,253,533

 
1,222,027

Total liabilities and stockholders’ equity
$
10,388,124

 
$
10,329,950

See accompanying notes to condensed consolidated financial statements.


1
Table of Contents

PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income — Unaudited
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands, except per-share amounts)
Revenues:
 
 
 
Direct premiums
$
568,205

 
$
560,904

Ceded premiums
(402,715
)
 
(410,604
)
Net premiums
165,490

 
150,300

Commissions and fees
126,933

 
112,273

Net investment income
21,599

 
23,216

Realized investment gains (losses), including other-than-temporary impairment losses
263

 
2,286

Other, net
10,043

 
10,375

Total revenues
324,328

 
298,450

Benefits and expenses:
 
 
 
Benefits and claims
75,191

 
68,816

Amortization of deferred policy acquisition costs
35,193

 
31,252

Sales commissions
65,121

 
55,048

Insurance expenses
28,502

 
25,512

Insurance commissions
4,083

 
4,223

Interest expense
8,606

 
8,795

Other operating expenses
40,800

 
45,664

Total benefits and expenses
257,496

 
239,310

Income from continuing operations before income taxes
66,832

 
59,140

Income taxes
23,347

 
21,005

Income from continuing operations
43,485

 
38,135

Income from discontinued operations, net of income taxes
1,595

 
710

Net income
$
45,080

 
$
38,845

 
 
 
 
Basic earnings per share:
 
 
 
Continuing operations
$
0.78

 
$
0.66

Discontinued operations
0.03

 
0.01

Basic earnings per share
$
0.81

 
$
0.67

 
 
 
 
Diluted earnings per share:
 
 
 
Continuing operations
$
0.78

 
$
0.64

Discontinued operations
0.03

 
0.01

Diluted earnings per share
$
0.81

 
$
0.65

 
 
 
 
Weighted-average shares used in computing earnings per share:
 
 
 
Basic
55,211

 
56,598

Diluted
55,233

 
58,407

 
 
 
 
Supplemental disclosures:
 
 
 
Total impairment losses
$
(149
)
 
$
(86
)
Impairment losses recognized in other comprehensive income before income taxes
—

 
15

Net impairment losses recognized in earnings
(149
)
 
(71
)
Other net realized investment gains (losses)
412

 
2,357

Realized investment gains (losses), including other-than-temporary impairment losses
$
263

 
$
2,286

Dividends declared per share
$
0.12

 
$
0.11

See accompanying notes to condensed consolidated financial statements.


2
Table of Contents

PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income — Unaudited
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands)
Net income
$
45,080

 
$
38,845

Other comprehensive income (loss) before income taxes:
 
 
 
Unrealized investment gains (losses):
 
 
 
Change in unrealized holding gains (losses) on investment securities
17,930

 
(2,500
)
Reclassification adjustment for realized investment (gains) losses included in net income
(188
)
 
(1,659
)
Foreign currency translation adjustments:
 
 
 
Change in unrealized foreign currency translation gains (losses)
(8,677
)
 
(4,188
)
Total other comprehensive income (loss) before income taxes
9,065

 
(8,347
)
Income tax expense (benefit) related to items of other comprehensive income (loss)
6,104

 
(1,514
)
Other comprehensive income (loss), net of income taxes
2,961

 
(6,833
)
Total comprehensive income
$
48,041

 
$
32,012

See accompanying notes to condensed consolidated financial statements.


3
Table of Contents

PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity — Unaudited
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands)
Common stock:
 
 
 
Balance, beginning of period
$
548

 
$
564

Repurchases of common stock
(4
)
 
(1
)
Net issuance of common stock
2

 
4

Balance, end of period
546

 
567

Paid-in capital:
 
 
 
Balance, beginning of period
472,633

 
602,269

Share-based compensation
9,699

 
9,912

Net issuance of common stock
(2
)
 
(4
)
Repurchases of common stock
(19,183
)
 
(3,077
)
Adjustments to paid-in capital, other
(309
)
 
—

Balance, end of period
462,838

 
609,100

Retained earnings:
 
 
 
Balance, beginning of period
640,840

 
503,173

Net income
45,080

 
38,845

Dividends
(6,738
)
 
(6,409
)
Balance, end of period
679,182

 
535,609

Accumulated other comprehensive income (loss):
 
 
 
Balance, beginning of period
108,006

 
169,410

Change in foreign currency translation adjustment, net of income tax expense (benefit) of $(106) in 2014 and $(59) in 2013
(8,571
)
 
(4,129
)
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 $6,210 in 2014 and $(1,450) in 2013
11,532

 
(2,694
)
Change in net unrealized investment losses other-than-temporarily impaired, net of income tax benefit of $0 in 2014 and $(5) in 2013
—

 
(10
)
Balance, end of period
110,967

 
162,577

Total stockholders’ equity
$
1,253,533

 
$
1,307,853

See accompanying notes to condensed consolidated financial statements.


4
Table of Contents

PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows — Unaudited
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
45,080

 
$
38,845

Adjustments to reconcile net income to cash provided by (used in) operating activities:
 
 
 
Change in future policy benefits and other policy liabilities
54,542

 
65,701

Deferral of policy acquisition costs
(73,045
)
 
(62,874
)
Amortization of deferred policy acquisition costs
35,193

 
31,252

Change in income taxes
14,906

 
2,309

Realized investment (gains) losses, including other-than-temporary impairments
(263
)
 
(2,286
)
Gain from sale of business, net
(1,595
)
 
—

Accretion and amortization of investments
(597
)
 
(526
)
Depreciation and amortization
2,884

 
2,424

Change in due from reinsurers
(32,759
)
 
(7,685
)
Change in premiums and other receivables
(4,173
)
 
(6,829
)
Trading securities sold, matured, or called (acquired), net
2,036

 
(1,654
)
Share-based compensation
2,848

 
5,196

Change in other operating assets and liabilities, net
(7,317
)
 
499

Net cash provided by (used in) operating activities
37,740

 
64,372

Cash flows from investing activities:
 
 
 
Available-for-sale investments sold, matured or called:
 
 
 
Fixed-maturity securities — sold
21,094

 
15,878

Fixed-maturity securities — matured or called
91,596

 
62,567

Equity securities
188

 
148

Available-for-sale investments acquired:
 
 
 
Fixed-maturity securities
(113,508
)
 
(34,958
)
Equity securities
(5,106
)
 
(46
)
Purchases of property and equipment and other investing activities, net
(1,491
)
 
(8,688
)
Proceeds from sale of business
3,000

 
—

Cash collateral received (returned) on loaned securities, net
19,242

 
(6,602
)
Sales (purchases) of short-term investments using securities lending collateral, net
(19,242
)
 
6,602

Net cash provided by (used in) investing activities
(4,227
)
 
34,901

Cash flows from financing activities:
 
 
 
Dividends paid
(6,738
)
 
(6,409
)
Common stock repurchased
(19,187
)
 
(3,078
)
Excess tax benefits on share-based compensation
2,954

 
925

Net cash provided by (used in) financing activities
(22,971
)
 
(8,562
)
Effect of foreign exchange rate changes on cash
(1,293
)
 
(415
)
Change in cash and cash equivalents
9,249

 
90,296

Cash and cash equivalents, beginning of period
149,189

 
112,216

Cash and cash equivalents, end of period
$
158,438

 
$
202,512

See accompanying notes to condensed consolidated financial statements.


5
Table of Contents

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

(1) Description of Business, Basis of Presentation, and Summary of Significant Accounting
Policies
Description of Business. Primerica, Inc. (the "Parent Company") together with its subsidiaries (collectively, "we", "us" or the "Company") is a leading distributor of financial products to middle income households in the United States and Canada. We assist our clients in meeting their needs for term life insurance, which we underwrite, and mutual funds, annuities and other financial products, which we distribute primarily on behalf of third parties. Our primary subsidiaries include the following entities: Primerica Financial Services, Inc. ("PFS"), a general agency and marketing company; Primerica Life Insurance Company ("Primerica Life"), our principal life insurance company; Primerica Financial Services (Canada) Ltd., a holding company for our Canadian operations, which includes Primerica Life Insurance Company of Canada ("Primerica Life Canada") and PFSL Investments Canada Ltd. ("PFSL Investments Canada"); and PFS Investments Inc. ("PFS Investments"), an investment products company and broker-dealer. Primerica Life, domiciled in Massachusetts, owns National Benefit Life Insurance Company ("NBLIC"), a New York 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 accounting principles generally accepted in the United States of America ("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, generally consisting of normal recurring accruals, which are necessary to fairly present the balance sheets as of March 31, 2014 and December 31, 2013 and the statements of income, comprehensive income, stockholders' equity, and cash flows for the three months ended March 31, 2014 and 2013. 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 unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2013 ("2013 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 and were primarily related to discontinued operations. See Note 2 (Discontinued Operations) for more information.
Subsequent Events. The Company has evaluated subsequent events for recognition and disclosure for occurrences and transactions after the date of the consolidated financial statements dated as of March 31, 2014.


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Table of Contents

Significant Accounting Policies. All significant accounting policies remain unchanged from the 2013 Annual Report.
Future Application of Accounting Standards. Recent accounting guidance not discussed is not applicable, is immaterial to our financial statements, or did not or will not have an impact on our business.

(2) Discontinued Operations
In January 2014, NBLIC sold the assets and liabilities of its short-term statutory disability benefit insurance business ("DBL") to AmTrust North America, Inc. and its affiliates (the "buyer"). As part of the sale agreement, the buyer assumed all liabilities for DBL insurance policies. In addition, NBLIC transferred the assets held in support of DBL's insurance liabilities and all other premium-related assets and liabilities to the buyer as of January 1, 2014. The results of DBL's operations from January 1, 2014 forward were also transferred to the buyer. NBLIC received cash proceeds from the sale of $3.0 million and recognized a pre-tax gain on the sale of approximately $2.5 million, which comprised income from discontinued operations before income taxes in our results of operations for the three months ended March 31, 2014.
As of March 31, 2014, we no longer have significant continuing involvement in the operations of DBL, and its direct cash flows have been eliminated from our ongoing operations. As a result, beginning in the first quarter of 2014, the results of operations for DBL have been reported in discontinued operations for all periods presented in our unaudited condensed consolidated statements of income. The results of operations and the carrying values of the assets and liabilities related to DBL were as follows:
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands)
Total revenues from discontinued operations
$
—

 
$
9,995

Income from discontinued operations before income taxes
2,454

 
1,092

Provision for income taxes
859

 
382

Income from discontinued operations, net of income taxes
$
1,595

 
$
710

 
March 31, 2014
 
December 31, 2013
 
(In thousands)
Premiums and other receivables
$
—

 
$
6,439

Future policy benefits
—

 
5,047

Other liabilities
—

 
1,197


(3) 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. The results of operations for DBL were previously reported in our Corporate and Other Distributed Products segment and have been reclassified into discontinued operations as discussed in Note 2 (Discontinued Operations).
Total assets by segment were as follows:
 
March 31,
2014
 
December 31,
2013
 
(In thousands)
Assets:
 
 
 
Term life insurance segment
$
6,851,984

 
$
6,783,194

Investment and savings products segment
2,669,092

 
2,699,000

Corporate and other distributed products segment 
867,048

 
847,756

Total assets
$
10,388,124

 
$
10,329,950

The Investment and Savings Products segment includes assets held in separate accounts. Excluding separate accounts, the Investment and Savings Products segment assets were approximately $211.0 million and $195.8 million as of March 31, 2014 and December 31, 2013, respectively.


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Table of Contents

Results of continuing operations by segment were as follows:
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands)
Revenues:
 
 
 
Term life insurance segment
$
182,980

 
$
167,833

Investment and savings products segment
123,270

 
108,722

Corporate and other distributed products segment
18,078

 
21,895

Total revenues
$
324,328

 
$
298,450

Income (loss) from continuing operations before income taxes:
 
 
 
Term life insurance segment
$
47,204

 
$
45,125

Investment and savings products segment
34,028

 
26,353

Corporate and other distributed products segment
(14,400
)
 
(12,338
)
Total income from continuing operations before income taxes
$
66,832

 
$
59,140

See “Management's Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report for more information regarding our operating segments.
Long-lived assets (primarily tangible assets) and results of continuing operations by country were as follows:
 
March 31,
2014
 
December 31,
2013
 
(In thousands)
Long-lived assets by country:
 
 
 
United States
$
25,224

 
$
24,413

Canada
569

 
637

Total long-lived assets
$
25,793

 
$
25,050

 
 
 
 
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands)
Revenues by country:
 
 
 
United States
$
262,204

 
$
239,373

Canada
62,124

 
59,077

Total revenues
$
324,328

 
$
298,450

Income from continuing operations before income taxes by country:
 
 
 
United States
$
48,912

 
$
43,039

Canada
17,920

 
16,101

Total income from continuing operations before income taxes
$
66,832

 
$
59,140




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Table of Contents

(4) 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, 2014
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
 
(In thousands)
Securities available for sale, carried at fair value:
 
 
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
 
 
U.S. government and agencies
$
8,665

 
$
527

 
$
(84
)
 
$
9,108

Foreign government
121,496

 
6,543

 
(3,079
)
 
124,960

States and political subdivisions
35,097

 
2,198

 
(307
)
 
36,988

Corporates
1,247,554

 
91,481

 
(7,008
)
 
1,332,027

Mortgage- and asset-backed securities
254,773

 
14,363

 
(647
)
 
268,489

Total fixed-maturity securities(1)
1,667,585

 
115,112

 
(11,125
)
 
1,771,572

Equity securities
37,875

 
9,728

 
(517
)
 
47,086

Total fixed-maturity and equity securities
$
1,705,460

 
$
124,840

 
$
(11,642
)
 
$
1,818,658

____________________
(1) 
Includes approximately $2.1 million of other-than-temporary impairment losses related to corporates and mortgage- and asset-backed securities recognized in accumulated other comprehensive income.
 
December 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
$
8,696

 
$
485

 
$
(127
)
 
$
9,054

Foreign government
111,610

 
7,512

 
(2,766
)
 
116,356

States and political subdivisions
32,308

 
1,860

 
(468
)
 
33,700

Corporates
1,240,100

 
84,545

 
(11,931
)
 
1,312,714

Mortgage- and asset-backed securities
270,308

 
14,610

 
(1,030
)
 
283,888

Total fixed-maturity securities(1)
1,663,022

 
109,012

 
(16,322
)
 
1,755,712

Equity securities
32,592

 
7,935

 
(633
)
 
39,894

Total fixed-maturity and equity securities
$
1,695,614

 
$
116,947

 
$
(16,955
)
 
$
1,795,606

____________________
(1) 
Includes approximately $2.1 million of other-than-temporary impairment losses related to corporates and mortgage- and asset-backed securities recognized in accumulated other comprehensive income.
The net effect on stockholders’ equity of unrealized gains and losses on available-for-sale securities was as follows:
 
March 31,
2014
 
December 31,
2013
 
(In thousands)
Net unrealized investment gains (losses) including foreign currency translation adjustment and other-than-temporary impairments:
 
 
 
Fixed-maturity and equity securities
$
113,198

 
$
99,992

Currency swaps
52

 
72

Foreign currency translation adjustment
6,079

 
1,523

Other-than-temporary impairments
2,072

 
2,072

Net unrealized investment gains excluding foreign currency translation adjustment and other-than-temporary impairments
121,401

 
103,659

Deferred income taxes
(42,490
)
 
(36,280
)
Net unrealized investment gains excluding foreign currency translation adjustment and other-than-temporary impairments, net of tax
$
78,911

 
$
67,379



9
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We also maintain a portfolio of fixed-maturity securities that are classified as trading securities. The carrying values of the fixed-maturity securities classified as trading securities were approximately $10.9 million and $13.0 million as of March 31, 2014 and December 31, 2013, 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 $18.5 million and $18.4 million as of March 31, 2014 and December 31, 2013, 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 invested 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 $109.1 million and $89.9 million as of March 31, 2014 and December 31, 2013, respectively.
The scheduled contractual maturity distribution of the available-for-sale fixed-maturity portfolio at March 31, 2014 follows:
 
March 31, 2014
 
Amortized cost
 
Fair value
 
(In thousands)
Due in one year or less
$
121,673

 
$
123,274

Due after one year through five years
524,879

 
572,521

Due after five years through 10 years
713,631

 
750,515

Due after 10 years
52,629

 
56,773

 
1,412,812

 
1,503,083

Mortgage- and asset-backed securities
254,773

 
268,489

Total fixed-maturity securities
$
1,667,585

 
$
1,771,572

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,
 
2014
 
2013
 
(In thousands)
Fixed-maturity securities
$
21,032

 
$
23,210

Equity securities
385

 
272

Policy loans and other invested assets
388

 
320

Cash and cash equivalents
53

 
87

Market return on deposit asset underlying 10% coinsurance agreement
953

 
564

Gross investment income
22,811

 
24,453

Investment expenses
(1,212
)
 
(1,237
)
Net investment income
$
21,599

 
$
23,216



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Table of Contents

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,
 
2014
 
2013
 
(In thousands)
Net realized investment gains (losses):
 
 
 
Gross gains from sales
$
343

 
$
1,733

Gross losses from sales
(6
)
 
(3
)
Other-than-temporary impairment losses
(149
)
 
(71
)
Gains (losses) from bifurcated options
75

 
627

Net realized investment gains (losses)
$
263

 
$
2,286

Supplemental information:
 
 
 
Gross realized investment gains (losses) reclassified from accumulated other comprehensive income into earnings
$
188

 
$
1,659

Tax expense (benefit) associated with realized investment gains (losses) reclassified from accumulated other comprehensive income into earnings
$
66

 
$
581

Proceeds from sales or other redemptions
$
112,878

 
$
78,593

Other-Than-Temporary Impairment. We conduct a review each quarter to identify and evaluate impaired investments that have indications of possible other-than-temporary impairment ("OTTI"). An investment in a debt or equity security is impaired if its fair value falls below its cost. Factors considered in determining whether an unrealized loss is temporary include the length of time and extent to which fair value has been below cost, the financial condition and near-term prospects for the issue, and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery, which may be maturity for fixed-maturity securities or within a reasonable period of time for equity securities. For additional information, see Note 3 (Investments) to the consolidated financial statements in our 2013 Annual Report.
Investments in fixed-maturity and equity securities with a cost basis in excess of their fair values were approximately $312.7 million and $454.2 million as of March 31, 2014 and December 31, 2013, 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, 2014
 
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
$
1,736

 
$
(3
)
 
1
 
$
869

 
$
(81
)
 
2
Foreign government
45,871

 
(2,462
)
 
57
 
5,093

 
(617
)
 
15
States and political subdivisions
8,395

 
(307
)
 
10
 
—

 
—

 
—
Corporates
182,175

 
(4,674
)
 
188
 
22,060

 
(2,334
)
 
34
Mortgage- and asset-backed securities
21,788

 
(237
)
 
30
 
8,857

 
(410
)
 
7
Total fixed-maturity securities
259,965

 
(7,683
)
 

 
36,879

 
(3,442
)
 

Equity securities
3,757

 
(303
)
 
5
 
415

 
(214
)
 
1
Total fixed-maturity and equity securities
$
263,722

 
$
(7,986
)
 

 
$
37,294

 
$
(3,656
)
 



11
Table of Contents

 
December 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
$
3,817

 
$
(36
)
 
3
 
$
859

 
$
(91
)
 
2
Foreign government
34,869

 
(2,190
)
 
47
 
5,999

 
(576
)
 
13
States and political subdivisions
8,520

 
(468
)
 
11
 
152

 
—

(1) 
1
Corporates
296,192

 
(9,510
)
 
295
 
19,022

 
(2,421
)
 
31
Mortgage- and asset-backed securities
54,215

 
(536
)
 
46
 
10,523

 
(494
)
 
9
Total fixed-maturity securities
397,613

 
(12,740
)
 

 
36,555

 
(3,582
)
 

Equity securities
3,081

 
(633
)
 
7
 
—

 
—

 
—
Total fixed-maturity and equity securities
$
400,694

 
$
(13,373
)
 

 
$
36,555

 
$
(3,582
)
 

____________________
(1) 
Less than one thousand.
The amortized cost and fair value of available-for-sale fixed-maturity securities in default were as follows:
 
March 31,
2014
 
December 31,
2013
 
Amortized cost
 
Fair value
 
Amortized cost
 
Fair value
 
(In thousands)
Fixed-maturity securities in default
$
31

 
$
303

 
$
31

 
$
267

Impairment charges recognized in earnings on available-for-sale securities were as follows:
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands)
Impairments on fixed-maturity securities not in default
$
149

 
$
71

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, 2014, the unrealized losses on our invested asset portfolio were largely caused by interest rate sensitivity and, to a lesser extent, changes in credit spreads. We believe that fluctuations caused by interest rate movement have little bearing on the recoverability of our investments. 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.


12
Table of Contents

Net impairment losses recognized in earnings were as follows:
 
Three months ended March 31,
 
2014
 
2013
 
(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

Less portion of OTTI loss recognized in accumulated other comprehensive income (loss)
—

 
(15
)
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
—

 
—

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
149

 
71

Net impairment losses recognized in earnings
$
149

 
$
71

The roll-forward of the credit-related losses recognized in income for all fixed-maturity securities still held follows:
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands)
Cumulative OTTI credit losses recognized for securities still held, beginning of period
$
14,516

 
$
14,171

Additions for OTTI securities where no credit losses were recognized prior to the beginning of the period
149

 
71

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

 
—

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

 
—

Cumulative OTTI credit losses recognized for securities still held, end of period
$
14,665

 
$
14,242

Derivatives. 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, 2014 and December 31, 2013, the fair value of these bifurcated options was approximately $4.9 million and $4.6 million, respectively.
We have a deferred loss related to closed forward contracts, which were settled several years ago, 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, 2014 and December 31, 2013. 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.

(5)
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.


13
Table of Contents

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.
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, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Fair value assets:
 
 
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
 
 
U.S. government and agencies
$
—

 
$
9,108

 
$
—

 
$
9,108

Foreign government
—

 
124,960

 
—

 
124,960

States and political subdivisions
—

 
36,988

 
—

 
36,988

Corporates
1,392

 
1,329,830

 
805

 
1,332,027

Mortgage- and asset-backed securities
—

 
266,986

 
1,503

 
268,489

Total fixed-maturity securities
1,392

 
1,767,872

 
2,308

 
1,771,572

Equity securities
41,709

 
5,329

 
48

 
47,086

Trading securities
—

 
10,934

 
—

 
10,934

Separate accounts
—

 
2,458,739

 
—

 
2,458,739

Total fair value assets
$
43,101

 
$
4,242,874

 
$
2,356

 
$
4,288,331

Fair value liabilities:
 
 
 
 
 
 
 
Currency swaps
$
—

 
$
151

 
$
—

 
$
151

Separate accounts
—

 
2,458,739

 
—

 
2,458,739

Total fair value liabilities
$
—

 
$
2,458,890

 
$
—

 
$
2,458,890



14
Table of Contents

 
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Fair value assets:
 
 
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
 
 
     U.S. government and agencies
$
—

 
$
9,054

 
$
—

 
$
9,054

     Foreign government
—

 
116,356

 
—

 
116,356

     States and political subdivisions
—

 
33,700

 
—

 
33,700

     Corporates
1,282

 
1,310,739

 
693

 
1,312,714

     Mortgage- and asset-backed securities
—

 
282,341

 
1,547

 
283,888

          Total fixed-maturity securities
1,282

 
1,752,190

 
2,240

 
1,755,712

Equity securities
34,868

 
4,978

 
48

 
39,894

Trading securities
—

 
12,991

 
—

 
12,991

Separate accounts
—

 
2,503,829

 
—

 
2,503,829

          Total fair value assets
$
36,150

 
$
4,273,988

 
$
2,288

 
$
4,312,426

Fair value liabilities:
 
 
 
 
 
 
 
Currency swaps
$
—

 
$
88

 
$
—

 
$
88

Separate accounts
—

 
2,503,829

 
—

 
2,503,829

           Total fair value liabilities
$
—

 
$
2,503,917

 
$
—

 
$
2,503,917

In assessing fair value of our investments, we use a third-party pricing service for approximately 95% of our securities. The remaining securities are primarily thinly traded securities valued using models based on observable inputs on public corporate spreads having similar tenors (e.g., sector, average life and quality rating) and liquidity and yield based on quality rating, average life and treasury yields. All observable data inputs are corroborated by independent third-party data. In the absence of sufficient observable inputs, we utilize non-binding broker quotes, which are reflected in our Level 3 classification as we are unable to evaluate the valuation technique(s) or significant inputs used to develop the quotes. Therefore, we do not internally develop the quantitative unobservable inputs used in measuring the fair value of Level 3 investments. However, we do corroborate pricing information provided by our third-party pricing servicing by performing a review of selected securities. Our review activities include obtaining detailed information about the assumptions, inputs and methodologies used in pricing the security; documenting this information; and corroborating it by comparison to independently obtained prices and or independently developed pricing methodologies.
Furthermore, we perform internal reasonableness assessments on fair value determinations within our portfolio throughout the quarter and at quarter-end, including pricing variance analyses and comparisons to alternative pricing sources and benchmark returns. If a fair value appears unusual relative to these assessments, we will re-examine the inputs and may challenge a fair value assessment made by the pricing service. If there is a known pricing error, we will request a reassessment by the pricing service. If the pricing service is unable to perform the reassessment on a timely basis, we will determine the appropriate price by requesting a reassessment from an alternative pricing service or other qualified source as necessary. We do not adjust quotes or prices except in a rare circumstance to resolve a known error.
Because many fixed-maturity securities do not trade on a daily basis, fair value is determined using industry-standard methodologies by applying available market information through processes such as U.S. Treasury curves, benchmarking of similar securities, sector groupings, quotes from market participants and matrix pricing. Observable information is compiled and integrates relevant credit information, perceived market movements and sector news. Additionally, security prices are periodically back-tested to validate and/or refine models as conditions warrant. Market indicators and industry and economic events are also monitored as triggers to obtain additional data. For certain structured securities with limited trading activity, industry-standard pricing methodologies use adjusted market information, such as index prices or discounting expected future cash flows, to estimate fair value. If these measures are not deemed observable for a particular security, the security will be classified as Level 3 in the fair value hierarchy.
Where specific market information is unavailable for certain securities, pricing models produce estimates of fair value primarily using Level 2 inputs along with certain Level 3 inputs. These models include matrix pricing. The pricing matrix uses current treasury rates and credit spreads received from third-party sources to estimate fair value. The credit spreads incorporate the issuer’s industry- or issuer-specific credit characteristics and the security’s


15
Table of Contents

time to maturity, if warranted. Remaining unpriced securities are valued using an estimate of fair value based on indicative market prices that include significant unobservable inputs not based on, nor corroborated by, market information, including the utilization of non-binding broker quotes.
The roll-forward of the Level 3 assets measured at fair value on a recurring basis was as follows:
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands)
Level 3 assets, beginning of period
$
2,288

 
$
5,221

Net unrealized gains (losses) included in other comprehensive income
120

 
23

Net realized gains (losses) included in realized investment gains (losses), including other-than-temporary impairment losses
—

 
61

Purchases
—

 
477

Sales
—

 
(10
)
Settlements
(52
)
 
(525
)
Transfers into Level 3
—

 
—

Transfers out of Level 3
—

 
(991
)
Level 3 assets, end of period
$
2,356

 
$
4,256

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, 2014 and 2013. In addition, there were no transfers between Level 1 and Level 3 during the three months ended March 31, 2014 and 2013.
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.
The table below is a summary of the estimated fair value for financial instruments.
 
March 31, 2014
 
December 31, 2013
 
Carrying
value
 
Estimated
fair value
 
Carrying
value
 
Estimated
fair value
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Fixed-maturity securities
$
1,771,572

 
$
1,771,572

 
$
1,755,712

 
$
1,755,712

Equity securities
47,086

 
47,086

 
39,894

 
39,894

Trading securities
10,934

 
10,934

 
12,991

 
12,991

Policy loans
26,580

 
26,580

 
26,806

 
26,806

Deposit asset underlying 10% coinsurance agreement
130,178

 
130,178

 
124,413

 
124,413

Separate accounts
2,458,739

 
2,458,739

 
2,503,829

 
2,503,829

Liabilities:
 
 
 
 
 
 
 
Notes payable
$
374,494

 
$
393,986

 
$
374,481

 
$
385,161

Currency swaps
151

 
151

 
88

 
88

Separate accounts
2,458,739

 
2,458,739

 
2,503,829

 
2,503,829

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 available-for-sale 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


16
Table of Contents

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 nonredeemable preferred stocks, are carried at fair value. Currency swaps are stated at fair value. Segregated funds in separate accounts are carried at the underlying value of the variable insurance contracts, which is fair value.
Nonrecurring fair value measurements. Policy loans, which are categorized as Level 3 fair value measurements, are carried at the unpaid principal balances. The fair value of policy loans approximate the unpaid principal balances as the timing of repayment is uncertain and the loans are collateralized by the amount of the policy. The deposit asset underlying the 10% coinsurance agreement with Prime Reinsurance Company, Inc. ("Prime Re"), an affiliate of Citigroup Inc. ("Citigroup"), represents the value of the assets necessary to back the economic reserves held in support of the reinsurance agreement. The carrying value of this deposit asset approximates fair value, which is categorized as Level 3 in the fair value hierarchy. Notes payable represent our publicly-traded senior notes and are valued as a Level 2 fair value measurement using the quoted market price for our notes.
The carrying amounts for cash and cash equivalents, receivables, accrued investment income, accounts payable, cash collateral and payables for security transactions approximate their fair values due to the short-term nature of these instruments. Consequently, such financial instruments are not included in the above table.

(6)
Reinsurance
We use reinsurance extensively, which has a significant effect on our results of operations. Reinsurance arrangements do not relieve us of our 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,
2014
 
December 31,
2013
 
(Dollars in thousands)
Direct life insurance in force
$
677,486,177

 
$
679,337,825

Amounts ceded to other companies
(599,355,477
)
 
(601,309,340
)
Net life insurance in force
$
78,130,700

 
$
78,028,485

Percentage of reinsured life insurance in force
88
%
 
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, 2014
 
December 31, 2013
Reinsurance
receivable
 
A.M. Best
rating
 
Reinsurance
receivable
 
A.M. Best
rating
(In thousands)
Prime Re(1)
$
2,603,726

 
NR
 
$
2,572,800

 
NR
SCOR Global Life Reinsurance Companies(3)
369,746

 
A
 
372,479

 
A
Financial Reassurance Company 2010, Ltd.(1)
330,560

 
NR
 
343,144

 
NR
Swiss Re Life & Health America Inc.(2)
257,397

 
A+
 
260,775

 
A+
American Health and Life Insurance Company(1)
176,203

 
A-
 
174,722

 
A-
Munich American Reassurance Company
100,840

 
A+
 
100,856

 
A+
Korean Reinsurance Company
89,705

 
A
 
89,405

 
A
RGA Reinsurance Company
76,762

 
A+
 
75,629

 
A+
Toa Reinsurance Company
20,616

 
A+
 
18,824

 
A+
Hannover Life Reassurance Company
17,460

 
A+
 
16,862

 
A+
All other reinsurers
31,512

 
-
 
29,558

 
-
Due from reinsurers
$
4,074,527

 
 
 
$
4,055,054

 
 
____________________ 
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.
(3) 
Includes amounts ceded to Generali USA Life Reassurance Company due to its purchase by the parent company of SCOR Global Life Reinsurance Companies in October 2013 and amounts retroceded from Transamerica Reinsurance Companies.


17
Table of Contents


(7)
Notes Payable
At March 31, 2014, the Company had $375.0 million of publicly-traded, senior unsecured notes with an annual interest rate of 4.75% that are scheduled to mature on July 15, 2022 (the "Senior Notes"). As of March 31, 2014, we were in compliance with the covenants of the Senior Notes. No events of default occurred on the Senior Notes during the three months ended March 31, 2014.
Further discussion on the Company’s notes payable is included in Note 9 (Notes Payable) to our consolidated financial statements within our 2013 Annual Report.

(8)
Stockholders’ Equity
A reconciliation of the number of shares of our common stock follows.
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands)
Common stock, beginning of period
54,834

 
56,374

Shares of restricted common stock issued
—

 
289

Shares issued for stock options exercised
4

 
—

Shares of common stock issued upon lapse of restricted stock units ("RSUs")
159

 
115

Common stock retired
(428
)
 
(96
)
Common stock, end of period
54,569

 
56,682

The above reconciliation excludes RSUs, which do not have voting rights. As the restrictions on the RSUs lapse, we issue common shares with voting rights. As of March 31, 2014, we had a total of approximately 1.3 million RSUs outstanding.
Our Board of Directors authorized a share repurchase program for up to $150 million of our outstanding common stock (the "share repurchase program"). Under the share repurchase program, we repurchased 283,000 shares of our common stock in open market transactions for an aggregate purchase price of approximately $13.1 million during the first quarter of 2014.

(9)
Earnings Per Share
The Company has outstanding common stock and equity awards that consist of restricted stock, RSUs and stock options. In addition, warrants to purchase additional shares of our common stock were outstanding until we repurchased and retired these warrants in 2013. The restricted stock and outstanding RSUs maintain non-forfeitable dividend rights that result in dividend payment obligations on a one-to-one ratio with common shares for any future dividend declarations. Unvested restricted stock and unvested RSUs are deemed participating securities for purposes of calculating EPS as they maintain dividend rights.
As a result of issuing restricted stock and outstanding RSUs that are deemed participating securities, we calculate EPS using the two-class method. Under the two-class method, we allocate earnings to common shares (excluding unvested restricted stock) and vested RSUs outstanding for the period. Earnings attributable to unvested participating securities, along with the corresponding share counts, are excluded from EPS as reflected in our consolidated statements of income.
In calculating basic EPS, we deduct any dividends and undistributed earnings allocated to unvested restricted stock and unvested RSUs from net income and then divide the result by the weighted-average number of common shares, fully vested restricted stock, and fully vested RSUs outstanding for the period.
We determine the potential dilutive effect of warrants and stock options outstanding on EPS using the treasury-stock method. Under this method, we determine the proceeds that would be received from the exercise of the warrants and stock options outstanding, which includes cash received for the exercise price, the remaining unrecognized stock option compensation expense and the resulting effect on the income tax deduction from the exercise of stock options. We then use the average market price of our common shares during the period the


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warrants and stock options were outstanding to determine how many shares we could repurchase with the proceeds raised from the exercise of the warrants and stock options outstanding. The net incremental share count issued represents the potential dilutive securities. We then reallocate earnings to common shares, fully vested restricted stock, and fully vested RSUs outstanding by incorporating the increased fully diluted share count to determine diluted EPS.
The calculation of basic and diluted EPS follows.
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands, except per-share amounts)
Basic EPS
 
 
 
Numerator (continuing operations):
 
 
 
Income from continuing operations
$
43,485

 
$
38,135

Income attributable to unvested participating securities
(557
)
 
(998
)
Income from continuing operations used in calculating basic EPS
$
42,928

 
$
37,137

Numerator (discontinued operations):
 
 
 
Income from discontinued operations
$
1,595

 
$
710

Income attributable to unvested participating securities
(20
)
 
(19
)
Income from discontinued operations used in calculating basic EPS
$
1,575

 
$
691

Denominator:
 
 
 
Weighted-average vested shares
55,211

 
56,598

Basic EPS from continuing operations
$
0.78

 
$
0.66

Basic EPS from discontinued operations
$
0.03

 
$
0.01

 
 
 
 
Diluted EPS
 
 
 
Numerator (continuing operations):
 
 
 
Income from continuing operations
$
43,485

 
$
38,135

Income attributable to unvested participating securities
(557
)
 
(973
)
Income from continuing operations used in calculating diluted EPS
$
42,928

 
$
37,162

Numerator (discontinued operations):
 
 
 
Income from discontinued operations
$
1,595

 
$
710

Income attributable to unvested participating securities
(20
)
 
(18
)
Income from discontinued operations used in calculating diluted EPS
$
1,575

 
$
692

Denominator:
 
 
 
Weighted-average vested shares
55,211

 
56,598

Dilutive effect of incremental shares if issued for warrants outstanding
—

 
1,809

Dilutive effect of incremental shares to be issued for equity awards
22

 
—

Weighted-average shares used in calculating diluted EPS
55,233

 
58,407

Diluted EPS from continuing operations
$
0.78

 
$
0.64

Diluted EPS from discontinued operations
$
0.03

 
$
0.01


(10)
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 equity awards to our management (officers and other key employees), non-employee directors, and sales force leaders under the OIP. For more information on equity awards granted under the OIP, see Note 13 (Share-Based Compensation) to our consolidated financial statements within our 2013 Annual Report.
In connection with our granting of equity awards to our management and members of the Board of Directors, we recognize expense over the service period of the equity award. Additionally, to the extent that equity awards to


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members of our sales force are an incremental direct cost of 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, we defer and amortize the fair value of these awards in the same manner as other deferred policy acquisition costs.
The impacts of equity awards granted are as follows:
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands)
Total equity awards expense recognized
$
2,848

 
$
5,196

Quarterly incentive awards expense deferred
3,787

 
3,805


(11) Commitments and Contingent Liabilities
Letter of Credit
Peach Re maintains 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 the Peach Re Coinsurance Agreement. Under the Credit Facility Agreement, Deutsche Bank issued a letter of credit for the benefit of Primerica Life. As of March 31, 2014, the Company was in compliance with all financial covenants under the Credit Facility Agreement.
Further discussion on the Company’s letter of credit is included in Note 15 (Commitments and Contingent Liabilities) to our consolidated financial statements within our 2013 Annual Report.
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.
Beginning in late 2011, numerous FINRA ("Financial Industry Regulatory Association") arbitration claims were filed, along with lawsuits in Florida state courts, against our subsidiary, PFS Investments, and certain of its registered representatives seeking 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.
In January 2014, PFS Investments entered into a memorandum of understanding to resolve this pending litigation. As of December 31, 2013, we had established a contingent liability for $9.3 million for the fair value of estimated benefits to be paid to the settling claimants through deferred payments that would begin in 2024 and approximately $6.4 million for estimated related costs, including awards relating to prior arbitrations, other potential settlements, and the payment of claimants’ attorneys' fees and expenses. The related contingent liabilities have been recorded in Other liabilities within the accompanying unaudited condensed consolidated balance sheets. The memorandum of understanding required that a certain percentage of claimants agree to the settlement. During April 2014, a required percentage of claimants have signed settlement agreements and releases, and, therefore, we continue to hold the $9.3 million contingent liability representing the deferred payments to be provided to the settling claimants. Through April 2014, the Company has paid approximately $5.6 million of the estimated $6.4 million for related costs.
The Company is currently undergoing targeted multi-state treasurer audits by 31 jurisdictions with respect to unclaimed property laws, and Primerica Life and NBLIC are engaged in targeted multi-state market conduct examinations by six jurisdictions with respect to their claims-paying practices. The Treasurer of the State of West Virginia brought a suit against Primerica Life and other insurance companies alleging violations of the West Virginia unclaimed property act. The suit was dismissed, and the Treasurer has appealed. Other jurisdictions may pursue similar audits, examinations and litigation. The audits, examinations and litigation are expected to take significant time to complete, and it is unclear whether the Company will be required to compare the Death Master File to its records for periods prior to 2011, including with respect to policies which have lapsed, to determine whether benefits are owed in instances where an insured appears to have died but no claim for death benefits has been


20
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made. The potential outcome of such actions is difficult to predict but could subject the Company to adverse consequences, including, but not limited to, settlement payments, additional payments to beneficiaries and additional escheatment of funds deemed abandoned under state laws. At this time, the Company cannot reasonably estimate the likelihood or the impact of additional costs or liabilities that could result from the resolution of these matters. These actions may also result in changes to the Company's procedures for the identification and escheatment of abandoned property and other financial liability.

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, 2014. As a result, the following discussion should be read in conjunction with MD&A and the consolidated financial statements and notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2013, ("2013 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 2013 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 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.
Investment and Savings Products. 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.


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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 underwritten by NBLIC, prepaid legal services, as well as credit information and debt referral services. These products are distributed pursuant to distribution arrangements with third parties 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 accounting principles generally accepted in the United States of America (“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 financial statements included in our 2013 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 could 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 deferred policy acquisition costs ("DAC"), future policy benefit reserves and corresponding amounts due from reinsurers, income taxes, the valuation of investments, and litigation. 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.
Accounting Policy Change. During the three months ended March 31, 2014, 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 2013 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 affect how consumers evaluate their savings and debt management plans. In addition, interest rates and equity market returns impact consumer demand for the savings and investment products we distribute. 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 get licensed to sell life insurance. We believe that recruitment and licensing levels are important to 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.


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Details on new recruits and life-licensed sales representative activity were as follows:
 
Three months ended March 31,
 
2014
 
2013
New recruits
48,306

 
46,348

New life-licensed sales representatives
7,447

 
7,165

Recruiting of new representatives and new life-licensed sales representatives both grew by approximately 4% for the three months ended March 31, 2014 compared with the same period a year ago.
The size of our life-licensed insurance sales force was as follows:
 
March 31, 2014
 
December 31, 2013
Life-licensed insurance sales representatives
95,382

 
95,566

The size of our life-licensed insurance sales force at March 31, 2014 remained consistent with the size of our life-licensed insurance sales force at December 31, 2013.
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.
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 sales representatives generally remains within a relatively narrow range (between 0.18x and 0.22x), 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,
 
2014
 
2013
Average number of life-licensed sales representatives
95,300

 
91,277

Number of new policies issued
49,320

 
50,356

Average monthly rate of new policies issued per life-licensed sales representative
0.17x

 
0.18x

The average monthly rate of new policies issued per life-licensed sales representative, which is normally lower in first quarter of each year, was slightly below the historical range during the three months ended March 31, 2014 in part due to the impact of adverse weather conditions across North America.
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 generally 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


23
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reduction in benefits and claims expense. The future policy benefit reserves associated with any given policy will change over the term of such policy. As a general matter, future policy benefit 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 will fluctuate 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 future policy benefit reserve liability increase with the assumed investment yield rate. Since DAC is higher than the future policy benefit 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 future policy benefit 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 future policy benefit 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 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.
In 2010, as part of our corporate reorganization, we entered into significant coinsurance transactions (the "coinsurance transactions") with three affiliates (collectively, the "Citigroup reinsurers") of Citigroup Inc. ("Citigroup") and ceded between 80% and 90% of the risks and rewards of our term life insurance policies that were in force at year-end 2009. We continue to administer all policies subject to these coinsurance agreements. With each successive period, we expect revenue and earnings growth to continue 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.
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 the change in these reserves.
•
Amortization of DAC. DAC, and therefore 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.


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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. Net investment income is allocated to the Term Life Insurance 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 impacted by the performance of our invested asset portfolio, 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, 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 categories. Examples of changes in the sales mix that influence our results include the following:
•
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 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; and
•
sales of a higher proportion of mutual fund products and the composition of the fund families sold will impact the timing and amount of revenue we earn given the marketing, support, recordkeeping and custodial services we perform for the various mutual fund products we distribute.
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 has in-force policies from several discontinued lines of insurance. During the three months ended March 31, 2014, NBLIC sold its short-term statutory disability benefit insurance business ("DBL") to AmTrust North America, Inc., and the operating results have been reported as discontinued operations for all periods presented. In 2014, NBLIC will also cease the marketing and underwriting of new student life insurance policies but will continue to administer the existing block of student life business. Corporate and Other Distributed Products segment net investment income is composed of two elements: the remainder of net investment income


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not allocated to our Term Life Insurance segment and the market return associated with the deposit asset underlying a 10% coinsurance agreement with the Citigroup reinsurers ("10% Coinsurance Agreement").
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 April 2010 initial public offering ("IPO"), 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 our senior unsecured notes and redundant reserve financings, as well as repurchases of shares and warrants of our common stock. For additional information regarding factors affecting our results, see Factors Affecting Our Results in our 2013 Annual Report.

Results of Operations
Primerica, Inc. and Subsidiaries Results. Our results of operations were as follows:
 
Three months ended March 31,
 
Change
 
2014
 
2013
 
$
 
%
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
 
Direct premiums
$
568,205

 
$
560,904

 
$
7,301

 
1
 %
Ceded premiums
(402,715
)
 
(410,604
)
 
(7,889
)
 
(2
)%
Net premiums
165,490

 
150,300

 
15,190

 
10
 %
Commissions and fees
126,933

 
112,273

 
14,660

 
13
 %
Net investment income
21,599

 
23,216

 
(1,617
)
 
(7
)%
Realized investment gains (losses), including other-than-temporary impairment losses
263

 
2,286

 
(2,023
)
 
(88
)%
Other, net
10,043

 
10,375

 
(332
)
 
(3
)%
Total revenues
324,328

 
298,450

 
25,878

 
9
 %
Benefits and expenses:
 
 
 
 
 
 
 
Benefits and claims
75,191

 
68,816

 
6,375

 
9
 %
Amortization of DAC
35,193

 
31,252

 
3,941

 
13
 %
Sales commissions
65,121

 
55,048

 
10,073

 
18
 %
Insurance expenses
28,502

 
25,512

 
2,990

 
12
 %
Insurance commissions
4,083

 
4,223

 
(140
)
 
(3
)%
Interest expense
8,606

 
8,795

 
(189
)
 
(2
)%
Other operating expenses
40,800

 
45,664

 
(4,864
)
 
(11
)%
Total benefits and expenses
257,496

 
239,310

 
18,186

 
8
 %
Income from continuing operations before income taxes
66,832

 
59,140

 
7,692

 
13
 %
Income taxes
23,347

 
21,005

 
2,342

 
11
 %
Income from continuing operations
43,485

 
38,135

 
5,350

 
14
 %
Income from discontinued operations, net of income taxes
1,595

 
710

 
885

 
*

Net income
$
45,080

 
$
38,845

 
$
6,235

 
16
 %
_____________________
*
Less than 1% or not meaningful.
Results for the Three Months Ended March 31, 2014 and 2013
Total revenues. The increase in revenues for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 was primarily attributable to incremental premiums on new term life insurance policies issued subsequent to the Citigroup reinsurance transactions ("New Term") and the favorable impact on commissions and fees of higher investment product sales and growth in client asset values, partially offset by declines in realized investment gains and net investment income. Realized investment gains decreased in the first quarter of 2014 primarily due to a large gain on a tendered security in the prior year period. The decline in allocated


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net investment income was attributable to lower average yield on invested assets, lower volume of called securities, and a lower average base of invested assets for the three months ended March 31, 2014.
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 sales commissions, benefits and claims, and amortization of DAC, as well as higher insurance expenses. These higher expenses were partially offset by lower legal fees in the first quarter of 2014 and lower stock compensation costs due to the full vesting of IPO equity awards in the prior year period.
Income taxes. Our effective income tax rate on continuing operations of 34.9% during the three months ended March 31, 2014 was lower than our effective income tax rate of 35.5% during the three months ended March 31, 2013 primarily driven by the limited deductibility of certain IPO equity awards, which fully vested in the prior year period.
For additional information, see the Segment Results discussions below.
Segment Results
Term Life Insurance Segment Results. Our results for the Term Life Insurance segment were as follows:
 
Three months ended March 31,
 
Change
 
2014
 
2013
 
$
 
%
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
 
Direct premiums
$
559,663

 
$
552,034

 
$
7,629

 
1
 %
Ceded premiums
(400,333
)
 
(407,854
)
 
(7,521
)